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<SEC-DOCUMENT>0000950152-03-008467.txt : 20030926
<SEC-HEADER>0000950152-03-008467.hdr.sgml : 20030926
<ACCEPTANCE-DATETIME>20030926161746
ACCESSION NUMBER: 0000950152-03-008467
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 20030630
FILED AS OF DATE: 20030926
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HARRIS INTERACTIVE INC
CENTRAL INDEX KEY: 0001094238
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742]
IRS NUMBER: 161538028
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-27577
FILM NUMBER: 03912767
BUSINESS ADDRESS:
STREET 1: 135 CORPORATE WOODS
CITY: ROCHESTER
STATE: NY
ZIP: 14623-1457
BUSINESS PHONE: 7162728400
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>l03090ae10vk.txt
<DESCRIPTION>HARRIS INTERACTIVE INC. 10-K/FYE 6-30-2003
<TEXT>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
<Table>
<C> <S>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER: 000-27577
---------------------
HARRIS INTERACTIVE INC.
(Exact Name of Registrant as Specified in its Charter)
<Table>
<S> <C>
DELAWARE 16-1538028
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</Table>
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 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 [ ]
INDICATE BY CHECKMARK IF DISCLOSURE OF DELINGUENT 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. [ ]
INDICATE BY CHECKMARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of December 31, 2002, the aggregate market value of voting and
non-voting common equity securities held by non-affiliates of the registrant was
$92,293,526.
On September 15, 2003, 55,448,763 shares of the Registrant's Common Stock,
$.001 par value, were outstanding.
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 2003, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HARRIS INTERACTIVE INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
INDEX
<Table>
<Caption>
PAGE
----
<S> <C> <C>
PART I:
"Safe Harbor" Statement under the Private Securities Litigation Reform 3
Act of 1995.........................................................
Item 1: Business.................................................... 3
Item 2: Properties.................................................. 15
Item 3: Legal Proceedings........................................... 16
Item 4: Submission of Matters to a Vote of Security Holders......... 16
PART II:
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6: Selected Consolidated Financial Data........................ 18
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A: Quantitative and Qualitative Disclosures About Market
Risk........................................................ 37
Item 8: Financial Statements and Supplementary Data................. 38
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 62
Item 9A: Controls and Procedures..................................... 62
PART III:
Item 10: Directors and Executive Officers of the Registrant.......... 62
Item 11: Executive Compensation...................................... 62
Item 12: Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 62
Item 13: Certain Relationships and Related Transactions.............. 62
Item 14: Principal Accountant Fees and Services...................... 62
PART IV:
Item 15: Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 63
Signature............................................................. 68
</Table>
2
<PAGE>
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 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 should also be
reviewed.
ITEM 1. BUSINESS
Harris Interactive Inc. 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 its various U.S. offices, its
wholly-owned subsidiaries: London- based HI Europe (www.hieurope.com) and
Tokyo-based Harris Interactive Japan K.K. (www.hpol.co.jp) -- as well as through
its Global Network of local market and opinion research firms.
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.
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. We make available
free of charge through our website the documents and reports we file with the
SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. Information on our website (or the websites of our
subsidiaries) does not constitute part of this Report on Form 10-K.
OVERVIEW
The Company operates as one business segment, and services its clients
through six distinct operating groups:
- Business and Consumer Research,
- Health Care & Policy Research,
- Customer Loyalty Management,
- HI Europe,
- Harris Interactive Japan, and
3
<PAGE>
- Harris Interactive Service Bureau.
The operating groups conduct:
- custom research -- internet-based and traditional studies conducted on
specific issues for specific customers,
- multi-client research -- internet-based studies conducted on issues of
general interest and sold to numerous clients, and
- service bureau research -- internet-based data collection conducted for
other research firms.
In 1997, the Company embarked on its mission to develop an Internet panel
and the proprietary technology infrastructure necessary to conduct fast,
comprehensive and accurate online market research. Accordingly, we have 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
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, the
number of online surveys that we have completed 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 Company's phone centers conduct
interviews utilizing computer-based questionnaires. The data are immediately
uploaded to the Company's central data-processing center, thereby enabling more
efficient and effective analysis. The Company's phone centers have sufficient
capacity to support reasonably predictable long-term needs. The Company also
out-sources telephone data collection to support shorter-term project needs and
others that exceed the Company's internal capacity.
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 Form 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, accelerated product launch schedules,
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, buying 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 and
loyalty, 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 methods are becoming increasingly less effective (and less affordable) due
to high data collection costs, small sample sizes and the extensive time
required to perform the research. Consequently, large traditional research
projects can only be funded by organizations with significant resources. The
Internet has 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. This capacity has actually
increased the amount of research that is being completed as much of our revenue
is "new" research that had never been done before.
4
<PAGE>
THE INTERNET AND ITS IMPACT ON THE MARKET RESEARCH AND POLLING INDUSTRY
Since its conception in the early 1960s, the Internet has enabled hundreds
of millions of people worldwide to gather and share information as well as
conduct business electronically. The use of the Internet as a market research
and polling tool is still in its relatively 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 U.S. population, who had Internet access. They
were not representative of the general population. Harris Interactive had to
perfect data weighting systems to correct for this bias. Today, the demographic
composition of Internet users has become closer to the overall population and
highly accurate weighting procedures have been developed, making the Internet a
viable means to conduct market research -- with significant advantages,
including:
- 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.
- 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.
Online qualitative research techniques such as chat room or bulletin
board focus groups provide substantial savings in time and travel costs.
- 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, do-not-call protection, 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 (and cost) advantage of the
Internet model actually becomes greater as the sample size increases.
- VALUE -- Internet-based methodology offers significant cost benefits when
compared to traditional market research methodologies. Traditional 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.
- PRODUCTIVITY -- Because online panelists can read questions faster than
they can listen, more questions can be asked in the same amount of time.
Respondents in qualitative sessions conducted online create their own
transcripts, which can be immediately reviewed and analyzed by the market
researcher- versus having to create transcriptions from audiotapes.
THE HARRIS INTERACTIVE ADVANTAGE
We believe that Harris Interactive is the global leader in online market
research. We offer our clients a broad suite of Internet-based market research
and polling products. We have several competitive advantages that we believe
will enable us to maintain and expand our lead position in Internet-based
research. Our key competitive advantages include:
- HIGHLY SATISFIED AND LOYAL CLIENTS. Our intensive measurement of customer
satisfaction and the associated process improvements have allowed us to
greatly improve the quality of services that we deliver. All of our
researchers and managers are evaluated on the customer satisfaction
scores that they earn from their clients, and their bonus compensation is
tied to customer satisfaction levels. Consequently,
5
<PAGE>
our Company-wide client satisfaction scores (over 9.0 out of 10 in fiscal
2003) are among the best in the industry.
- This high level of customer satisfaction provides us with a true
competitive advantage in the marketplace by:
- Monitoring and then responding to changing customer needs,
- Increasing the loyalty of our customers, which generates a larger
lifetime value earned from each client,
- Improving our margins by softening price sensitivity, and
- Decreasing our cost of sales due to the higher propensity for repeat
business.
- A PROPRIETARY PROPENSITY SCORE WEIGHTING SYSTEM. This system ensures very
accurate online data collection results by correcting for data anomalies
that occur due to sample bias - such as the difference in behavior
between online respondents and offline respondents. We believe that no
other online market research firm has an equal system to correctly weight
data and project results to a larger population. The accuracy of this
system was proven when Harris Interactive produced the most accurate
forecast of the 2000 U.S. presidential election and state-by-state
forecasts (72 races in total) that were approximately 2 times as accurate
as those generated through telephone polls.
- THE WORLD'S LARGEST INTERNET PANEL for conducting online market research.
Currently, our panel consists of several million individuals from around
the world who have been double opted-in and voluntarily agreed to
participate in our various online research studies. We are currently
adding thousands of additional names to our global panel on a daily
basis. This large and diverse Internet panel enables us to:
- conduct a broad range of customer-specific or multi-client research
studies across a wide set of industries,
- conduct very large surveys of the general population and studies of
low-incidence, hard-to-find subsets,
- market new research products and services through co-branded alliances
that we historically could not develop alone, and
- sell our online data collection services to other research firms through
the Harris Interactive Service Bureau, enabling us to penetrate new
markets and gain additional market share where we do not have
relationships or specific expertise.
- SPECIALTY-PANELS. During the past three years, we have performed
additional screening of the respondents in our main panel in order to
form specialty panels or groups of people with similar, hard to find
characteristics. We have developed numerous specialty panels, including
Affluent, Chronic Illness, Gay, Lesbian and Bisexual, Mothers and
Expectant Mothers, Physicians, Pet Companion and Technology Decision
Makers. Our clients highly value our ability to rapidly perform online
surveying of these low incidence populations, and have even asked us to
develop proprietary specialty panels exclusively for their use. Specialty
panel research has become a key driver of high profit revenue growth for
the Company.
- PROPRIETARY TECHNOLOGY INFRASTRUCTURE. A significant amount of computer
software and hardware is required to conduct Internet-based market
research and polling. The key elements of our technology infrastructure
include:
- A HIGH SPEED CUSTOMIZED EMAIL SYSTEM, which enables us to rapidly
format, target and send over one million customized email invitations
per hour;
- A SOPHISTICATED SURVEY ENGINE, which can process 240,000 five-minute
incoming surveys per hour with a peak capacity of 20,000 surveys
processed simultaneously;
- SOFTWARE SYSTEMS with the ability to collect data in any language
supported by Microsoft, including double-byte character sets (such as
the Asian languages) and left to right reading languages;
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- An advanced SURVEY DISPATCHER SYSTEM, which acts like an air traffic
control system to monitor, control and balance all respondent activity
across all of our servers - and to ensure that no respondent will get a
"sorry - the system is busy" notice. In addition, our proprietary
dispatcher system gathers real-time statistics on survey starts,
suspensions and completions, shutting off the surveys when the
contracted completion levels have been achieved, thereby reducing cost
overruns.
- 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 preference and delivers the survey in that language;
- Flexible, AUTOMATED REAL TIME REPORTING TOOLS that allow online access
to weighted survey data at any time and speed the process of data
delivery to clients;
- A SCALABLE TECHNOLOGY INFRASTRUCTURE. This infrastructure was designed
with no theoretical upper limit and can easily and cheaply grow with the
expansion of our business. Currently, we believe that we can double our
existing capacity at a cost of less than $300,000.
- 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.
OUR PRODUCTS AND SERVICES
Our services are focused upon serving numerous vertical markets, which
include, but are not limited to, pharmaceutical and health care, ecommerce,
consumer packaged goods, automotive, financial services, technology, education,
media and advertising and public policy. By aligning all of our support
functions (e.g. sales, marketing, research staff, etc.) to specific vertical
markets, we can effectively and efficiently deliver our services, while
providing a high level of industry expertise and consultative support.
Our three primary sources of revenue are:
- custom research
- multi-client research
- 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
2003, 46% of our total revenue was derived from Internet-based products, up from
41% in fiscal 2002. We continue to dedicate a significant amount of our
financial and management resources to developing and marketing new products and
services that use our Internet-based methodologies.
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The following table summarizes our products and services.
<Table>
<Caption>
PRODUCT TYPE DESCRIPTION METHODOLOGY
- ------------ ----------- -----------
<S> <C> <C>
Custom Research Market research and polling Traditional and Internet-based
conducted on an issue specifically
identified by a client.
Multi-Client Research Studies developed for, and sold to, Internet-based
a large number of clients who have
a similar interest in a particular
subject area -- like Equitrend(R)
brand equity research and our
annual Business School Reputation
Rankings.
Service Bureau Research Data Collection conducted for other Internet-based
market research firms.
</Table>
CUSTOM RESEARCH
For almost 50 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 strong expertise in the following markets:
- health care,
- pharmaceuticals and medical devices,
- office equipment and technology,
- education and public policy,
- transportation,
- marketing communications and advertising, and
- public relations.
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:
- SURVEY DESIGN -- 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.
- DATA COLLECTION -- Field data collection is conducted through
computer-aided Internet or telephone interviewing, by mail or in person,
or by 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.
- 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.
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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 revenue 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 data
collection for other market research firms 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, and therefore serves as a barrier
to entry to our competition
Harris Interactive Service Bureau clients can utilize our data collection
capabilities on a long-term, continuous basis or on a project-by-project basis.
During fiscal 2003, 100 market research firms used HISB, up from 90 in fiscal
2002 and 74 at the end of fiscal 2001.
OUR CLIENTS
In fiscal 2003, approximately 42% of the Company's revenue was derived from
Fortune 500 companies. The Company served approximately 1,070 clients, derived
from the following lines of business:
<Table>
<Caption>
% FY2003
REVENUE
--------
<S> <C>
Customer Loyalty Management................................. 25
Health Care................................................. 19
Technology.................................................. 11
Harris Interactive Service Bureau (HISB).................... 7
Strategic Brands & Consulting............................... 7
Media & Public Relations.................................... 6
Automotive & Transportation................................. 5
Marketing Communications.................................... 4
Youth & Education........................................... 3
Customer Retention.......................................... 3
General Markets/Other....................................... 10
</Table>
In fiscal 2003, no single client accounted for more than 10% of the
Company's consolidated revenue.
OUR SALES AND MARKETING PROGRAMS
During fiscal 2003 the Company invested approximately $2.3 million to
implement a broad range of sales and marketing programs, intended to:
- raise awareness of the The Harris Poll, The Harris Poll Online, Harris
Interactive, HI Europe and Harris Interactive Japan brands,
- build specific product awareness,
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- generate new sales leads,
- expand our Internet panel, and
- support our global network.
Marketing activities are integrated and may contain elements of public
relations, offline and online advertising and promotion, trade shows, industry
event participation and speaking engagements, market research knowledge sharing
conferences and direct marketing.
- 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. During fiscal 2003, the Company created and
distributed over 150 media releases, including the worldwide weekly
distribution of The Harris Poll and The Harris Interactive Health Care
News. Our public relations team also collaborated with our clients on
over 250 joint releases of information, and responded to over 2,500 media
inquiries from reporters, editors, authors and educational institutions
who wanted to publish our data. The Harris Interactive name regularly
appears in Business Week and Time magazines, and on CNN as a research
provider for Time/CNN surveys. BRANDWEEK 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.
- TRADE SHOWS AND SPEAKING ENGAGEMENTS. 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 expositions. Speakers from the Company have
traveled the world to share their knowledge with many prestigious
organizations, including the Congress of the United States.
- OFFLINE ADVERTISING AND PROMOTION. We use print advertising in U.S.,
European and Japanese business and trade publications to raise awareness
of our brand name and to generate leads for individual products and
services. The weekly, public release of The Harris Poll is one of our
most effective offline promotional activities. The Company also publishes
The Harris Interactive Health Care News, containing recent health care
research on a weekly schedule. We also regularly publish Trends and
'Tudes (youth and education research), Entree (food and beverage industry
research) and @dvantage (HISB) newsletters to share knowledge with our
current and potential customers.
