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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 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 ______________
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
135 CORPORATE WOODS, ROCHESTER, NY 14623
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (585) 272-8400
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On September 30, 2002, 52,505,689 shares of the Registrant's Common Stock, $.001
par value, were outstanding.
HARRIS INTERACTIVE INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
INDEX
Page
----
Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2002 and June 30, 2002 1
Consolidated Statements of Operations for the three months ended
September 30, 2002 and 2001 2
Consolidated Statements of Cash Flows for the three months ended
September 30, 2002 and 2001 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3: Quantitative and Qualitative Disclosures About Market Risk 12
Item 4: Controls and Procedures 12
Part II: Other Information
Item 1: Legal proceedings 13
Item 2: Changes in Securities and Use of Proceeds 13
Item 3: Defaults Upon Senior Securities 13
Item 4: Submission of Matters to a Vote of Security Holders 13
Item 5: Other Information 13
Item 6: Exhibits and Reports on Form 8-K 13
Signatures 14
HARRIS INTERACTIVE INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
September 30, June 30,
2002 2002
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 9,958 $ 10,787
Marketable securities 15,570 17,070
Accounts receivable, less allowances of $408 and $474, respectively 21,061 20,791
Costs and estimated earnings in excess of billings on uncompleted
contracts 5,377 4,669
Other current assets 5,280 4,808
--------- ---------
Total current assets 57,246 58,125
Property, plant and equipment, net 9,291 9,703
Goodwill 63,428 63,428
Other intangibles, less accumulated amortization of $486 and $408,
respectively 964 1,042
Other assets 3,305 3,221
--------- ---------
Total assets $ 134,234 $ 135,519
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installment of long-term debt $ 185 $ 1,193
Accounts payable 7,387 7,417
Accrued expenses 9,937 11,081
Short-term borrowings 1,475 811
Billings in excess of costs and estimated earnings on
uncompleted contracts 9,360 9,824
--------- ---------
Total current liabilities 28,344 30,326
Long-term debt, excluding current installment 244 314
Other long-term liabilities 1,371 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; 53,161,289
shares issued at September 30,
2002 and 53,020,087 shares issued at June 30, 2002 53 53
Additional paid in capital 177,159 177,014
Unamortized deferred compensation (124) (147)
Accumulated other comprehensive loss (455) (248)
Accumulated deficit (70,388) (71,402)
Officer loan (277) (277)
Less: treasury stock at cost, 655,600 shares at
September 30, 2002 and June 30, 2002, respectively (1,693) (1,693)
--------- ---------
Total stockholders' equity 104,275 103,300
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 134,234 $ 135,519
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
- 1 -
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
September 30,
---------------------------------
2002 2001
------------ ------------
Revenues from services $ 30,329 $ 17,134
Cost of services 16,552 9,188
------------ ------------
Gross profit 13,777 7,946
Operating expenses:
Sales and marketing expenses 1,909 1,599
General and administrative expenses 11,003 10,087
------------ ------------
Operating income (loss) 865 (3,740)
Interest and other income 168 529
Interest expense (19) (19)
------------ ------------
Income (loss before income taxes) 1,014 (3,230)
------------ ------------
Income tax expense -- --
------------ ------------
Net income (loss) 1,014 (3,230)
============ ============
Basic net income (loss) per share $ 0.02 $ (0.09)
============ ============
Diluted net income (loss) per share $ 0.02 $ (0.09)
============ ============
Weighted average shares outstanding - basic 52,399,007 34,543,527
============ ============
Weighted average shares outstanding - diluted 54,108,920 34,543,527
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
- 2 -
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
September 30,
-------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net profit (loss) $ 1,014 $ (3,230)
Adjustments to reconcile net profit (loss) to net cash
used in operating activities -
Depreciation and amortization 1,328 1,794
Cash outflows related to restructuring and asset impairment charge (293)
Amortization of deferred compensation 23 72
Amortization of premium and discount on marketable securities 52 (31)
(Increase) decrease in -
Accounts receivable (210) 3,081
Cost and estimated earnings in excess of billings on
uncompleted contracts (677) 325
Other current assets (451) 369
Other assets (94) (330)
(Decrease) increase in -
Accounts payable (77) (1,579)
Accrued expenses (1,210) (202)
Other long-term liabilities 85
Billings in excess of costs and estimated earnings on
uncompleted contracts (479) (1,140)
-------- --------
Net cash used in operating activities (989) (871)
-------- --------
Cash flows from investing activities:
Cash paid in connection with acquisitions, net of cash acquired (811)
Purchase of marketable securities (5,318) (7,130)
Proceeds from maturities and sales of marketable securities 6,747 14,408
Capital expenditures (801) (497)
-------- --------
Net cash provided by investing activities 628 5,970
-------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock and exercise of stock options 146 190
Principal payments on long-term debt (1,070) (1,478)
Increase in short-term borrowings 663 576
Repurchase of treasury stock -- (901)
-------- --------
Net cash used in financing activities (261) (2,765)
Effect of exchange rate change on cash and cash equivalents (207) (34)
-------- --------
Net (decrease) increase in cash and cash equivalents (829) 2,300
Cash and cash equivalents at beginning of period 10,787 10,585
-------- --------
Cash and cash equivalents at end of period $ 9,958 $ 12,885
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
- 3 -
HARRIS INTERACTIVE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. BASIS OF PRESENTATION
Harris Interactive Inc. (the "Company" or "Harris Interactive") is a global
market research, polling and consulting firm, using Internet-based and
traditional methodologies to provide our clients with information about the
views, behaviors and attitudes of people worldwide. Known for The Harris Poll
(R), 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.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. The consolidated balance sheet as of June 30, 2002 has been
prepared from the audited consolidated financial statements of the Company.
These unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Annual Report on Form 10-K, filed by the Company with the Securities and
Exchange Commission on September 30, 2002.
2. EARNINGS PER SHARE
The following table presents the shares used in computing basic and diluted
earnings per share ("EPS") for the quarter ended September 30, 2002. During
periods of losses from continuing operations, all potentially dilutive
securities are excluded from the calculation of diluted net loss per share, as
the effect would be anti-dilutive. Options to purchase 2,025,600 shares of
common stock at a weighted average price per share of $5.18 were outstanding at
September 30, 2003 but were not included in the computation of net income per
share on a diluted basis because the effect would have been anti-dilutive.
- -------------------------------------------------------------------------------------------------
Quarter ended
September 30, 2002
- -------------------------------------------------------------------------------------------------
Weighted average of outstanding common shares for basic EPS 52,399,007
- -------------------------------------------------------------------------------------------------
Diluted effect of outstanding stock options 1,709,913
- -------------------------------------------------------------------------------------------------
Shares for diluted EPS 54,108,920
- -------------------------------------------------------------------------------------------------
3. COMPREHENSIVE INCOME (LOSS)
The components of the Company's total comprehensive income (loss) were:
Three months ended
-----------------------------
September 30, September 30,
------------- -------------
2002 2001
------------- -------------
Net income (loss) $ 1,014 $(3,230)
Foreign currency translation adjustments (187) (34)
Unrealized (loss) gain on marketable securities (20) 4
------- -------
Total comprehensive income (loss) $ 807 $(3,260)
======= =======
- 4 -
HARRIS INTERACTIVE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 145 and SFAS 146
In May 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13
and Technical Corrections". SFAS No. 145 eliminates the requirement that gains
and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect.
However, an entity is not prohibited from classifying such gains and losses as
extraordinary items, so long as they meet the criteria outlined in Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal Occurring Events and Transactions. SFAS No.
145 also eliminates the inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This statement is effective for
financial statements issued for fiscal years beginning after May 15, 2002, with
early adoption encouraged. The Company has adopted SFAS No. 145. There was no
material impact.
In July 2002, the Financial Accounting Standards Board issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. Previous accounting guidance was provided by Emerging Issues
Task Force ("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 replaces EITF Issue No. 94-3.
This statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company will adopt SFAS No. 146, as
applicable, beginning in the second quarter of this fiscal year.
5. 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.
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 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 $3,609. 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 9).
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.
- 5 -
HARRIS INTERACTIVE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. BUSINESS COMBINATIONS CONT.