- ONLINE ADVERTISING AND PROMOTION. The Company has entered into numerous
agreements with Internet portals, like The Wall Street Journal Online,
which publishes the weekly editions of The Harris Poll and The Wall
Street Journal-Harris Interactive Health Care Poll. The Company also
purchases key word searches, global banner advertising and
co-registration opportunities to generate leads and to recruit new
members into The Harris Poll Online. Currently, these efforts are adding
thousands of double-opted in panel members per day in the U.S., Canada,
The United Kingdom, France, Germany, Italy, Spain and the Scandinavian
countries. Other online promotions are undertaken from time to time to
recruit special population segments into our panel such as senior
citizens, teens, minorities, practicing physicians and information
technology (IT) users.
- DIRECT MARKETING. Direct marketing strategies are also used to generate
leads for our specific products and services. 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.
- SALES FORCE AUTOMATION. At the end of fiscal 2003, a major effort to
implement a web-based, Customer Relationship Management (CRM) system was
launched for internal use. We expect that by the end of December 2003,
more than 200 employees in the U.S. and Europe will be wired into this
integrated system to share customer data, manage leads and contacts as
well as track sales proposals, RFP's and contracts sold.
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OUR COMPETITION
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. Consolidation in the industry
continues to create larger and larger global firms, some with billions of
dollars in annual revenue.
Industry analysts at Inside Research estimate that traditional market
research and polling revenue in the U.S. will grow at about 1.9% (compounded
annual growth rate, "CAGR", adjusted for inflation) in calendar year 2003, while
the Internet-based market research and polling segment of the industry will grow
at about 17% (CAGR adjusted for inflation) in calendar year 2003 -- down from
60% (CAGR adjusted for inflation) in CY2002 and 53% (CAGR adjusted for
inflation) in CY2001. Although barriers to entry are high, we expect that
competition will intensify as existing market research firms continue to invest
in building their online research capabilities.
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.
We believe, however, that we can and will remain highly competitive due to
the knowledge of our people and our ability to excel in:
- proprietary sample design techniques,
- questionnaire development,
- in-depth data collection, and
- the ability to accurately deliver data that represents the desired
demographics.
We also believe that we have additional competitive advantages such as:
- our expanding global footprint
- our ability to project results to the required universe,
- our large Internet panel, diverse in geographic scope and demographic
depth,
- our scalable proprietary Internet technology platform,
- our quality, and the depth and breadth of our products and services,
- our brand recognition and strong reputation,
- our values, and
- our very high levels of customer satisfaction
OUR INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success in becoming the leader in Internet-based market research has
been largely driven not only by our investment in our database but also 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,
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<PAGE>
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:
- 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
- Harris Interactive Configurator -- 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, HI Europe, 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 investments to rebuild our brand identity.
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 1996 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 trademark license
agreement with TNS, which provides us with a non-transferable license to use the
names HARRIS ONLINE, HARRIS POLL ONLINE, HARRIS INTERACTIVE, and HARRIS POLL
INTERACTIVE within the Territory. Our use of these trademarks is permitted only
in connection with market research services involving use of the Internet and
with reference to the license. 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 the business or assets of
Harris Interactive in favor of a competitor of TNS; provided however, in the
latter two cases we may purchase perpetual rights to the names.
We have licensed in the past, and expect to license in the future, certain
of our proprietary rights, such as trademarks or copyrighted material, to third
parties. While we attempt to ensure that the quality of our brand is maintained
by these licenses, licensees may take actions that might harm the value of our
proprietary rights or reputation. The steps taken by us to protect our
proprietary rights may not be adequate and third parties may infringe or
misappropriate our copyrights, trademarks and similar proprietary rights. In
addition, other parties may assert claims of infringement of intellectual
property or other proprietary rights against us.
In addition, there can be no assurance that third parties will not
independently develop functionally equivalent or superior systems, software or
procedures. We believe that our systems, software and procedures and other
proprietary rights do not infringe on the proprietary rights of third parties.
There can be no assurance, however, that third parties will not assert
infringement claims against us in the future or that any such claim will not
require us to enter into materially adverse license agreements or result in
protracted and costly litigation, regardless of the merits of such claims.
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FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
During fiscal 2003 and 2002, approximately 77% and 78%, respectively, of
our total consolidated revenue was derived from our U.S. operations and
approximately 23% and 22%, respectively, of our total consolidated revenue was
derived from our non-U.S. operations. Further financial information about the
geographic areas in which the Company operates is included in Note 8, "Business
Segment and Geographic Information," to our Audited Consolidated Financial
Statements contained in this Form 10-K.
BACKLOG
As of June 30, 2003, we had a revenue backlog of approximately $36 million,
as compared to a backlog of approximately $40 million at June 30, 2002. It is
estimated that substantially all of the backlog as of June 30, 2003 will be
recognized during the fiscal year ending June 30, 2004.
EMPLOYEES
As of June 30, 2003, we employed a total of 731 persons on a full-time
basis worldwide, 561 of which were employed in the United States. In addition,
we employed 1,003 part-time and hourly individuals on a worldwide basis, for
data gathering and processing activities, 199 of which were employed in the
United States.
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
15, 2003. These individuals have been elected by and are serving at the pleasure
of our board of directors:
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gordon S. Black 62 Chairman of the Board, Chief Executive Officer
Albert Angrisani 54 President, Chief Operating Officer
Leonard R. Bayer 53 Executive Vice President, Chief Technology
Officer
Bruce A. Newman 49 Chief Financial Officer, Secretary and
Treasurer
Dennis K. Bhame 55 Executive Vice President, Human Resources
Peter J. Milla 44 Executive Vice President, Chief Information
Officer
Gregory T. Novak 41 President, U.S. Operations
Arthur E. Coles 60 Group President, Health Care & Policy Research
Theresa A. Flanagan 42 President, Customer Loyalty Management
Ronald Knight 64 Group President, Harris Interactive Service
Bureau and Chief of Staff
George Terhanian 39 President, Harris Interactive Europe
Minoru Aoo 59 Managing Director, Harris Interactive Japan
David Vaden 32 Senior Vice President, Business Development &
Internet Services
James Fredrickson 42 Senior Vice President, Research Operations
</Table>
The following is a brief account of the business experience of each of the
above executive officers:
Gordon S. Black PhD. 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.
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<PAGE>
Albert 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 Dickinson 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.
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.
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 Inc., 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.
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.
Arthur E. Coles has served as our Group President, Health Care & Policy
Research, 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.
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.
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
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The Sutherland Group from September 1998 through July 2000. He is the former
Vice President and Chief of Staff of Business Operations for Xerox Corporation's
Production Systems Group (PSG) where he worked for 30 years. He served as a
Lieutenant in the U.S. Navy and worked as a financial analyst for General Motors
prior to joining Xerox Corporation. Mr. Knight holds a B.S. in Business
Administration from the University of Rochester, and an M.B.A. from the
University of Rhode Island.
Gregory T. Novak has served as President, U.S. Operations, since July 2003,
and prior to that he was 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.
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/North Asia in
the International Marketing Services Department. Mr. Aoo joined Nihon Keizai
Shimbun after receiving a Bachelor of Commercial Science from Keio University in
Tokyo.
George Terhanian PhD has served as President, Harris Interactive Europe,
since July 2003 and continues to serve as President of Global Internet Research.
Dr. Terhanian has directed the Company's online research activities since they
began in 1997. Prior to joining the Company in 1996, Dr. Terhanian taught in
elementary and secondary schools in the United States and was an analyst for the
Inspector General's Office of the United States Department of Education. He has
also served an appointment as an American Educational Research Association
Fellow at the National Center for Educational Statistics. Dr. Terhanian received
his B.A. from Haverford College, his Masters degree from Harvard University, and
his Ph.D. from the University of Pennsylvania.
David Vaden has served as Senior Vice President, Business Development and
Internet Services since January 2002. Mr. Vaden is responsible for direction of
the Company's acquisition and alliance program, strategic planning, and global
management of the Company's Internet research panel and specialty subpanels. He
served as Vice President, Finance from January 2000 to December 2001. Prior to
joining the Company, Mr. Vaden served as a Manager in the Audit and Business
Advisory Services division at PricewaterhouseCoopers LLP (PwC). While at PwC,
David was selected as one of fifty employees among thirty seven thousand
personnel in the United States to participate in the PwC Scholars Program. David
received an M.B.A. with distinction from Columbia University Business School, a
B.S. in Accounting with honors from St. John Fisher College and is a Certified
Public Accountant.
James Fredrickson has served as Senior Vice President, Research Operations,
since May 2002. In this role, Mr. Fredrickson is responsible for all of the
firm's operational activities associated with providing market research services
in support of client studies. Mr. Fredrickson was Vice President, Harris
Interactive Service Bureau from its inception in March 1999 to April 2002. From
1987 to 1999, Mr. Fredrickson served in a variety of operational roles. Mr.
Fredrickson received a B.S. in Mathematics from the State University of New York
at Brockport.
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 2008. In addition, we lease data collection centers, in
which we operate telephone interviewing centers 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, Norwalk, Connecticut, Minneapolis, Minnesota, Claremont,
California, London, England and Tokyo, Japan.
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<PAGE>
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, 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 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 2003.
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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.
<Table>
<Caption>
PRICE RANGE
OF COMMON STOCK
---------------
HIGH LOW
------ ------
<S> <C> <C>
Year ending June 30, 2003:
Fourth Quarter............................................ 6.9500 4.0000
Third Quarter............................................. 5.6000 2.9200
Second Quarter............................................ 3.5800 2.0000
First Quarter............................................. 3.5000 2.0800
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
</Table>
HOLDERS
At September 15, 2003, the Company's common stock was held by approximately
5,400 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
The Company issued and sold an aggregate of 414,299 shares of its common
stock to employees during the fourth quarter of fiscal 2003, upon the exercise
of options granted under the Company's 1997 stock option plan, at exercise
prices ranging from $0.35 per share to $3.70 per share, for an aggregate cash
consideration of $753,524. As to each employee of the Company who was issued the
common stock described in this paragraph, the Company relied on the exemption
from registration provided by 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).
On June 30, 2003, the Company issued an aggregate of 33,209 shares of its
common stock as the Company's matching contribution under its 401(k) Plan for an
aggregate consideration of $214,530, which did not constitute a sale under
Section 2(3) of the Securities Act of 1933, as amended.
During the fourth quarter of fiscal 2003, the Company issued and sold an
aggregate of 134,420 shares of its common stock to individuals who exercised
options to acquire shares received in connection with their investment in Total
Research in 1998, which options were assumed by the Company as part of the
Merger. The shares were issued at an exercise price of $1.84 per share for an
aggregate cash consideration of $247,333. As to
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<PAGE>
each person who was issued common stock described in this paragraph, the Company
relied on an exemption from registration provided under Section 4(2) of the
Securities Act of 1933.
On December 6, 1999, 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. During the period from December 6, 1999
through June 30, 2003, the Company used portions of the proceeds from its public
offering as follows: (i) approximately $56.2 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 used for
acquisitions and (iv) $4.0 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 of Harris Interactive
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.
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
---------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND SALES GROWTH)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue from services.............................. $130,551 $100,048 $ 60,061 $ 51,289 $28,965
Cost of services................................... 66,852 53,470 30,764 28,600 19,086
-------- -------- -------- -------- -------
Gross profit....................................... 63,699 46,578 29,297 22,689 9,879
OPERATING EXPENSES:
Sales and marketing expenses....................... 9,542 9,720 8,475 8,665 1,316
General and administrative expenses................ 47,507 46,708 48,537 37,856 17,590
Restructuring (credits) charges and asset
write-downs...................................... (997) 6,222 -- -- --
-------- -------- -------- -------- -------
Operating income (loss)............................ 7,647 (16,072) (27,715) (23,832) (9,027)
Interest and other income.......................... 563 1,412 3,721 3,100 206
Interest expense................................... (57) (95) (26) (160) (26)
-------- -------- -------- -------- -------
Income (loss) before income taxes.................. 8,153 (14,755) (24,020) (20,892) (8,847)
-------- -------- -------- -------- -------
Income tax (benefit) expense....................... (2,954) 38 -- 50 --
-------- -------- -------- -------- -------
Net income (loss).................................. 11,107 (14,793) (24,020) (20,942) (8,847)
Accrued dividends on preferred stock............... -- -- (738) (1,176)
-------- -------- -------- -------- -------
Net income (loss) available to holders of common
stock............................................ $ 11,107 $(14,793) $(24,020) $(21,680) (10,023)
======== ======== ======== ======== =======
Basic net income (loss) per share.................. $ 0.21 $ (0.32) $ (0.70) $ (0.93) $ (1.01)
======== ======== ======== ======== =======
Diluted net income (loss) per share................ $ 0.20 $ (0.32) $ (0.70) $ (0.93) $ (1.01)
======== ======== ======== ======== =======
Weighted average shares outstanding -- basic...... 52,984 46,136 34,239 23,318 9,955
Weighted average shares outstanding -- diluted.... 54,639 46,136 34,239 23,318 9,955
SELECTED OPERATING DATA:
Sales Growth....................................... 30% 67% 17% 77% 10%
Capital Expenditures............................... 2,178 2,841 7,606 12,092 4,372
BALANCE SHEET DATA (AT THE END OF THE PERIOD):
Cash and cash equivalents.......................... 20,391 10,787 10,585 23,932 108
Marketable securities.............................. 18,693 17,070 31,906 48,960
Working capital.................................... 41,321 27,799 45,394 78,698 552
Total Assets....................................... 145,242 135,463 85,221 104,452 14,785
Long-term debt, excluding current installment...... -- 314 -- -- --
Mandatory redeemable preferred stock............... -- -- -- -- 15,876
Total stockholders' equity (deficit)............... 118,489 103,300 71,174 94,350 (8,496)
</Table>
The selected consolidated financial data reported above includes the
financial results of the following entities which we acquired as of the dates
indicated: 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).
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Harris Interactive provides 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 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 services on a periodic subscription basis, typically
annually. Harris Interactive Service Bureau also 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 areas involving difficult or complex judgments made by
management with respect to the preparation of the Company's financial statements
for fiscal 2003 include:
- Revenue recognition,
- Provision for uncollectible accounts,
- Valuation of intangible assets and other long-lived assets,
- Valuation of goodwill
- Realizability of deferred tax assets, and
- 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.
Revenue under fixed fee arrangements is recognized on a proportional
performance basis based on the ratio of costs incurred to total estimated costs.
This revenue includes amounts billed to our clients to cover subcontractor costs
and other direct expenses. Provisions for estimated contract losses, if any, are
made in the period such losses are determined. Subscription revenue is
recognized upon delivery of the research results. 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.
The Company maintains provisions for uncollectible accounts and 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 and long-lived assets, excluding 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: a significant decrease in the market
price of a long-lived asset; 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 or their physical
condition; and significant adverse industry or market trends. In the event that
the carrying value of an asset is determined to be unrecoverable, the Company
would record an adjustment to the respective carrying value.
With respect to goodwill, the Company completes an impairment test on an
annual basis. In performing this annual test, the Company compares the fair
value of its reporting units with each reporting unit's carrying amount,
including goodwill. In the event that a reporting unit's carrying value exceeds
its fair value, the Company would record an adjustment to the respective
reporting unit's goodwill for the difference between the implied fair value of
goodwill and the carrying value. In addition to the annual impairment analysis,
the Company also
19
<PAGE>
assesses the carrying value of goodwill whenever events or changes in
circumstances indicate that the carrying amount of the underlying asset may not
be recoverable.
The Company evaluates the valuation allowance and potential realization of
its deferred tax assets on an ongoing basis. In the determination of the
valuation allowance, the Company has considered future taxable income. As a
result of the Company's operating performance in fiscal 2003 and the more
favorable near term outlook for profitability, a portion of the valuation
allowance was reversed with the resultant benefit to income and goodwill. Should
the Company determine that it is more likely than not that it will realize
additional deferred tax assets in the future, an additional adjustment would be
required to reduce the existing valuation allowance, with the resultant benefit
to income, goodwill and additional paid in capital. Further financial
information about income taxes is included in Note 11, "Income Taxes," to our
Audited Consolidated Financial Statements contained in this Form 10-K.
Since July 2001, the Company has had a loyalty program (HIpoints(TM)),
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 maintains a reserve for its
obligations with respect to future redemption of outstanding points, calculated
based on the expected redemption rate of the points. This expected redemption
rate is estimated based on research from other loyalty and retention programs
and the Company's actual redemption rates to date. 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 has created 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 services, and use a combined
worldwide network. For example, the Company was able to build on Total
Research's prior relationship with a key customer to win unrelated
Internet-based work in excess of $1 million over the past year.
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 has recorded approximately $50.5
million in goodwill and intangibles related to the acquisition in accordance
with the provisions of SFAS 141.
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
20
<PAGE>
Oxford, England, in consideration of a combination of cash and shares of Harris
Interactive common stock, and in February, 2001 the Company acquired all of the
assets of the custom research group of Yankelovich Partners, Inc., headquartered
in Norwalk, Connecticut.
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 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 a reserve for 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. In fiscal 2003 the Company realized
non-cash savings of approximately $2.1 million and cash savings of approximately
$5.6 million.
The following table summarizes activity with respect to the restructuring
and asset impairment charge for the period ended June 30, 2003:
<Table>
<Caption>
(IN THOUSANDS)
----------------------------------------------
ASSET LEASE
SEVERANCE WRITE-DOWNS COMMITMENTS TOTAL
--------- ----------- ----------- ------
<S> <C> <C> <C> <C>
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 (954) (1,025)
Fiscal 2003 adjustments......................... (997) (997)
------ ------ ------ ------
Remaining reserve at June 30, 2003................ $ 0 $ 0 $ 150 $ 150
====== ====== ====== ======
</Table>
As of June 30, 2002, all actions were completed, however cash payments for
lease commitments have been, and will continue to be, made on a longer-term
basis according to the contractually scheduled payments of such commitments and
will continue through 2005. During fiscal 2003, the Company adjusted the reserve
for restructuring charges by $997,000 for lease commitments that were no longer
required. The adjustments were due to the Company obtaining a release from its
obligations under lease obligations previously included in restructuring
charges.
The total number of employees included in the charge and ultimately
terminated was 82.
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated our results of
operations expressed as a percentage of revenue:
<Table>
<Caption>
YEAR ENDED JUNE 30,
--------------------
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Revenue from services....................................... 100% 100% 100%
Cost of services............................................ 51 53 51
--- --- ---
Gross profit................................................ 49 47 49
--- --- ---
Operating expenses:
Sales and marketing......................................... 7 10 14
General and administrative.................................. 37 47 81
Restructuring (credits) charges and asset write-downs....... (1) 6 --
--- --- ---
Operating income (loss)..................................... 6 (16) (46)
Interest and other income, net.............................. 1 1 6
--- --- ---
Net income (loss) before taxes.............................. 7 (15) (40)
--- --- ---
Income tax (benefit) expense................................ (2) -- --
--- --- ---
Net income (loss)........................................... 9 (15) (40)
=== === ===
</Table>
FISCAL 2003 AS COMPARED TO FISCAL 2002
REVENUE FROM SERVICES. Total fiscal 2003 revenue increased 30%, from
$100.0 million in fiscal 2002 to $130.6 million in fiscal 2003. This increase in
revenue was primarily driven by the $22.6 million increase in U.S. revenue, or
29%, to $101.1 million for fiscal 2003. The increased U.S. revenue was partially
attributable to the incremental revenue generated from the acquisition of Total
Research as well as overall growth in several U.S. markets, most prominently
healthcare and customer loyalty management. Additionally, excluding the Total
Research acquisition, the Company recognized a modest increase in U.S. revenue
related to our expanding Internet client base and Internet-based market research
services, which contributed $59.3 million in total U.S. Internet-based revenue
for fiscal 2003, as compared to $40.6 million for the prior fiscal year.
Revenue for the United Kingdom increased from the prior year by $6.6
million, or 40%, to $23.0 million in fiscal 2003. Revenue for Japan increased
$1.3 million, or 26%, to $6.5 million in fiscal 2003. The increase in U.K.
revenue was primarily attributable to the incremental revenue generated from the
acquisition of Total Research in November 2001. Revenue from Japan increased due
to the continued benefit we derived from new contracts with selected customers
throughout fiscal 2003.
GROSS PROFIT. Gross profit was $63.7 million, or 49% of revenue, for
fiscal 2003, compared with $46.6 million, or 47% of revenue, for fiscal 2002.
The improvement in gross margin percentage resulted primarily from the growth in
Internet-related business relative to overall revenue growth. Revenue from
Internet-based services was $60.1 million, or 46% of total revenue, in fiscal
2003, compared with $40.6 million, or 41% of revenue, for fiscal 2002. This
increase in Internet revenue was due in part to the acquisition of new
Internet-based projects as well as the conversion of existing, traditional work
to the Internet. Additionally, through increasing the level of Internet related
work, the Company has been able to use our existing panel for research in place
of more expensive outsourcing and telephone costs. HISB has also played a
significant role in the growth of Internet revenue. HISB projects generate
higher gross margins due to the fact that they are data collection only and
typically do not include as much professional time as customer Internet-based
research work.
SALES AND MARKETING. Sales and marketing expenses in fiscal 2003 were $9.5
million, or 7% of revenue, compared with $9.7 million, or 10% of revenue, for
fiscal 2002. As a percentage of revenue, sales and marketing expenses decreased
three percentage points. The decrease is attributable to reductions in headcount
and related expenses, reflecting the Company's continuing efforts to reduce
costs, as well as productivity improvements from
22
<PAGE>
the increased experience level of the Company's sales force with Harris
Interactive sales and marketing strategies. The Company has been able to
maintain a consistent level of sales and marketing costs as a percentage of
sales throughout the fiscal year despite increased fiscal 2003 fourth quarter
expenditures for incentive compensation and severance related costs. The
severance related costs were associated with reorganizing our U.K. management
team and the closing of one of our four U.K. offices. The additional incentive
compensation expense resulted from increased full year revenue results as
compared to budget that led to increased commissions and bonuses to employees in
accordance with the Company's compensation plans. In total annual expenditures
in fiscal 2003 continue to support the Company's overall business model
established in the prior year.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $47.5
million, or 37% of revenue, in fiscal 2003 compared with $46.7 million, or 47%
of revenue, for fiscal 2002. The ten percentage point decrease in such expenses
as a percentage of revenue reflects reductions in headcount and related
expenses, rent expense and depreciation expense, and reflects the Company's
continuing efforts to reduce costs. Depreciation and equipment rental and
maintenance expenses decreased by a combined $1.1 million, or 15%, to $6.3
million in fiscal 2003 primarily as a result of the fixed asset write-offs in
connection with the Company's fiscal 2002 second quarter restructuring charge
which reduced the level of gross fixed assets. The 2002 restructuring plan also
reduced fiscal 2003 rent expense by $0.7 million as a result of the closing of
three of our telephone centers. As part of its cost savings efforts, the Company
has eliminated all but two telephone centers in the United States and the United
Kingdom, retaining one in each country primarily to support committed projects
with longer-term, predictable needs. The balance of telephone data collection
has been migrated to lower cost providers, including some in foreign countries.
The cost savings from the prior year restructuring plan were partially offset by
increased database development costs related to the establishment of our Western
European panel as well as the continued expansion of our U.S. panel, which are
expected to continue in fiscal 2004.
INTEREST AND OTHER INCOME, NET. Net interest and other income totaled $0.5
million for fiscal 2003 compared with $1.3 million for fiscal 2002. The decrease
was primarily attributable to a lower average marketable securities balance and
interest rates for fiscal 2003 compared to fiscal 2002.
INCOME TAX BENEFIT. The Company recorded an income tax benefit of $3.0
million in fiscal 2003 as compared to a minimal expense in fiscal 2002. For
financial reporting purposes, in fiscal 2003 the Company was able to utilize net
operating loss carryforwards to apply against current year net income, resulting
in substantially no current income tax expense. The recorded benefit in 2003 was
as a result of the partial reversal of the valuation allowance on the Company's
deferred tax assets. Since the deferred tax assets were substantially comprised
of net operating loss carryforwards and it was determined that it is more likely
than not that we will utilize additional net operating losses in the near
future, as required by GAAP a portion of the valuation allowance was reversed in
2003. Due to operating losses in fiscal 2002 no benefit was recognized in that
fiscal year.
FISCAL 2002 AS COMPARED TO FISCAL 2001
REVENUE FROM SERVICES. Revenue 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, and Market Research Solutions
Limited and M&A Create Limited in August of fiscal 2002. In fiscal 2002, the
Company also increased Internet-based revenue 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 PROFIT. Gross profit decreased to 47% in fiscal 2002, from 49% in
fiscal 2001. The margins declined primarily because a large majority of the
revenue derived from acquisitions was generated from traditional research as
opposed to Internet-based research.
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.
23
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $46.7
million, or 47% of revenue in fiscal 2002, compared with $48.5 million, or 81%
of revenue in fiscal 2001. Similar to sales and marketing expenses, general and
administrative expenses excluding database development costs 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 was directly attributable to continuing cost
reduction efforts including the fiscal 2002, second quarter restructuring plan.
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
primarily due to significant expenditures to build our U.S. database in fiscal
2001, the decreased price to acquire double opt-in names for database
replenishment in fiscal 2002, the termination of our panel recruitment agreement
with during fiscal 2002, and the elimination of costs associated with The Planet
Project Global Poll conducted in November 2000.
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 fiscal 2001.
SIGNIFICANT FACTORS AFFECTING COMPANY PERFORMANCE
In the past, the Company has reported EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization), which is a non-GAAP financial measure as
defined under SEC Regulation G. The Company has reported EBITDA because
management believes that EBITDA, although not a GAAP measurement, is widely
understood and is an additional tool that assists investors in evaluating
current operating performance of the business without the effect of the non-cash
depreciation and amortization expenses. Management internally monitors EBITDA to
monitor cash flow unencumbered by non-cash items. While instructive, EBITDA
should be considered in addition to, rather than as a substitute for, operating
income, net income or cash flows from operations or any other GAAP measure of
performance or liquidity.
Globally, for fiscal 2003, EBITDA was $13.3 million, or 10% of revenue,
compared to the fiscal 2002 and 2001 EBITDA losses of $9.6 million and $21.3
million, or 10% and 35% of revenue, respectively, as reconciled with the most
directly comparable financial measure calculated in accordance with GAAP within
the following table.
<Table>
<Caption>
YEAR ENDED
JUNE 30,
-----------------------------
2003 2002 2001
------ -------- -------
<S> <C> <C> <C>
Net income (loss)....................................... 11,107 (14,793) (24,020)
Less: interest and other income, net.................... (506) (1,317) (3,695)
Plus: income tax (benefit) expense...................... (2,954) 38 --
Plus: depreciation and amortization..................... 5,676 6,515 6,441
------ ------- -------
EBITDA.................................................. 13,323 (9,557) (21,274)
------ ------- -------
Net income (loss) as a % of revenue..................... 9% (15%) (40%)
------ ------- -------
EBITDA as a % of revenue................................ 10% (10%) (35%)
====== ======= =======
</Table>
By comparison, a published index reports average EBITDA as a percentage of
revenue of 5.9% for the U.S. market research industry as a whole for the
calendar year ended December 31, 2002.
The primary factors driving the growth in the Company's gross profit,
EBITDA and net income (loss) are growth in revenue and the mix of the revenue
derived from Internet versus traditional work. The Company's model is based upon
the premise that Internet work is more profitable than traditional work, due to
the
24
<PAGE>
comparatively low variable data collection cost of Internet work. The model,
which the Company believes reasonably represents comparability of traditional
and Internet-based projects, is as follows:
<Table>
<Caption>
TRADITIONAL INTERNET-BASED
----------- --------------
<S> <C> <C>
Revenue..................................................... 100% 100%
Less: Cost of Services (as a % of revenue)
Direct Payroll............................................ 25% 30%
Variable Data Collection.................................. 40% 5% - 10%
--- ---------
Variable Gross Profit (as a % of revenue)................... 35% 60% - 65%
=== =========
</Table>
In addition to the Variable Data Collection Costs, the Internet-Based model
has additional fixed costs associated with the development and maintenance of
underlying databases and Internet technology. Such costs decrease Net Income and
EBITDA for Internet-based work. In general, however, due to the interplay
between the variable and fixed components of cost, the premise is that, as the
percentage of Internet work increases, and assuming that project professional
service components and pricing are comparable and operating expenses continue to
be managed in the ordinary course, Net Income and EBITDA as a percentage of
revenue should also increase. Based upon the operation of the model, the Company
believes that net operating margins of its business can grow steadily over a
period of years with a potential as high as EBITDA in the range of high teens to
20%. Such growth is predicated upon the Company's global mix of Internet-based
versus traditional work, continued growth of revenue with the ability to
continue to achieve reasonable pricing, controlled growth of operating expenses,
and maintenance and continued growth of the respondent database sufficient to
support the Company's business at reasonable per-unit costs. The model should be
viewed as illustrative and not as an actual measure or predictor of any
particular project or the Company's projects as a whole at any given point in
time.
Regarding the Company's ability to continue to generate revenue, the
Company must constantly develop new business, both for growth and to replace
non-renewed projects. Although work for no one client constitutes more than 10%
of the Company's revenue, the Company has had to, and in the future will likely
have to, find significant amounts of replacement and additional revenue as
customer relationships and work for continuing customers change. The Company's
ability to generate revenue is dependent not only on execution of its business
plan but also on general market factors outside of its control. Many of our
clients treat all or a portion of their market research expenditures as
discretionary. As a result, as economic conditions decline in any of our
markets, our ability to generate revenue is adversely impacted.