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.
Three months ended
September 30,
--------------------------
2002 2001
---------- -----------
Revenue $ 30,329 $ 29,856
Net income (loss) 1,014 (10,043)
Income(loss) per share - basic $ 0.02 $ ( 0.20)
Income(loss) per share - diluted $ 0.02 $ ( 0.20)
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 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 U.K.
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 September 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
6. RESTRUCTURING CHARGES AND ASSET WRITE-DOWNS
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 of 2002. The following table
summarizes activity with respect to the restructuring charges for the period
ended September 30, 2002:
Asset write- Lease
Severance downs Commitments Total
--------- ------------ ----------- -----
Net charge fiscal 2002 $ 1,169 $ 2,792 $ 2,261 $ 6,222
Asset write-offs during fiscal 2002 0 (2,792) 0 (2,792)
Cash payments during fiscal 2002 (1,098) 0 (160) (1,258)
------- ------- ------- -------
Remaining reserve at June 30, 2002 71 0 2,101 2,172
------- ------- ------- -------
Cash payments during fiscal 2003 (71) 0 (222) (293)
------- ------- ------- -------
Remaining reserve at September 30, 2002 $ 0 $ 0 $ 1,879 $ 1,879
======= ======= ======= =======
As of June 30, 2002, all actions were completed, however cash payments for lease
commitments will be made on a longer-term basis according to the contractually
scheduled payments of such commitments and will continue through 2005. Total
number of employees included in the charge and ultimately terminated was 82.
-6 -
HARRIS INTERACTIVE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. GEOGRAPHIC 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. Non-US market research is comprised of operations in
the United Kingdom and Japan. There were no significant inter-segment
transactions that materially affected the financial statements. Geographic
information for the three months ended September 30, 2002, 2001 and 2000 are as
follows:
US United Kingdom Japan
Market Market Market
Research Research Research Total
-------- -------------- --------- -------
Three months ended September 30, 2002:
Revenues.................................. $22,796 $ 6,081 $ 1,452 $30,329
Long-lived assets......................... 63,732 9,223 3,165 76,120
Three months ended September 30, 2001:
Revenues.................................. $14,332 $2,802 $17,134
Long-lived assets......................... 24,883 5,874 30,757
Three months ended September 30, 2000:
Revenues.................................. $12,053 $12,053
Long-lived assets......................... 17,719 17,719
8. ACQUIRED INTANGIBLE ASSESTS SUBJECT TO AMORTIZATION
As of September 30, 2002
--------------------------------
Gross carrying Accumulated
Amount Amortization
-------------- ------------
Amortized intangible assets
Contract-based intangibles $1,450 $ 486
------ ------
Total $1,450 $ 486
====== ======
Aggregate amortization expense:
For the three months ended September 30, 2002 $ 78
------
Estimated amortization expense:
For the year ending June 30, 2003 $ 312
------
For the year ending June 30, 2004 $ 312
------
For the year ending June 30, 2005 $ 312
------
For the year ending June 30, 2006 $ 106
------
- 7 -
HARRIS INTERACTIVE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. GOODWILL AND OTHER INTANGIBLES
The changes in the carrying amount of goodwill and other intangibles with
indefinite lives for the period ended September 30, 2002 are as follows:
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 $ 49,239
============
Balance as of June 30, 2002 and September 30, 2002 $ 63,428
============
10. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF FAS 142
Three months ended
September 30,
----------------------
2002 2001
--------- ---------
Reported net income (loss) $ 1,014 $ (3,230)
Add back goodwill amortization
Adjusted net income (loss) $ 1,014 $ (3,230)
Basic and diluted net loss per share:
Reported net income (loss) $ 0.02 $ (0.09)
Add back goodwill amortization
Adjusted basic and diluted net loss per share $ 0.02 $ (0.09)
The Company adopted FAS 142 as of July 1, 2001. The Company completed its annual
impairment test in accordance with FAS 141 as of June 30, 2002, with no
impairment identified.