The Company believes that its ability to continue to sustain and grow
revenue is significantly affected by client satisfaction with completed work,
and that improved client satisfaction ratings have had and will continue to have
a positive impact on the growth of the Company's business. We have instituted
what we believe are among the most comprehensive systems to measure client
satisfaction in our industry. We use information provided by our clients to
improve the quality of our products, services, and relationships, and therefore
to improve future satisfaction levels. As the Company matured in the conversion
of its business model to the Internet, we have been able to improve client
satisfaction scores to over 9.0 out of 10.0, among the top in our industry. We
believe that such improvements have had a direct result in greater customer
loyalty and an increased rate of customer acceptance of our proposals.
Regarding the mix of work, for fiscal 2003, the Company's actual Internet
mix was 46% on a global basis and 59% in the United States alone. The Company
considers all of the revenue from a project to be Internet-based whenever 50% or
more of the surveys were completed over the Internet. Although the Company
continues to work to convert projects to the Internet in the United States, the
primary new growth opportunity is in Europe, where the ability to change the
Internet mix is dependent upon the Company's success in expanding the size of
its respondent panel and increase customer acceptance of Internet-based work.
The globalization of the Internet portion of the Company's business has
commenced and we believe that it is expected to ramp up over the next several
years.
The Company's global database of more than 4 million Internet survey
respondents continues to be a critical component of its success. The Company
believes that its multi-million participant U.S. database, to which it is
25
<PAGE>
adding between 3,500 and 4,000 names per day on average, continues to be
adequate to service its Internet-based business. In fiscal 2003, the Company
launched an initiative to build a European database as well. To that end, it has
entered into name acquisition agreements with a major Internet portal and
others. Names are being added regularly to the European database, which included
approximately 350,000 names as of July 2003, and the Company is now conducting
Internet-based projects in Europe. The Company intends to continue to expand the
European panel in fiscal 2004 and beyond in order to support growth of
Internet-based research in Europe and is currently adding more than 1,000 names
per day. Additionally, in both the U.S. and in Europe, the Company intends to
continue efforts to enhance existing and build new specialty panels. For
example, it has entered into joint development activities with IMS Health, Inc.
to build physician specialty panels. The amount of the Company's investments in
names for its databases will continue to vary, particularly quarter by quarter,
based upon factors such as panel availability, opportunities that arise for
acquisition or development of panels in specialty or under-represented groups,
and attrition.
Internet databases by their nature experience participant attrition. There
are no standard measurement systems for such attrition, particularly in the
Internet survey response field. Measurement involves complex variables. For
example, determining attrition, by lack of response from a panelist for a set
length of time since last contact, is not necessarily reflective of expected
long-term attrition. The panelist may not have had an interest in responding
regarding particular survey topics offered over a period of time but may, after
an absence, respond to a later survey covering a topic of particular interest to
the respondent. Thus, percentage rates of attrition may not be comparable or
meaningful within the industry. When the Company first developed its Internet
model, it expected attrition of panel members to be in the range of 20%
annually. With the Company's increased expertise gained from several years of
investment in panel management techniques, it monitors panel fatigue and
attrition in multiple ways. Its overall attrition rates by most measures,
however, are significantly less than originally anticipated.
LIQUIDITY AND CAPITAL RESOURCES
Prior to fiscal 2003 we 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
$42.5 million at June 30, 2001, and $27.9 million at June 30, 2002. In fiscal
2003 the Company generated positive cash flows for the first time in recent
years and as a result our cash and cash equivalents and marketable securities
were $39.1 at June 30, 2003.
Net cash provided by operating activities was $11.9 million for fiscal 2003
as compared to net cash used in operating activities of $5.5 million and $15.5
million for fiscal 2002 and 2001, respectively. The positive cash flow in fiscal
2003 was primarily as a result of the Company generating net income in fiscal
2003 as compared to the funding of net losses in fiscal 2002 and 2001.
Net cash used in investing activities was $3.9 million in fiscal 2003 as
compared with net cash provided by investing activities of $8.0 million and $2.1
million for fiscal 2002 and fiscal 2001, respectively. During fiscal 2003 the
Company's investing activities included the net purchase of additional
marketable securities of approximately $1.9 million as well as capital
expenditures of $2.2 million. During fiscal 2002, net proceeds from sales and
maturities of marketable securities of $14.6 million were partially offset by
capital expenditures of $2.8 million and 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 capital expenditures of $7.6 million and
the $8.2 million cash outflow to purchase the custom research division of
Yankelovich Partners, Inc. in February 2001. Fiscal 2003, 2002 and 2001 capital
expenditures primarily supported the development of our Internet infrastructure
in the U.S.
In fiscal 2003 the Company had net cash provided by financing activities of
$1.8 million. The Company received cash of $4.1 million in fiscal 2003 as a
result of issuances of common stock and stock option exercises; this was offset
by the repayment of $2.3 million in short and long term borrowings. Net cash
used in financing activities of $1.7 million in fiscal 2002 was primarily
related to the repayment of long-term debt of $2.3 million and the repurchase of
422,900 shares of common stock for $0.9 million, these cash outflows were
partially offset by $1.7 million provided by the issuance of common stock and
stock option exercises. Net cash provided by
26
<PAGE>
financing activities was $0.1 million in fiscal 2001, resulting from issuances
of common stock and stock options of $0.9 million, offset by the repurchase of
common stock of $0.8 million.
Our capital requirements depend on numerous factors, including market
acceptance of our 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, our acquisition activities
and other factors. Management anticipates continuing expenditures for property,
plant and equipment and working capital requirements throughout fiscal 2004 at
levels consistent with fiscal 2003.
As of June 30, 2003 the Company had no short-term or long-term borrowings.
At 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 ranged from 1.8% to
3.0%. There were no restrictive covenants associated with these borrowings.
In fiscal 2003 and 2002, the Company had, and continues to maintain, a line
of credit with a commercial bank providing borrowing availability up to $5.0
million, at the prime interest rate. The prime rate in effect at June 30, 2003
was 4.0%. Borrowings under this arrangement are due upon demand. There were no
borrowings under this agreement at June 30, 2003 and June 30, 2002. The line of
credit is collateralized by the assets of the Company.
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 to support the Company's planned
operations for the foreseeable future. We cannot be certain, however, that our
underlying assumed levels of revenue 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 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.
CONTRACTUAL CASH OBLIGATIONS (IN THOUSANDS)
The Company's consolidated contractual cash obligations and other
commercial commitments as of June 30, 2003 are as follows:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
-----------------------------------------------
LESS THAN 1-3 3-5 AFTER
TOTAL 1 YEAR YEARS YEARS 5 YEARS
------- --------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
CONTRACTUAL OBLIGATIONS
- --------------------------
Long-term debt.................................. $ -- $ -- $ -- $ -- $ --
Capital lease obligations....................... -- -- -- -- --
Operating leases................................ 18,031 4,857 6,901 3,581 2,692
Purchase obligations............................ 2,767 1,237 1,530 -- --
Other long-term obligations..................... -- -- -- -- --
------- ------ ------ ------ ------
Total contractual cash obligations.............. $20,798 $6,094 $8,431 $3,581 $2,692
======= ====== ====== ====== ======
</Table>
<Table>
<Caption>
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
----------------------------------------------
LESS THAN 1-3 3-5 AFTER
TOTAL 1 YEAR YEARS YEARS 5 YEARS
------ --------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Lines of credit (1).............................. $5,000 $ -- $ -- $ -- $ --
Standby letters of credit........................ -- -- -- -- --
------ ------ ------ ------ ------
Total commercial commitments..................... $5,000 -- -- -- $ --
====== ====== ====== ====== ======
</Table>
- ---------------
(1) The Company's line of credit is payable upon demand under the terms of its
agreement. There were no borrowings outstanding under the line of credit at
June 30, 2003.
27
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NEW ACCOUNTING PRONOUNCEMENTS
SFAS 145
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
adopted SFAS No. 145 on July 1, 2002. The adoption did not have an impact on the
Company's consolidated financial statements.
SFAS 146
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 standard is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company adopted SFAS No. 146 on January
1, 2003. This adoption did not have an impact on the Company's consolidated
financial statements.
SFAS 148
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation -- Transition and Disclosure."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company is required
to follow the prescribed format and provide the additional disclosures required
by SFAS No. 148 in its annual financial statements for the year ending June 30,
2003 and is also required to provide the disclosures in its quarterly reports
containing condensed financial statements for interim periods beginning with the
quarterly period ended March 31, 2003. The Company adopted SFAS 148 on January
1, 2003 and elects to continue to account for its stock based compensation plans
under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees" as are described in Note 14 of the audited Consolidated Financial
Statements included in this Form 10-K. The adoption did not have an impact on
the Company's consolidated financial statements.
SFAS 149
In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and
hedging relationships designated after June 30, 2003, except for those
provisions of SFAS No. 149 which relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003.
The Company
28
<PAGE>
does not expect the adoption of SFAS 149 to have a material impact on the
Company's consolidated financial statements.
SFAS 150
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or as an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and is otherwise effective for the Company
beginning July 1, 2003. The Company does not expect the adoption of SFAS No. 150
to have a material impact on the Company's consolidated financial statements.
FIN 45
In November 2002, the FASB published Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that a guarantor
recognize a liability for the fair value of an obligation assumed under a
guarantee and also discusses additional disclosures to be made in the interim
and annual financial statements of the guarantor regarding obligations under
certain guarantees. The initial measurement and recognition requirements of FIN
45 are effective prospectively for guarantees issued or modified after December
31, 2002. The Company adopted FIN 45 on January 1, 2003. The adoption did not
have a material impact on the Company's consolidated financial statements.
FIN 46
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This standard clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and
addresses consolidation by business enterprises of variable interest entities
(more commonly known as Special Purpose Entities or SPE's). FIN No. 46 requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risk among the
parties involved. FIN No. 46 also enhances the disclosure requirements related
to variable interest entities. This statement is effective for variable interest
entities created or in which an enterprise obtains an interest after January 31,
2003. The Company adopted FIN 46 on July 1, 2003. The adoption did not have a
material impact on the Company's consolidated financial statements.
RISK FACTORS
THE MARKET RESEARCH INDUSTRY IS VULNERABLE TO GENERAL ECONOMIC CONDITIONS.
Many of our clients treat all or a portion of their market research
expenditures as discretionary. As general economic conditions decline and our
customers seek to control variable costs, projects to be performed by the
Company may be delayed or cancelled, and new project bookings may slow. As a
result, the growth and earnings of the Company may be adversely impacted.
OUR GROWTH WILL BE ADVERSELY AFFECTED IF THE MARKETPLACE DOES NOT CONTINUE TO
CONVERT TO INTERNET-BASED MARKET RESEARCH AND POLLING.
The ongoing success of our business will depend on our ability to
continually develop and market Internet-based products and services that achieve
broad market acceptance. Our 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 spent $67.1 million and
significant management resources to develop and grow our Internet-based market
research and polling business. Some of our clients have expressed concern that
Internet users do not yet accurately reflect their applicable population, and
that any information
29
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collected via the Internet will be inherently biased. If our current and
potential clients do not continue to 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 FACE INTENSE COMPETITIVE PRESSURES AND UNCERTAINTIES WITHIN THE MARKET
RESEARCH AND POLLING INDUSTRY.
The market research and polling industry is highly fragmented and includes
competitors much larger than we are. As competitors increase their ability to
offer alternative products in the market, we may come under increasing pressures
in selling and pricing our products and services. No one customer accounts for
more than 5% of our revenues and most of our revenues are derived on a project
by project basis. We must continuously replace completed work with new projects
in order to sustain and grow our revenues. The market research industry tends to
be adversely affected by slow or depressed business conditions in the market as
a whole. We are at risk of decreased market research budgets as our customers
respond to difficult economic conditions, as well as to delays in projects both
committed and uncommitted.
IF WE ARE UNABLE TO MAINTAIN ADEQUATE SIZE AND DEMOGRAPHIC COMPOSITION OF OUR
GLOBAL 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 worldwide panelists in our Internet panel and its
specialty-panels. Our ability to maintain an adequate online panel or increase
Internet revenues may be harmed if:
- a significant number of our current online panelists decide that they are
no longer willing to participate in our surveys,
- we lose a large number of online panelists from over-use, and then must
rely on a limited number of online panelists for ongoing research,
- we are unable to attract an adequate number of replacement panelists and
specialty panel members, or
- new regulatory requirements related to Internet "spam" make it
impractical for us to continue operations as currently conducted.
If the number of our active 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 will be unable to 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 that our HIpoints(SM), HIstakes(SM) and instant results programs
currently 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 a reduction in size of the panel.
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:
- inability to attract a critical mass of panel members in key countries
and regions, particularly in Europe,
- export controls relating to encryption technology,
- inability to comply with or enactment of more restrictive privacy laws,
30
<PAGE>
- changes in regulatory requirements,
- currency exchange fluctuations,
- problems in collecting accounts receivable and longer collection periods,
- potentially adverse tax consequences,
- political instability,
- Internet access restrictions, and
- anti-American sentiment or terrorist activity against American interests
abroad.
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.
IF WE DO NOT CONTINUE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE WITHIN THE
MARKET RESEARCH AND POLLING INDUSTRY, WE WILL NOT BE ABLE TO SUCCESSFULLY
IMPLEMENT OUR BUSINESS PLAN.
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.
Our ongoing success will depend on our continued ability to improve 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.
Any system failure, including network, software or hardware failure, that
causes an interruption in our ability to communicate with our Internet panel,
collect research data, or protect visual materials included in our surveys,
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.
One supplier of our secure off-site Web hosting facilities currently maintains
approximately one-third of our servers at one facility, and while we have
redundancy in our systems we depend upon the supplier and others to protect our
systems and operations from the events described above.
We have experienced technical difficulties and downtime of individual
components of our computer system in the past and believe that technical
difficulties and downtime may occur from time to time in the future. Although
technical difficulties and downtime have had minimal impact on our operations
during the past fiscal year, 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 to add
additional software and hardware to accommodate increased demand, unanticipated
system disruptions and slower data collection would likely result.
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.
Major components of the Internet backbone itself could fail due to
terrorist attack, war or natural disaster.
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While the impact of these outages in the past has been minimal, any future
system delays or failures in the Internet 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.
SUSTAINING OUR GROWTH MAY STRAIN OUR MANAGERIAL AND SYSTEMS RESOURCES.
We have grown rapidly and need to continue to grow in all areas of our
operations. 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 will not be able to successfully implement our business plan at
projected levels.
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. In the past,
competition for highly skilled employees has resulted in additional costs for
recruitment, compensation and relocation or the 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.
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, only a few of
our employees are currently bound by an employment agreement. All of our other
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.
OUR SUCCESSION PLANS MAY NOT BE SUCCESSFULLY EXECUTED.
We have started our search to identify potential candidates for Chief
Executive Officer. The hiring of a new CEO would allow Gordon S. Black, the
current CEO, to move to a position as Executive Chairman and more fully
concentrate on corporate strategy, major account marketing, international
expansion. investor relations, and acquisition. If the succession plans for the
CEO and other senior executives are not successfully executed, and appropriate
replacement(s) cannot be hired, the senior management may be overtaxed and
unable to properly execute all of their duties.
OUR BUSINESS IS LARGELY DEPENDENT ON THE CONTINUED DEVELOPMENT AND WORLDWIDE
GROWTH OF THE INTERNET. THE INTERNET MAY NOT GROW, OR 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:
- inadequate network infrastructure,
- security concerns,
- inconsistent quality of service, and
- unavailability of cost effective, high speed service.
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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.
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.
A BREACH OF OUR INTERNET SECURITY MEASURES OR SECURITY CONCERNS COULD ADVERSELY
AFFECT OUR BUSINESS.
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.
A failure in our security measures could result in the misappropriation of
private data. 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.
FAILURE OR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT
OUR BUSINESS.
Our success and ability to compete depends substantially on our internally
developed technologies and trademarks, which we protect through a combination of
patent, copyright, trade secret and trademark laws. We have registered 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 expenditures to
promote and rebuild our brand identity.
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. 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.
We generally enter into confidentiality or license agreements with parties
with whom we do business, and generally control access to, and distribution of,
our technologies, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights from unauthorized use or disclosure,
parties may attempt to disclose, obtain or use our technologies. The steps we
have taken may not prevent misappropriation of our technologies, particularly in
foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.
We also rely on off-the-shelf technologies that we license from third
parties. "Off-the-shelf" technology refers to generally commercially available
software that is not customized for a particular user. These third party
licenses may not continue to be available to us on commercially reasonable terms
or at all. The inability to use licensed technology important to our business
could require us to obtain substitute technology of lower quality or performance
standards or at a greater cost. In the future, we may seek to license additional
technology to enhance our current technology infrastructure. We cannot be
certain that any such licenses will be available on commercially reasonable
terms or at all. The loss of any of these technology licenses could result in
delays in providing our products and services until equivalent technology, if
available, is identified, licensed and integrated.
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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. We may be
accused of sending bulk unsolicited email, and have our email blocked by many
ISPs and therefore be unable to conduct online data collection.
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.
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 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.
CHANGES IN GOVERNMENT REGULATION OR INDUSTRY PRACTICES COULD LIMIT OUR INTERNET
ACTIVITIES OR RESULT IN ADDITIONAL COSTS OF DOING BUSINESS ON THE INTERNET.
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.
As of July 2003, at least 37 U.S. state legislatures had enacted laws
regulating the distribution of unsolicited email.
In April 2003, The Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003 (CAN-SPAM) was introduced in the U.S. senate. This bill
would require unsolicited e-mail marketing messages have a valid return address.
E-mail marketers would be required to remove customers from their mailing lists
if requested. The bill also give more legal ammunition for ISPs to take spammers
to court, allows the Federal Trade Commission (FTC) to impose fines, and gives
state attorneys general the power to bring lawsuit.
Any future 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:
- email distribution,
- user privacy and expression,
- the rights and safety of children,
- intellectual property,
- information security,
- anti-competitive practices,
- the convergence of traditional channels with Internet commerce,
- taxation and pricing, and
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<PAGE>
- 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.
WE HAVE INCURRED LOSSES IN RECENT YEARS AND MAY INCUR THEM AGAIN.
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, which are based on our estimates of future
revenues. While we have been profitable for fiscal 2003, 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 remain profitable in the future,
we may be unable to maintain current profitability growth on an ongoing 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:
- declines in general economic conditions or the budgets of our clients,
- a general decline in the demand for market research and polling products
and services,
- seasonal decreases in demand for market research and polling services,
- development of equal or superior products and services by our
competitors,
- technical difficulties that cause general and long-term failure of the
Internet, and
- currency fluctuations.
Factors that are partially within our control, and that have caused our
results to fluctuate in the past or that may affect us in the future, include:
- our relative mix of Internet-based and traditional market research and
polling businesses,
- technical difficulties that negatively affect our operations,
- 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,
- our ability to recruit respondents into our sub-panels, such as our IT
Decision Makers, to conduct high-value research for our clients, and
- 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 or any other trend
in our performance as an indication of our future results.
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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 likely 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 again, 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 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.
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 increase revenue, expand our Internet
panel, acquire additional intellectual capital and add to our portfolio of
existing products and services, we may acquire or make investments in
complementary businesses, services, products or technologies. We may be unable
to identify suitable acquisition candidates or acquire them at reasonable prices
and/or on reasonable terms.
Some material risks of acquisitions are:
- difficulties in the integration and assimilation of the operations,
technologies, products and personnel of the acquired business,
- the diversion of management's attention from other business concerns,
- the availability of favorable acquisition financing, and
- the potential loss of key employees and/or customers of any acquired
business.
Acquisitions may require the use of significant amounts of cash, resulting
in the inability to use those funds for other business purposes. Acquisitions
using our capital stock could have a dilutive effect, and could adversely affect
the market price of our common stock. Amortization of intangible 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.
36
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has international sales and facilities in the United Kingdom
and Japan and therefore, is subject to foreign currency rate exposure. Non-U.S.
sales are denominated in the functional currencies of the country in which our
foreign subsidiaries reside. Total consolidated assets and liabilities of the
Company are translated into U.S. dollars at the exchange rates in effect as of
the balance sheet date. Income and expense items are translated at the average
exchange rate for each period presented. Accumulated net translation adjustments
are recorded in stockholders' equity. Foreign exchange transaction gains and
losses are included in the Company's results of operations, and were not
material for the periods presented. As a result of operating in foreign markets,
the Company's financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions. To the extent the
Company incurs expenses that are based on locally denominated sales volumes paid
in local currency, the exposure to foreign exchange risk is reduced. The Company
has determined that the impact of a near-term 10% appreciation or depreciation
of the U.S. dollar would have an insignificant effect on our financial position,
results of operations and cash flows. We have historically had very low exposure
to changes in foreign currency exchange rates. While the United Kingdom now
contributes significantly to our revenues, we continue to believe our exposure
to foreign currency fluctuation risk is low. Therefore the Company has not
entered into any derivative financial instruments to mitigate the exposure to
translation and transaction risk. However, this does not preclude the Company's
adoption of specific hedging strategies in the future. As we continue to expand
globally, the risk of foreign currency exchange rate fluctuation may increase.
Therefore, in the future, we will continue to assess the need to utilize
financial instruments to hedge currency exposures on an ongoing basis to
mitigate such risks.
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.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
<S> <C>
Report of Independent Auditors.............................. 39
Consolidated Balance Sheets at June 30, 2003 and 2002....... 40
Consolidated Statements of Operations for the years ended
June 30, 2003, 2002 and 2001.............................. 41
Consolidated Statements of Cash Flows for the years ended
June 30, 2003, 2002 and 2001.............................. 42
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2003, 2002 and 2001.................. 43
Notes to Consolidated Financial Statements (including
unaudited quarterly results of operations)................ 44
Index to Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts............ 67
</Table>
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.
38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF HARRIS INTERACTIVE INC.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Harris
Interactive Inc. (the "Company") and its subsidiaries at June 30, 2003 and June
30, 2002, and the results of their operations and their cash flows for each of
the three fiscal years in the period ended June 30, 2003, 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 25, 2003
39
<PAGE>
HARRIS INTERACTIVE INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
JUNE 30, JUNE 30,
2003 2002
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 20,391 $ 10,787
Marketable securities..................................... 18,693 17,070
Accounts receivable, less allowances of $325 and $474,
respectively........................................... 20,821 20,791
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 3,776 4,669
Other current assets...................................... 3,690 4,808
Deferred tax assets....................................... 127 --
-------- --------
Total current assets................................... 67,498 58,125
Property, plant and equipment, net........................ 7,806 9,703
Goodwill.................................................. 63,259 63,428
Other intangibles, less accumulated amortization of $720
and $408, respectively................................. 730 1,042
Other assets.............................................. 2,045 2,350
Deferred tax assets....................................... 3,904 815
-------- --------
Total assets........................................... $145,242 $135,463
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installment of long-term debt..................... $ -- $ 1,193
Accounts payable.......................................... 6,752 7,417
Accrued expenses.......................................... 9,050 11,081
Short-term borrowings..................................... -- 811
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 10,375 9,824
-------- --------
Total current liabilities.............................. 26,177 30,326
Long-term debt, excluding current installment............... -- 314
Other long-term liabilities................................. 576 1,523
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 shares
authorized; 54,500,713 shares issued at June 30, 2003
and 53,020,087 shares issued at June 30, 2002.......... 55 53
Additional paid in capital................................ 179,108 177,014
Unamortized deferred compensation......................... (56) (147)
Accumulated other comprehensive loss...................... (323) (248)
Accumulated deficit....................................... (60,295) (71,402)
Officer loan.............................................. -- (277)
Less: Treasury stock at cost, no shares at June 30, 2003
and 655,600 shares at June 30, 2002.................... -- (1,693)
-------- --------
Total stockholders' equity............................. 118,489 103,300
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $145,242 $135,463
======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE>
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
<S> <C> <C> <C>
Revenue from services.................................... $ 130,551 $ 100,048 $ 60,061
Cost of services......................................... 66,852 53,470 30,764
---------- ---------- ----------
Gross profit........................................ 63,699 46,578 29,297
Operating expenses:
Sales and marketing expenses........................... 9,542 9,720 8,475
General and administrative expenses.................... 47,507 46,708 48,537
Restructuring (credits) charges and asset
write-downs......................................... (997) 6,222 --
---------- ---------- ----------
Operating income (loss)............................. 7,647 (16,072) (27,715)
Interest and other income................................ 563 1,412 3,721
Interest expense......................................... (57) (95) (26)
---------- ---------- ----------
Income (loss) before income taxes................... 8,153 (14,755) (24,020)
---------- ---------- ----------
Income tax (benefit) expense............................. (2,954) 38 --
---------- ---------- ----------
Net income (loss)................................... 11,107 (14,793) (24,020)
========== ========== ==========
Basic net income (loss) per share........................ $ 0.21 $ (0.32) $ (0.70)
========== ========== ==========
Diluted net income (loss) per share...................... $ 0.20 $ (0.32) $ (0.70)
========== ========== ==========
Weighted average shares outstanding -- basic............ 52,983,689 46,136,445 34,239,393
========== ========== ==========
Weighted average shares outstanding -- diluted.......... 54,638,596 46,136,445 34,239,393
========== ========== ==========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
-----------------------------
2003 2002 2001
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $11,107 $(14,793) $(24,020)
Adjustments to reconcile net income (loss) to net cash
used in operating activities -- Depreciation and
amortization........................................... 5,583 6,534 6,441
Restructuring (credits) charges and asset write-offs... (997) 6,222
Less: Cash outflows related to restructuring charges
and asset write-offs................................. (1,025) (1,258)
Amortization of deferred compensation.................. 91 289 421
Amortization of premium and discount on marketable
securities........................................... 259 54 (493)
Loss on disposal of assets............................. 152
(Increase) decrease in --
Accounts receivable.................................. 266 3,138 (2,666)
Cost and estimated earnings in excess of billings on
uncompleted contracts............................. 965 425 1,892
Other current assets................................. (3,822) (379) 492
Other assets......................................... 1,033 681 (1,668)
(Decrease) increase in --
Accounts payable.................................. (805) (1,975) 562
Accrued expenses.................................. (254) (4,663) (95)
Other liabilities................................. (982) 1,168 --
Billings in excess of costs and estimated earnings
on uncompleted contracts........................ 444 (971) 3,478
------- -------- --------
Net cash provided by (used in) operating
activities...................................... 11,863 (5,528) (15,504)
------- -------- --------
Cash flows from investing activities:
Cash paid in connection with acquisitions, net of cash
acquired............................................... 168 (3,751) (8,207)
Purchase of marketable securities......................... (32,926) (36,603) (41,838)
Proceeds from maturities and sales of marketable
securities............................................. 31,023 51,208 59,742
Capital expenditures...................................... (2,178) (2,841) (7,606)
------- -------- --------
Net cash (used in) provided by investing
activities...................................... (3,913) 8,013 2,091
------- -------- --------
Cash flows from financing activities :
Principal payments under long-term debt................... (2,327)
Decrease in short-term borrowings......................... (811) (137)
Decrease in long-term borrowings.......................... (1,507)
Issuance of common stock and stock options................ 4,091 1,662 898
Repurchase of common stock................................ (901) (792)
------- -------- --------
Net cash provided by (used in) financing
activities...................................... 1,773 (1,703) 106
Effect of exchange rate changes on cash and cash
equivalents............................................... (119) (580) (40)
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 9,604 202 (13,347)
Cash and cash equivalents at beginning of period............ 10,787 10,585 23,932
------- -------- --------
Cash and cash equivalents at end of period.................. $20,391 $ 10,787 $ 10,585
======= ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<Table>
<Caption>
COMMON STOCK ACCUMULATED RETAINED
OUTSTANDING ADDITIONAL UNAMORTIZED OTHER EARNINGS
--------------- PAID-IN DEFERRED COMPREHENSIVE (ACCUMULATED TREASURY OFFICER
SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) DEFICIT) STOCK LOAN
------ ------ ---------- ------------ ------------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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.... (792)
Issuance of common stock...... 67 195
------ -- ------- ------ ---- ------- ------ ----
BALANCE AT JUNE 30, 2001...... 34,614 34 128,793 (436) 184 (56,609) (792)
Comprehensive loss:
Net loss.................... (14,793)
Unrealized loss 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.... (901)
Issuance of common stock under
401(k) plan................. 120 328
Issuance of common stock for
acquisitions................ 17,533 18 47,104 (500)
Paydown of officer loan....... (60) (223) 223
------ -- ------- ------ ---- ------- ------ ----
BALANCE AT JUNE 30, 2002...... 53,020 53 177,014 (147) (248) (71,402) (1,693) (277)
Comprehensive income (loss):
Net income.................. 11,107
Unrealized loss on
marketable securities..... (20)
Foreign currency
translation............... (55)
Total comprehensive loss......
Exercise of options........... 2,101 2 3,209
Issuance of common stock under
Employee Stock Purchase
Plan........................ 100 268
Amortization of deferred
compensation................ 91
Retirement of common stock.... (791) (1,698) 1,693
Issuance of common stock under
401(k) plan................. 157 615
Paydown of officer loan....... (86) (300) 277
------ -- ------- ------ ---- ------- ------ ----
BALANCE AT JUNE 30, 2003...... 54,501 55 179,108 (56) (323) (60,295) -- --
====== == ======= ====== ==== ======= ====== ====
<Caption>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
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)
Issuance of common stock...... 195
-------
BALANCE AT JUNE 30, 2001...... 71,174
Comprehensive loss:
Net loss.................... (14,793)
Unrealized loss on
marketable securities..... (176)
Foreign currency
translation............... (256)
-------
Total comprehensive loss...... (15,225)
-------
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)
Issuance of common stock under
401(k) plan................. 328
Issuance of common stock for
acquisitions................ 46,622
Paydown of officer loan.......