-8 -
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS FORM 10-Q 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 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. THE
RISK FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS HARRIS INTERACTIVE FILES
FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, SUCH AS OUR 10-K
FILED SEPTEMBER 30, 2002 FOR THE FISCAL YEAR ENDED JUNE 30, 2002 WITH THE
SECURITIES AND EXCHANGE COMMISSION SHOULD BE REVIEWED.
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 fiscal 2003 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 HIpoints(TM) 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 affect 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 is
determined to be unrecoverable, the Company would record an adjustment to the
respective carrying value. With respect to goodwill, the Company will complete
its two-step impairment test on an annual basis.
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.
- 9 -
The Company has implemented a loyalty program (HIpointsTM) whereby points are
awarded to market 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 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 sell
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 eleven months of
combined operations lead us to believe that our expectations are 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 142 (See
Note 9).
RESTRUCTURING AND ASSET WRITE-DOWN 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 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 of 2002. 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 charges
for the period ended September 30, 2002:
Asset write- Lease
Severance downs Commitments Total
--------- ------------ ----------- -----
Net charge fiscal 2002 $ 1,169 $ 2,792 $ 2,261 $ 6,222
Asset write-offs during fiscal 2002 0 (2,792) 0 (2,792)
Cash payments during fiscal 2002 (1,098) 0 (160) (1,258)
------- ------- ------- -------
Remaining reserve at June 30, 2002 71 0 2,101 2,172
------- ------- ------- -------
Cash payments during fiscal 2003 (71) 0 (222) (293)
------- ------- ------- -------
Remaining reserve at September 30, 2002 $ 0 $ 0 $ 1,879 $ 1,879
======= ======= ======= =======
As of June 30, 2002, all actions were completed, however cash payments for lease
commitments will be made on a longer-term basis according to the contractually
scheduled payments of such commitments and will continue through 2005. Total
number of employees included in the charge and ultimately terminated was 82.
- 10 -
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated our results of
operations expressed as a percentage of revenues:
Three months ended
September 30,
------------------
2002 2001
------ ------
Revenues from services 100% 100%
Cost of services 55 54
---- ----
Gross margin 45 46
---- ----
Operating expenses:
Sales and marketing 6 9
General and administrative 36 59
---- ----
Operating income (loss) 3 (22)
Interest and other income, net -- 3
---- ----
Net income (loss) 3 (19)
==== ====
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Revenues from services. Total revenues increased 77% to $30.3 million for the
quarter ended September 30, 2002, from $17.1 million for the quarter ended
September 30, 2001. This increase was primarily attributable to the incremental
revenue generated from the acquisition of Total Research in November 2001.
Revenue from Internet-based products was $11.4 million, or 37.7% of total
revenues, for the first quarter of fiscal 2003, compared with $7.9 million, or
46.0% of total revenues for the first quarter of fiscal 2002. The decline as a
percentage of total revenues is the result of the acquired revenue mix from
Total Research. While many clients have been converted to Internet-based
research, a significant amount of the revenues being generated by acquired
clients is still being conducted through traditional research.
Gross margin. Gross margin for the quarter ended September 30, 2002 was $13.8
million, or 45% of revenues, compared with $7.9 million or 46% of revenues for
the quarter ended September 30, 2001. The slight decline in gross margin as a
percentage of revenue reflects the largely traditional-based acquired revenues,
as noted above.
Sales and marketing. Sales and marketing expenses increased 19% to $1.9 million
for the first quarter of fiscal 2003 from the same prior year quarter. However,
as a percentage of revenue, sales and marketing expenses decreased three
percentage points. The absolute 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 for the quarter
ended September 30, 2002 increased $0.9 million, or 9% over the quarter ended
September 30, 2001. As a percentage of revenue, general and administrative
expenses decreased twenty-three percentage points. 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 $0.1
million for the quarter ended September 30, 2002 compared with $0.5 million for
the quarter ended September 30, 2001. The decrease was primarily attributable to
a lower average marketable securities balance for fiscal 2003 compared to the
prior year as well as lower average interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a line of credit with a commercial bank providing
borrowings up to $5.0 million in fiscal 2003 and 2002, at prime. The prime rate
in effect at September 30, 2002 was 4.75%. Borrowings under this arrangement are
due upon demand. There were no borrowings under this agreement at September 30,
2002 and 2001. The line of credit is collateralized by the assets of the
Company.