-------
BALANCE AT JUNE 30, 2002...... 103,300
Comprehensive income (loss):
Net income.................. 11,107
Unrealized loss on
marketable securities..... (20)
Foreign currency
translation............... (55)
-------
Total comprehensive loss...... 11,032
-------
Exercise of options........... 3,211
Issuance of common stock under
Employee Stock Purchase
Plan........................ 268
Amortization of deferred
compensation................ 91
Retirement of common stock.... (5)
Issuance of common stock under
401(k) plan................. 615
Paydown of officer loan....... (23)
-------
BALANCE AT JUNE 30, 2003...... 118,489
=======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(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 Poll (TM), 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, 2003 and 2002.
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. 144, "Accounting for the Impairment and Disposal of
Long-Lived Assets" the Company assesses property, plant and equipment, for
impairment whenever events or changes in circumstances indicate that the
carrying amounts 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 upon
adoption, 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. See also footnotes 16, 17
and 18.
44
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
The Company follows the provisions of Statement of Position 98-1
"Accounting for Costs of Computer Software Developed or Obtained for Internal
Use" which accounts for the costs of computer software developed or obtained for
internal use and identifies the characteristics of internal use software. Such
amounts are included in other assets in the balance sheet and amounted to $1,485
and $1,628 at June 30, 2003 and 2002, respectively. Amortization expense related
to these costs amounted to $1,072, $913 and $678 for fiscal years 2003, 2002 and
2001, respectively.
REVENUE RECOGNITION
The Company recognizes revenue from services principally on a proportional
performance basis based on the ratio of costs incurred to total estimated costs.
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.
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 2003 and fiscal 2002, no single customer
accounted for more than 10% of the Company's consolidated revenue. For the year
ended June 30, 2001, the Company's largest customer comprised 12% of total
revenue and no other single customer comprised 10% of total revenue.
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.
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 $1,021, $1,275 and $1,653, for the
years ended June 30, 2003, 2002 and 2001, respectively.
45
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 financial statements and the reported amounts of revenue
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.
INCOME (LOSS) PER SHARE
Basic income (loss) per share amounts are computed based on the weighted
average number of shares of common stock outstanding during the year. Diluted
net income (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.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 145
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
adopted SFAS No. 145 on July 1, 2002. The adoption did not have an impact on the
Company's consolidated financial statements.
SFAS 146
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
46
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
standard is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company adopted SFAS No. 146 on January 1, 2003.
The adoption did not have an impact on the Company's consolidated financial
statements.
SFAS 148
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation -- Transition and Disclosure."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company is required
to follow the prescribed format and provide the additional disclosures required
by SFAS No. 148 in its annual financial statements for the year ending June 30,
2003 and is also required to provide the disclosures in its quarterly reports
containing condensed financial statements for interim periods. The Company
adopted SFAS 148 on January 1, 2003 and elects to continue to account for its
stock based compensation plans under the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" as are described in Note 14 of these
Audited Consolidated Financial Statements. The adoption did not have an impact
on the Company's consolidated financial statements.
SFAS 149
In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and
hedging relationships designated after June 30, 2003, except for those
provisions of SFAS No. 149 which relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003.
The Company does not expect the adoption of SFAS 149 to have a material impact
on the Company's consolidated financial statements.
SFAS 150
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or as an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and is otherwise effective for the Company
beginning July 1, 2003. The Company does not expect the adoption of SFAS No. 150
to have a material impact on the Company's consolidated financial statements.
FIN 45
In November 2002, the FASB published Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that a guarantor
recognize a liability for the fair value of an obligation assumed under a
guarantee and also discusses additional disclosures to be made in the interim
and annual financial statements of the guarantor regarding
47
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
obligations under certain guarantees. The initial measurement and recognition
requirements of FIN 45 are effective prospectively for guarantees issued or
modified after December 31, 2002. The Company adopted FIN 45 on January 1, 2003.
The adoption did not have an impact on the Company's consolidated financial
statements.
FIN 46
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This standard clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and
addresses consolidation by business enterprises of variable interest entities
(more commonly known as Special Purpose Entities or SPE's). FIN 46 requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risk among the
parties involved. FIN 46 also enhances the disclosure requirements related to
variable interest entities. This statement is effective for variable interest
entities created or in which an enterprise obtains an interest after January 31,
2003. The Company adopted FIN 46 on July 1, 2003. The adoption did not have an
impact on the Company's consolidated financial statements.
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 has created 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 services, and use a combined
worldwide network.
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 has recorded approximately $50,521 in goodwill and intangibles
related to the acquisition in accordance with the provisions of SFAS 142 (See
Notes 16 and 17).
The pro forma information set forth below assumes the acquisition with
Total Research Corporation had occurred at the beginning of fiscal 2002, after
giving effect to adjustments for amortization of intangibles. The 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
acquisition been consummated at that time.
48
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
3. BUSINESS COMBINATIONS -- (CONTINUED)
<Table>
<Caption>
TWELVE MONTHS ENDED
JUNE 30,
------------------------------------
(PRO-FORMA) (PRO-FORMA)
(UNAUDITED) (UNAUDITED)
2003 2002 2001
-------- ----------- -----------
<S> <C> <C> <C>
Revenue............................................. $130,551 $114,139 $113,845
Net income (loss)................................... 11,107 (22,755) (21,992)
Income(loss) per share -- basic..................... $ 0.21 $ (0.43) (0.43)
Income(loss) per share -- diluted................... $ 0.20 $ (0.43) (0.43)
</Table>
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:
<Table>
<Caption>
AS OF JUNE 30, 2003
-------------------
<S> <C>
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............................. $13,861
Liabilities assumed....................................... 17,174
Stock issued.............................................. 41,259
Fair value of stock options issued........................ 3,609
</Table>
4. RESTRUCTURING (CREDITS) 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
a reserve for lease commitments at these locations. The plan was formally
communicated to the affected employees during the second fiscal quarter of 2002.
49
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
4. RESTRUCTURING (CREDITS) CHARGES AND ASSET WRITE-DOWNS -- (CONTINUED)
The following table summarizes activity with respect to the restructuring
charges for the period ended June 30, 2003:
<Table>
<Caption>
ASSET WRITE- LEASE
SEVERANCE DOWNS COMMITMENTS TOTAL
--------- ------------ ----------- ------
<S> <C> <C> <C> <C>
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 (954) (1,025)
Fiscal 2003 adjustments................. (997) (997)
------ ------ ------ ------
Remaining reserve at June 30, 2003........ $ 0 $ 0 $ 150 $ 150
====== ====== ====== ======
</Table>
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. The total number of employees included in the charge and ultimately
terminated was 82.
During fiscal 2003, the Company adjusted the reserve for restructuring
charges by $997 for lease commitments that were no longer required. The
adjustments were due to the Company obtaining a release from its obligations
under previous lease obligations.
5. MARKETABLE SECURITIES
At June 30, 2003 and 2002, marketable securities consisted of the
following:
<Table>
<Caption>
2003 2002
-------------------- --------------------
COST FAIR VALUE COST FAIR VALUE
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Type of issue:
Available-for-sale securities Commercial
paper................................... $ 2,400 $ 2,400 $ 4,127 $ 4,127
Corporate bonds............................ 12,186 12,214 7,878 7,924
Government securities...................... 4,067 4,079 5,012 5,019
------- ------- ------- -------
Total available-for-sale securities.......... $18,653 $18,693 $17,017 $17,070
======= ======= ======= =======
</Table>
Gross unrealized gains and losses on available-for-sale securities at June
30, 2003 were $41 and $1, respectively. Gross unrealized gains and losses on
available-for-sale securities at June 30, 2002 were $53 and $3, respectively.
The cost and fair value of available-for-sale securities at June 30, 2003
and 2002, by contractual maturity, are shown below:
<Table>
<Caption>
2003 2002
-------------------- --------------------
COST FAIR VALUE COST FAIR VALUE
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Maturity date:
Due in one year or less.................... $10,389 $10,413 $15,507 $15,560
Due after one year through three years..... 8,264 8,280 1,510 1,510
------- ------- ------- -------
Total available-for-sale securities.......... $18,653 $18,693 $17,017 $17,070
======= ======= ======= =======
</Table>
50
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
5. MARKETABLE SECURITIES -- (CONTINUED)
There were no material gains or losses from sales of available-for-sale
securities during the years ended June 30, 2003 and 2002
6. CONTRACTS IN PROGRESS
Accumulated costs and estimated earnings and billings on contracts in
progress at June 30 was as follows:
<Table>
<Caption>
2003 2002
------- -------
<S> <C> <C>
Accumulated costs and estimated earnings.................... $28,299 $16,687
Billings.................................................... (34,898) (21,842)
------- -------
$(6,599) $(5,155)
======= =======
</Table>
Contracts in progress are included in the accompanying balance sheets under
the following captions:
<Table>
<Caption>
2003 2002
-------- -------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 3,776 $ 4,669
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (10,375) (9,824)
-------- -------
$ (6,599) $(5,155)
======== =======
</Table>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<Table>
<Caption>
JUNE 30,
-------------------
2003 2002
-------- --------
<S> <C> <C>
Furniture and fixtures...................................... $ 4,341 $ 4,691
Equipment................................................... 19,696 17,679
Leasehold improvements...................................... 3,320 3,173
-------- --------
27,357 25,543
Accumulated depreciation.................................. (19,551) (15,840)
-------- --------
$ 7,806 $ 9,703
======== ========
</Table>
Depreciation expense on property, plant and equipment amounted to $4,198,
$4,421 and $4,755 in fiscal years 2003, 2002 and 2001, respectively.
The Company has several non-cancelable operating leases for office space,
vehicles and equipment. Future minimum lease payments under non-cancelable
operating leases as of June 30, 2003 are as follows:
<Table>
<Caption>
YEARS ENDING JUNE 30:
- ---------------------
<S> <C>
2004........................................................ $4,857
2005........................................................ 4,042
2006........................................................ 2,859
2007........................................................ 1,848
2008........................................................ 1,733
2009 and beyond............................................. 2,692
</Table>
51
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
7. PROPERTY, PLANT AND EQUIPMENT -- (CONTINUED)
Total rental expense for operating leases in 2003, 2002 and 2001 was
$5,183, $5,922 and $5,121, respectively.
8. BUSINESS SEGMENT AND 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 United States, the United Kingdom and Japan. Non-U.S. 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 and all inter-segment sales have been eliminated upon consolidation.
Geographic information for the years ended June 30, 2003, 2002 and 2001 are as
follows:
<Table>
<Caption>
U.S. U.K. JAPAN
MARKET MARKET MARKET
RESEARCH RESEARCH RESEARCH TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Year ended June 30, 2003:
Revenue...................................... $101,050 $23,044 $6,457 $130,551
Long-lived assets............................ 61,498 9,087 3,255 73,840
Year ended June 30, 2002:
Revenue...................................... $ 78,488 $16,418 $5,142 $100,048
Long-lived assets............................ 64,277 9,056 3,188 76,521
Year ended June 30, 2001:
Revenue...................................... $ 60,061 $ 0 $ 0 $ 60,061
Long-lived assets............................ 25,804 0 0 25,804
</Table>
9. ACCRUED EXPENSES
Accrued expenses consisted of the following at June 30:
<Table>
<Caption>
2003 2002
------ -------
<S> <C> <C>
Payroll and withholding expenses............................ $1,078 $ 1,022
Accrued benefits............................................ 792 1,055
Bonuses..................................................... 2,217 2,003
Accrued restructuring....................................... 150 1,053
Accrued HIpoints............................................ 1,562 930
Vacation accrual............................................ 339 688
Other....................................................... 2,912 4,330
------ -------
$9,050 $11,081
====== =======
</Table>
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
borrowing availability up to $5 million in fiscal 2003 and 2002, at the prime
rate. The prime rate in effect at June 30, 2003 was 4.0% and
52
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
10. LINE OF CREDIT -- (CONTINUED)
borrowings under this arrangement are due upon demand. There were no borrowings
outstanding under this agreement at June 30, 2003 or 2002. The line of credit is
collateralized by the assets of the Company.
At June 30, 2003 the Company had no short-term or long-term borrowings. At
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 ranged from 1.8% to
3.0% with maturity dates extending to 2006. There were no restrictive covenants
associated with these borrowings.
11. INCOME TAXES
The provision for income taxes consists of:
<Table>
<Caption>
2003 2002 2001
------- -------- --------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 262 $-- $--
State................................................ 38 -- --
Foreign.............................................. 45 38 --
------- --- ---
$ 345 $38 $--
Deferred:
Federal.............................................. $(2,654) $-- $--
State................................................ (382) -- --
Foreign.............................................. (263) -- --
------- --- ---
$(3,299) $-- $--
------- --- ---
$(2,954) $-- $--
======= === ===
</Table>
The U.S. and foreign components of loss before income taxes are as follows:
<Table>
<Caption>
2003 2002 2001
------ -------- --------
<S> <C> <C> <C>
U.S..................................................... $7,663 $(12,528) $(23,839)
Foreign................................................. 490 (2,227) (181)
------ -------- --------
$8,153 $(14,755) $(24,020)
====== ======== ========
</Table>
53
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
11. INCOME TAXES -- (CONTINUED)
Deferred tax assets (liabilities) at June 30 consist of the following:
<Table>
<Caption>
2003 2002
------- -------
<S> <C> <C>
Net operating loss carryforwards............................ $31,050 $30,121
Internet database development expenses...................... 1,048 1,837
Stock option compensation................................... 180 521
HIPoints Reserve............................................ 608 361
Other....................................................... 891 1,202
------- -------
Gross deferred tax assets................................... 33,777 34,042
Valuation allowance......................................... (29,227) (32,966)
------- -------
4,550 1,076
Goodwill.................................................... (519) (261)
------- -------
Net deferred tax assets..................................... $ 4,031 $ 815
======= =======
</Table>
As of June 30, 2003, the Company has Federal and New York State net
operating loss carryforwards of approximately $82,822 and $80,747, 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.
Deferred tax assets have been recognized to the extent management believes
it is more likely than not that the asset will be realized. Changes in facts,
circumstances and projections may have an effect on the amount of the asset
recognized in future periods.
The reversal of the valuation allowance established against deferred tax
assets for temporary differences resulting from APB 16 purchase accounting is
credited directly to goodwill, rather then income tax expense, resulting in zero
net effect to the income statement. If the deferred assets underlying the
valuation allowance are recognized, $3,192 of the valuation allowance would be
credited to goodwill.
Of the June 30, 2003 valuation allowance, $5,217 was established against
deferred tax assets associated with stock option deductions. The future reversal
of this portion of the valuation allowance would be credited directly to
additional paid in capital, which would result in no tax benefit recorded in the
income statement.
The (benefit) 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:
<Table>
<Caption>
2003 2002 2001
------ ------- -------
<S> <C> <C> <C>
Expense (Benefit) at Federal statutory rate............... $2,772 $(5,017) $(8,167)
State income tax benefit, net of Federal income tax....... 249 (938) (1,162)
Foreign rate differential................................. (10) (778) 62
Merger related expenses................................... -- (1,426) --
(Decrease) Increase in valuation allowance................ (6,023) 8,172 9,377
Other non-deductible items................................ 58 25 (110)
------ ------- -------
(2,954) $ 38 $ --
====== ======= =======
</Table>
54
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
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, 2003 and 2002 the Company had no outstanding Warrants.
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 2003, 2002 and 2001, employees purchased 99,383,
104,507 and 145,143 shares of common stock through the ESPP, 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" unless
such shares are formally retired. As of June 30, 2003, the Company had
repurchased and retired 655,600 shares of common stock, at a cost of $1,693
under such program.
INVESTOR STOCK OPTIONS
At June 30, 2003 and 2002, the Company had outstanding options to acquire
12,220 and 244,400, respectively, shares of its common stock (not including
options under the Company's employee stock option plan, as discussed in Note 14
below), which represent options to acquire common stock of Total Research which
were assumed by the Company in connection with the Merger.
13. NET INCOME (LOSS) PER SHARE
The following table presents the shares used in computing basic and diluted
earnings per share ("EPS") for the years ended June 30, 2003, 2002 and 2001.
Unexercised stock options to purchase 564,343 shares of the Company's common
stock for the year ended June 30, 2003 at a weighted average price per share of
$8.05 were not included in the computations of diluted earnings per share
because the options exercise prices were greater than the average market price
of the Company's common stock for fiscal 2003. As a result of losses from
continuing operations, unexercised stock options to purchase 6,543,458 and
3,858,484 shares of the Company's common stock for the years ended June 30, 2002
and 2001, respectively, at weighted average prices per share of $2.67 and $3.38,
were excluded from the calculation of diluted net loss per share as the effect
would have been anti-dilutive.
<Table>
<Caption>
FOR THE YEAR ENDED JUNE 30,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average outstanding common shares for
basic EPS................................... 52,983,689 46,136,445 34,239,393
Diluted effect of outstanding stock options... 1,654,907 -- --
Shares for diluted EPS........................ 54,638,596 46,136,445 34,239,393
</Table>
55
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
13. NET INCOME (LOSS) PER SHARE -- (CONTINUED)
The following table sets forth the computation of basic and diluted net
loss per share:
<Table>
<Caption>
2003 2002 2001
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income(loss) attributable to holders of
common stock............................. $ 11,107 $ (14,793) $ (24,020)
=========== =========== ===========
Denominator for basic income(loss) per
share -- weighted average shares............ 52,983,689 46,136,445 34,239,393
=========== =========== ===========
Basic income (loss) per share................. $ 0.21 $ (0.32) $ (0.70)
=========== =========== ===========
Denominator for diluted income(loss) per
share -- weighted average shares............ 54,638,596 46,136,445 34,239,393
=========== =========== ===========
Diluted income (loss) per share............... $ 0.20 $ (0.32) $ (0.70)
=========== =========== ===========
</Table>
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 1,162,766 shares available
for future grant at June 30, 2003.
Additionally, pursuant to the terms of the Merger, outstanding options to
purchase common stock of Total Research Corporation became fully vested and
exercisable to purchase an aggregate of 2,654,306 shares of the Company's common
stock on November 1, 2001. All other terms of these options continue to be
governed by the applicable Total Research option agreements.
56
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
14. EMPLOYEE STOCK OPTION PLAN -- (CONTINUED)
A summary of the status of the Company's employee stock option plan
(including Total Research options after November 1, 2001) for the years ended
June 30, 2003, 2002 and 2001 is as follows:
<Table>
<Caption>
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE
---------- ----------------
<S> <C> <C>
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................................. 2,654,306 2.05
Granted............................................. 877,000 2.10
Canceled............................................ (367,194) 6.51
Exercised........................................... (723,538) 1.15
----------
Outstanding at June 30, 2002............................. 6,299,058 $2.70
Granted............................................. 785,000 2.48
Canceled............................................ (524,572) 4.51
Exercised........................................... (1,870,341) 1.49
----------
Outstanding at June 30, 2003............................. 4,689,145 2.95
==========
</Table>
Employee stock options exercisable as of June 30, 2003, 2002 and 2001
amounted to 3,436,548, 4,965,355 and 2,456,572, respectively. The weighted
average exercise price of the exercisable options at June 30, 2003, 2002 and
2001 was $3.00, $2.43 and $2.50, respectively.
The following represents additional information about employee stock
options outstanding at June 30, 2003:
<Table>
<Caption>
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)
--------------- ----------- ---------------- -------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ .35 - $ .47...... 389,000 4.3 $ 0.45 389,000 $ 0.45
1.26 - 3.70...... 3,584,866 7.1 $ 2.38 2,508,019 $ 2.41
3.75 - 7.06...... 447,279 7.1 $ 4.64 314,446 $ 4.79
11.00 - 14.00...... 268,000 6.7 $11.31 225,083 $11.33
</Table>
During fiscal 2000, 617,000 stock options 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 these options that 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 2003, 2002 and 2001. During fiscal 2003,
2002 and 2001, compensation expense recognized in the consolidated statements of
operations amounted to $91, $289 and $421, respectively.
The weighted average fair market value of options granted during fiscal
2003, 2002 and 2001 was $1.37, $1.17 and $2.92, respectively. For purposes of
this disclosure, the fair value of each option grant was estimated
57
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
14. EMPLOYEE STOCK OPTION PLAN -- (CONTINUED)
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants outstanding in 2003, 2002
and 2001.
<Table>
<Caption>
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate..................................... 2.35% 3.01% 4.31%
Weighted average expected life (years)...................... 4 3 3
Volatility factor........................................... 72% 81% 110%
Dividend yield.............................................. -- -- --
</Table>
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees. The pro forma information below illustrates the effect on
net income (loss) and net income (loss) per share based on provisions of
Statement of Financial Accounting Standard ("FAS") No. 123, Accounting for
Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, issued in December 2002.
<Table>
<Caption>
BASIC NET INCOME DILUTED NET INCOME
(LOSS) PER SHARE (LOSS) PER SHARE
AVAILABLE TO AVAILABLE TO
NET INCOME (LOSS) HOLDERS OF HOLDERS OF
AVAILABLE TO HOLDERS OF COMMON STOCK COMMON STOCK COMMON STOCK
------------------------------------- ---------------- ------------------
FAIR VALUE
AS COMPENSATION PRO AS PRO AS PRO
REPORTED EXPENSE FORMA REPORTED FORMA REPORTED FORMA
--------- ------------- --------- -------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
2003................. $ 11,107 $1,099 $ 10,008 $ .21 $.19 $ .20 $ .18
2002................. (14,793) 1,215 (16,008) $(.32) (.35) (.32) (.35)
2001................. (24,020) 1,262 (25,282) (.70) (.74) (.70) (.74)
</Table>
15. 401(K) PLAN
The Company established a 401(k) Plan (the "Plan") effective January 1,
1995. Eligibility to participate in the Plan, including employer matching
contributions, if any, is limited to those employees who are at least 21 years
of age and have completed one year of employment with at least 1,000 hours of
service. However, employees are eligible to contribute to the Plan upon
completion of one quarter of service.
Participants may contribute 1% to 100% of compensation up to federally
established limitations. Employer matching contributions are discretionary, and
include matching contributions and profit sharing contributions. Matching
contribution expense incurred by the Company during 2003, 2002 and 2001 was
$616, $634 and $344, respectively.
58
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
16. ACQUIRED INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
<Table>
<Caption>
AS OF JUNE 30,
-------------------------------------------------------------
2003 2002
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Amortized intangible assets
Contract-based intangibles...... $1,450 $720 $1,450 $408
------ ---- ------ ----
Total........................ $1,450 $720 $1,450 $408
====== ==== ====== ====
<Caption>
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------
2003 2002 2001
-------------- ------------ --------------
<S> <C> <C> <C> <C>
Aggregate amortization expense:
For the year ended.............. $ 312 $241 $ --
------ ---- ------
Estimated amortization expense:
For the year ending June 30,
2004......................... $ 312
------
For the year ending June 30,
2005......................... $ 312
------
For the year ending June 30,
2006......................... $ 106
------
</Table>
17. GOODWILL
<Table>
<Caption>
<S> <C>
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
Acquisition of Total Research during the quarter ended
December 31, 2001......................................... 49,239
-------
Balance as of July 1, 2002.................................. $63,428
Additional purchase accounting adjustments in connection
with the acquisition of Total Research.................... 249
Goodwill written off related to the reversal of deferred tax
asset valuation allowance................................. (418)
-------
Balance as of June 30, 2003................................. $63,259
=======
</Table>
18. GOODWILL AND OTHER INTANGIBLE ASSET -- ADOPTION OF FAS 142
On July 1, 2001 the Company adopted the provisions of SFAS No. 142
"Goodwill and Other Intangible Assets." The pronouncement required an annual
impairment test in lieu of monthly amortization for goodwill. 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, 2003 and 2002,
with no impairment identified.
59
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
18. GOODWILL AND OTHER INTANGIBLE ASSET -- ADOPTION OF FAS 142 -- (CONTINUED)
The following table presents prior years earnings and earnings per share as
if the provisions of FAS 142 had been applied to prior years:
<Table>
<Caption>
TWELVE MONTHS ENDED JUNE 30,
-----------------------------
2003 2002 2001
------- -------- --------
<S> <C> <C> <C>
Reported net income (loss)............................. $11,107 $(14,793) $(24,020)
Add back goodwill amortization......................... 331
Adjusted net income (loss)............................. $11,107 $(14,793) $(23,689)
Basic net income (loss) per share:
Reported net income (loss)............................. $ 0.21 $ (0.32) $ (0.70)
Add back goodwill amortization......................... -- -- 0.01
Adjusted basic and diluted net income (loss)........... $ 0.21 $ (0.32) $ (0.69)
Diluted net income (loss) per share:
Reported net income (loss)............................. $ 0.20 $ (0.32) $ (0.70)
Add back goodwill amortization......................... -- -- 0.01
Adjusted basic and diluted net income (loss)........... $ 0.20 $ (0.32) $ (0.69)
</Table>
19. SUPPLEMENTAL CASH FLOW INFORMATION
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) during the year for:
<Table>
<Caption>
2003 2002 2001
----- ------- -------
<S> <C> <C> <C>
Interest................................................... $(411) $(1,686) $(3,941)
----- ------- -------
Taxes...................................................... $(823) $ 41 $ --
----- ------- -------
</Table>
20. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited consolidated quarterly statement of
operations data for the years ended June 30, 2003 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
60
<PAGE>
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
20. UNAUDITED QUARTERLY RESULTS OF OPERATIONS -- (CONTINUED)
Form 10-K. The results of operations for any quarter are not necessarily
indicative of results that may be expected for any future periods.
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
2001 2001 2002 2002 2002 2002 2003 2003
------------- ------------ --------- -------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from
services........... $17,134 $ 24,804 $28,323 $29,787 $30,329 $32,468 $32,080 $35,674
Cost of services..... 9,188 14,405 14,536 15,341 16,552 16,944 16,141 17,215
------- -------- ------- ------- ------- ------- ------- -------
Gross Profit......... 7,946 10,399 13,787 14,446 13,777 15,524 15,939 18,459
Operating expenses:
Sales and marketing
expenses......... 1,599 2,742 3,023 2,344 1,909 2,226 2,352 3,055
General and
administrative
expenses......... 10,087 12,332 12,205 12,096 11,003 11,763 11,411 13,330
Restructuring and
asset
impairment....... -- 6,222 -- -- -- (389) (273) (335)
------- -------- ------- ------- ------- ------- ------- -------
Operating (loss)
income............. (3,740) (10,897) (1,441) 6 865 1,924 2,449 2,409
Interest and other
income............. 529 406 247 230 168 149 114 132
Interest expense..... (19) (25) (22) (29) (19) (19) (6) (13)
------- -------- ------- ------- ------- ------- ------- -------
(Loss) income before
income taxes....... (3,230) (10,516) (1,216) 207 1,014 2,054 2,557 2,528
Income tax (benefit)
expense............ -- -- -- 38 -- -- -- (2,954)
------- -------- ------- ------- ------- ------- ------- -------
Net (loss) income.... $(3,230) $(10,516) $(1,216) $ 169 $ 1,014 $ 2,054 $ 2,557 $ 5,482
======= ======== ======= ======= ======= ======= ======= =======
Basic net (loss)
Income per share... $ (0.09) $ (0.23) $ (0.02) $ 0.00 $ 0.02 $ 0.04 $ 0.05 $ 0.10
======= ======== ======= ======= ======= ======= ======= =======
Diluted net (loss)
Income per share... $ (0.09) $ (0.23) $ (0.02) $ 0.00 $ 0.02 $ 0.04 $ 0.05 $ 0.10
======= ======== ======= ======= ======= ======= ======= =======
</Table>
61
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Principal
Executive Officer and Principal Financial Officer, evaluated the effectiveness
of the design and operation of Harris Interactive's disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Based on that evaluation, the Company's
Principal Executive Officer and Principal Financial Officer concluded that
Harris Interactive's disclosure controls and procedures as of June 30, 2003 (the
end of the period covered by this Report on Form 10-K) have been designed and
are functioning effectively to provide reasonable assurance that the information
required to be disclosed by Harris Interactive in reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
PART III
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 on November 11, 2003
(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 and significant employees, see the section captioned
"Executive Officers of Harris Interactive" in Part I of this Form 10-K. 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
of Executive Officers and Directors and Other Matters", "Compensation Committee
Report on Executive Compensation", and "Comparison of 43 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Audit Fees"
in the Proxy Statement.
62
<PAGE>
PART IV
ITEM 15. 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":
<Table>
<Caption>
<S> <C>
Report of Independent Auditors.............................. 39
Consolidated Balance Sheets at June 30, 2003 and 2002....... 40
Consolidated Statements of Operations for the years ended
June 30, 2003, 2002 and 2001.............................. 41
Consolidated Statements of Cash Flows for the years ended
June 30, 2002, 2001 and 2000.............................. 42
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2003, 2002 and 2001.................. 43
Notes to Consolidated Financial Statements (including
unaudited quarterly results of operations)................ 44
</Table>
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, 2003. 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 23, 2003, a report on Form 8-K was furnished to the SEC pursuant
to Items 7 and 9 (Item 12) announcing the Company's earnings for the calendar
quarter ended March 31, 2003.
On May 1, 2003, a report on Form 8-K was filed with the SEC pursuant to
Item 5 announcing the participation of certain current executives of the Company
in 10b5-1 Sales plans.
On May 8, 2003, a report on Form 8-K was filed with the SEC pursuant to
Item 5 announcing the Company's receipt of a notice of demand registration
rights with respect to registration of an aggregate of 11,810,278 shares of the
common stock, par value $.001 per share, of the Company held by BVCF III, L.P.,
Brinson MAP Venture Capital Fund III Trust and Virginia Retirement System
(collectively, the "Investors"), pursuant to a Registration Agreement dated as
of July 7, 1998, as amended, between the Company and the Investors.