- 11 -
As of September 30, 2002, the Company had short-term and long-term borrowings of
$1.5 million and $0.4 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 $1.0 million for the first quarter of
2003, compared with $0.8 million for the same prior year quarter. During fiscal
2003 the use of cash was primarily related to the payout of fiscal 2002 bonuses.
During fiscal 2002 the use of cash was primarily the result of net losses.
Net cash provided by investing activities was $0.6 million for the first quarter
of fiscal 2003, compared with $6.0 million for the same period in the prior
year. The positive cash flow in each period resulted from the maturity and
liquidation of marketable securities. Capital expenditures were $0.8 million for
the quarter of fiscal 2003, an increase of $0.4 million from the same prior year
period.
Net cash used in financing activities was $0.3 million for the first quarter of
fiscal 2003, compared with $2.8 million for the same prior year period. The use
of cash in fiscal 2003 is primarily related to the repayment of long-term debt
obligations. The use of cash in fiscal 2002 was also related to the repayment of
long-term debt obligations, as well as the repurchase of 422,900 shares,
pursuant to the Company's stock repurchase program, being held as Treasury
Stock.
Our capital requirements depend on numerous factors, including market acceptance
of our products and services, the resources we allocate to the continuing
development of our Internet infrastructure and Internet panel, marketing and
selling of our services, our promotional activities and other factors. While
management anticipates continuing expenditures for property, plant and equipment
and working capital requirements throughout fiscal 2003, these expenditures are
expected to be consistent with fiscal 2002.
ITEM 3 - 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.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this report, the Company's
principal executive officer and principal financial officer have concluded that
the Company's disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act) are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there were no
corrective actions taken.
- 12 -
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In the normal course of business, the Company is 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 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 6, 1999, the Securities and Exchange Commission declared effective
the Company's Registration Statement on Form S-1 (No. 333-87311). Pursuant to
this Registration Statement, the Company completed an initial public offering of
6,670,000 shares of its common stock. Proceeds to the Company from the Offering
totaled approximately $85.5 million.
The Company issued and sold an aggregate of 91,900 shares of its common stock to
employees during the first quarter of fiscal 2003, upon the exercise of options
granted under the Company's 1997 stock option plan, at a price of $.47 per
share, for an aggregate cash consideration of $42,734. 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).
During the period from December 6, 1999 through September 30, 2002, the Company
used a portion of the proceeds from its public offering as follows: (i)
approximately $54.8 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 $11.3 million of net cash for business acquisitions, and (iv)
approximately $4.0 million of net cash used in connection with the repayment of
short-term and long-term borrowings.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) - Exhibits
99.1 Certificate of the Chief Executive Officer pursuant to 18
U.S.C.ss.1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
99.2 Certificate of the Chief Financial Officer pursuant to 18
U.S.C.ss.1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
(b) - Reports on Form 8-K
On September 30, 2002, a report on Form 8-K was filed with the SEC reporting
that the Annual Report on Form 10-K filed on September 30, 2002 by Harris
Interactive was accompanied by the certifications of Messrs. Gordon S. Black and
Bruce A. Newman required under Section 906 of the Sarbanes-Oxley Act of 2002.
- 13 -
SIGNATURE
Pursuant to the requirements 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,
November 14, 2002 Harris Interactive Inc.
By /s/ BRUCE A. NEWMAN
---------------------------------------------
Bruce A. Newman
Chief Financial Officer, Secretary and Treasurer
(On Behalf of the Registrant and as Principal
Financial and Accounting Officer)
- 14 -
CERTIFICATION
--------------------------------------------------------------------
I, Gordon S. Black, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harris Interactive
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function);
(a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 Signature: /s/ GORDON S. BLACK
------------------------------------
Gordon S. Black
Chairman and Chief Executive Officer
- 15 -
CERTIFICATION
--------------------------------------------------------------------
I, Bruce A. Newman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harris Interactive
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function);
(a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
7. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 Signature: /s/ BRUCE A. NEWMAN
------------------------------------
Bruce A. Newman
Chief Financial Officer, Secretary
and Treasurer
- 16 -