63
<PAGE>
EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
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, 2001 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).
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 Credit Facility between Gordon S. Black
Corporation and Manufacturers and Traders Trust Company
dated August 18, 1999 (filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.9 Investment Agreement between Market Facts, Inc. and the
Company dated April, 1999 (filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
</Table>
64
<PAGE>
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
10.10 Amended and Restated Investment Agreement between Riedman
Corporation and the Company dated October 15, 1991 (filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1/A filed October 26, 1999 (Registration No.
333-87311) and incorporated herein by reference).
10.11 Investment Agreement among SEQUEL Limited Partnership II and
Sequel Entrepreneur's Fund II, L.P. and the Company dated as
of October 15, 1995 (filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-1/A filed October 26, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.12 Investment Agreement between Young & Rubicam Inc. and the
Company dated as of October 15, 1999 (filed as Exhibit 10.14
to the Company's Registration Statement on Form S-1/A filed
October 26, 1999 (Registration No. 333-87311) and
incorporated herein by reference).
10.14 Amendment No. 1 to the Registration Agreement between the
Company and Brinson Map Venture Capital Fund III, Brinson
MAP Venture Capital Fund III Trust, BVCF III, L.P., and
Virginia Retirement System dated as of October 15, 1999
(filed as Exhibit 10.16 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.15 Registration Agreement between the Company and Riedman
Corporation dated as of October 15, 1999 (filed as Exhibit
10.17 to the Company's Registration Statement on Form S-1/A
filed October 26, 1999 (Registration No. 333-87311) and
incorporated herein by reference).
10.16 Registration Agreement among the Company and Sequel Limited
Partnership II and Sequel Entrepreneur's Fund II, L.P. dated
as of October 15, 1999 (filed as Exhibit 10.18 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.17 Registration Agreement between the Registrant and Young &
Rubicam Inc. dated as of October 15, 1999 (filed as Exhibit
10.19 to the Company's Registration Statement on Form 5-1/A
filed October 26, 1999 (Registration No. 333-87311 and
incorporated herein by reference).
10.18 Registration Agreement between the Registrant and Excite,
Inc. dated as of October 15, 1999 (filed as Exhibit 10.20 to
the Company's Registration Statement on Form S-1/A filed
October 26, 1999 (Registration No. 333-87311) and
incorporated herein by reference).
10.19 Stockholder's Agreement by and among the Company, Brinson
MAP Venture Capital Fund III, BVCF III, L.P., Virginia
Retirement System, Gordon S. Black, Leonard R. Bayer, David
M. Clemm, Excite, Inc., Young & Rubicam Inc., Riedman
Corporation, Sequel Limited Partnership II and Sequel
Entrepreneur's Fund II, L.P. dated as of October 15, 1999
(filed as Exhibit 10.21 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.20 Research Agreement between the Company and Young & Rubicam
Inc. dated October 22, 1999 (filed as Exhibit 10.22 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.21* Consulting Agreement between the Company and James R.
Riedman dated April 25, 2001 (filed as Exhibit 10.21 to Form
10-K filed August 31, 2002 and incorporated herein by
reference).
10.22* Separation Agreement by and between the Company 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 the Company 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 the Company and
Bruce A. Newman, dated as of June 28, 2002 (filed as Exhibit
10.25 to Form 10-K filed September 30, 2002 and incorporated
herein by reference).
</Table>
65
<PAGE>
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
10.26* Amendment No. 1 to the Employment Agreement by and between
the Company and Albert A. Angrisani, dated as of June 28,
2002 (filed as Exhibit 10.26 to Form 10-K filed September
30, 2002 and incorporated herein by reference).
10.27* Amendment No. 1 to the Letter Agreement of Albert A.
Angrisani, dated as of June 28, 2002 (filed as Exhibit 10.27
to Form 10-K filed September 30, 2002 and incorporated
herein by reference).
10.28* Employment Agreement between the Company and Gordon S.
Black, dated as of December 16, 2002 (filed as Exhibit 10.1
to Form 10-Q filed on February 10, 2003 (erroneously
referenced therein as Confidentiality and Non-Competition
Agreement and incorporated herein by reference)).
10.29* Form of Change in Control Agreement entered into by Company
with each of the following individuals (filed as Exhibit
10.1 to Form 10-Q filed on May 14, 2003 and incorporated
herein by reference):
</Table>
<Table>
<S> <C> <C>
Dennis K. Bhame Arthur E. Coles
Gareth Davies James E. Fredrickson
Ronald B. Knight Peter J. Milla
Gregory T. Novak George B. Terhanian
David B. Vaden
</Table>
<Table>
<S> <C>
10.30* Amendment to Employment Agreement by and between the Company
and Gordon S. Black, dated July 1, 2003 (filed herewith).
10.31* Employment Agreement by and between the Company and Leonard
R. Bayer, dated July 1, 2003 (filed herewith).
10.32* Employment Agreement by and between the Company and George
Terhanian, dated September 26, 2002 (filed herewith).
10.33* Letter Agreement of Albert A. Angrisani, effective as of
July 1, 2003 (filed herewith).
10.34* Employment Agreement by and between the Company and Theresa
Flanagan, dated January 1, 1999 (filed herewith).
21. List of Subsidiaries (filed as Exhibit 21 to Form 10-K filed
September 30, 2002 and incorporated herein by reference).
23.1 Consent of Independent Auditors (filed herewith).
23.2 Report of Independent Auditors on Financial Statement
Schedule (filed herewith).
24. Power of Attorney (included on page 69 of this Report).
31.1 Certificate of the Chief Executive Officer pursuant to 18
U.S.C. sec.1350 (Section 302 of the Sarbanes-Oxley Act of
2002) (filed herewith).
31.2 Certificate of the Chief Financial Officer pursuant to 18
U.S.C. sec.1350 (Section 302 of the Sarbanes-Oxley Act of
2002) (filed herewith).
32.1 Certificate of the Chief Executive Officer pursuant to 18
U.S.C. sec.1350 (Section 906 of the Sarbanes-Oxley Act of
2002) (filed herewith).
32.2 Certificate of the Chief Financial Officer pursuant to 18
U.S.C. sec.1350 (Section 906 of the Sarbanes-Oxley Act of
2002) (filed herewith).
</Table>
- ---------------
* Denotes management contract or compensatory plan or arrangement.
66
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<Table>
<Caption>
BALANCE AT ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO AMOUNTS AT END
OF PERIOD EARNINGS WRITTEN OFF OF PERIOD
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
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
======= ====== ====== =======
Year ended June 30, 2003
Deducted in the consolidated balance sheet:
Trade accounts receivable, allowance for
doubtful accounts............................ 474 78 227 325
======= ====== ====== =======
Deferred tax valuation allowance............... 32,966 0 3,739 29,227
======= ====== ====== =======
</Table>
67
<PAGE>
SIGNATURE
Pursuant to the requirements 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,
HARRIS INTERACTIVE INC.
September 26, 2003
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)
68
<PAGE>
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.
<Table>
<Caption>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C> <C>
/s/ GORDON S. BLACK Chairman of the Board and Chief September 26, 2003
- -------------------------------------- Executive Officer (Principal
Gordon S. Black Executive Officer)
/s/ BRUCE A. NEWMAN Chief Financial Officer, September 26, 2003
- -------------------------------------- Secretary, and Treasurer
Bruce A. Newman (Principal Financial and
Accounting Officer)
/s/ ALBERT A. ANGRISANI President, Chief Operating September 26, 2003
- -------------------------------------- Officer, and Director
Albert A. Angrisani
/s/ LEONARD R. BAYER Director September 26, 2003
- --------------------------------------
Leonard R. Bayer
/s/ THOMAS D. BERMAN Director September 26, 2003
- --------------------------------------
Thomas D. Berman
/s/ JAMES R. RIEDMAN Director September 26, 2003
- --------------------------------------
James R. Riedman
/s/ BENJAMIN D. ADDOMS Director September 26, 2003
- --------------------------------------
Benjamin D. Addoms
/s/ DAVID BRODSKY Director September 26, 2003
- --------------------------------------
David Brodsky
/s/ HOWARD L. SHECTER Director September 26, 2003
- --------------------------------------
Howard L. Shecter
</Table>
69
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.30
<SEQUENCE>3
<FILENAME>l03090aexv10w30.txt
<DESCRIPTION>EXHIBIT 10.30
<TEXT>
<PAGE>
EXHIBIT 10.30
AMENDMENT TO AGREEMENT
THIS AMENDMENT TO THE AGREEMENT, dated and effective as of July 1, 2003 (this
"Amendment"), is by and between Harris Interactive Inc. ("Harris"), a Delaware
corporation with offices at 60 Corporate Woods, Rochester, New York 14623, and
Gordon S. Black ("Black"), an individual with an address of 4747 W. Lake Road,
Canandaigua, New York 14424.
WHEREAS, Harris and Black are parties to an Agreement, dated as of December 16,
2002 (the "Agreement"); and
WHEREAS, Harris and Black desire to amend the Agreement as set forth in this
Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby mutually acknowledged, the parties hereto agree as follows:
1. The Agreement is amended as follows:
(a) The definition of the term "Base Salary" is hereby deleted in its
entirety and replaced with the following:
"Base Salary" means $375,000 per annum effective July 1, 2003, or such
higher base salary as may hereafter be approved by the Board of
Directors."
(b) The definition of the term "Termination Date" is hereby amended by
replacing "December 31, 2003" in clause (a)(i) with "December 31,
2004."
(c) Section 3(c) of the Agreement is hereby deleted in its entirety and
replaced with the following:
"Until the Termination Date, Black agrees to devote the time and effort
reasonably necessary to perform his duties. The parties acknowledge that Black
will be expected to undertake a significant amount of travel in furtherance of
the duties described in Section 3(a)."
(d) Section 5(a)(ii) of the Agreement is hereby deleted in its entirety
and replaced with the following:
"Bonus under the existing bonus programs applicable to Black for the fiscal
year ended June 30, 2003, and Bonus under bonus programs approved by the
Compensation Committee of Harris's Board of Directors applicable to executive
employees for fiscal years thereafter (it being acknowledged that Black's target
Bonus for fiscal years 2004 and after will be at least $50,000 greater than his
target Bonus for fiscal year 2003), pro rated for the period through and
including the Termination Date,"
(e) Section 5(a)(vii) of the Agreement is hereby deleted in its entirety
and replaced with the following:
"(vii) a car allowance of $1,000 per month through and including the
Termination Date, and"
2. Expenses. Harris shall reimburse Black for his attorney fees and
disbursements related to the negotiation, preparation and execution of this
Amendment.
3. Governing Law. This Amendment shall be construed under and governed by
the laws of the State of New York, without reference to principles of conflicts
of laws. The parties hereto consent to exclusive venue in the courts of the
State of New York sitting in Monroe County, or in the United States District
Court, Western District of New York with respect to any dispute regarding the
subject matter hereof. If any legal action is commenced to enforce or interpret
the provisions of this Amendment, or to recover damages for its breach, all
reasonable legal fees, disbursements, and court costs paid or incurred by the
prevailing party arising out of or resulting from such action or proceeding
shall be reimbursed by the other party to the prevailing party in such action or
proceeding.
4. Severability. If one or more of the provisions in this Amendment are
deemed unenforceable by law, then the remaining provisions shall continue in
full force and effect.
5. Counterparts. This Amendment may be executed in two or more counterparts,
each of which shall be deemed to be an original and all of which, when taken
together, shall be deemed to constitute the same Amendment.
[Signature page follows.]
1
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
HARRIS INTERACTIVE INC.
By: Gordon S. Black
-------------------------------------
Title: Chairman and Chief Executive Officer
/s/ Gordon S. Black
-------------------------------------
GORDON S. BLACK
2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.31
<SEQUENCE>4
<FILENAME>l03090aexv10w31.txt
<DESCRIPTION>EXHIBIT 10.31
<TEXT>
<PAGE>
EXHIBIT 10.31
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT ("Agreement") dated as of July 1, 2003 (the "Effective
Date") between Harris Interactive Inc., a Delaware corporation ("Company"), and
Leonard R. Bayer ("Executive").
BACKGROUND
----------
Executive has served as the Chief Technology Officer of Company since 1978.
Executive and Company are parties to a Confidentiality and Non-Competition
Agreement dated September 1, 1999 (the "Prior Agreement").
Company desires to have Executive serve as its Executive Vice President, Chief
Scientist, and Chief Technology Officer on the terms and conditions contained in
this Agreement, and to replace the Prior Agreement with this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and intending to be legally bound hereby, the parties hereto
agree as follows:
TERMS
-----
SECTION 1. CAPACITY AND DUTIES
-------------------
1.1 EMPLOYMENT; ACCEPTANCE OF EMPLOYMENT. Company hereby employs Executive
and Executive hereby accepts employment by Company for the period and upon the
terms and conditions hereinafter set forth.
1.2 CAPACITY AND DUTIES.
(a) Executive shall serve as the Executive Vice President, Chief
Scientist, and Chief Technology Officer of Company. Executive shall perform
duties and shall have authority as may from time to time be specified by the
Chief Executive Officer and the Board of Directors of Company (the "Board");
provided, however, that Executive shall not be required to perform duties not
normally performed by a person filling the role of chief scientist or chief
technology officer of comparable companies. Executive will report to the
Chairman and Chief Executive Officer. Executive shall perform his duties for
Company principally at Company's executive offices, presently in Rochester, New
York, provided, however, that Executive acknowledges and agrees that travel to
Company's and its affiliates' various offices, and to other locations in
furtherance of Company's business, will be required in connection with the
performance of Executive's duties hereunder.
(b) Company shall use its reasonable efforts to cause Executive to be
elected a member of the Board during the period this Agreement is in effect, but
the failure of the stockholders of Company to elect the Executive a member of
the Board shall not constitute a breach of this Agreement by Company.
(c) Executive shall devote full time efforts to the performance of
Executive's duties hereunder, in a manner that will faithfully and diligently
further the business and interests of Company.
SECTION 2. TERM OF EMPLOYMENT
------------------
2.1 TERM. The term of Executive's employment hereunder, for all purposes of
this Agreement, shall commence on the Effective Date (the "Commencement Date")
and continue through and including June 30, 2005, as further extended or unless
sooner terminated in accordance with the other provisions hereof (collectively,
the "Term", with the initial two years of the Term called the "Initial Term").
Except as hereinafter provided, on the expiration of the Initial Term this
Agreement shall be automatically extended for an additional one-year term, and
if so extended shall be automatically extended for successive additional
one-year terms, unless either the Executive or Company shall have given the
other written notice of nonrenewal of this Agreement at least six (6) months
prior to the end of the Initial Term or any one-year extension term then in
effect. If written notice of nonrenewal is given as provided above, Executive's
employment under this Agreement shall terminate on June 30, 2005, or if the Term
has automatically renewed, on the June 30 immediately following the date of the
non-renewal notice.
SECTION 3. COMPENSATION
------------
3.1 BASE COMPENSATION. As compensation for Executive's services, Company
shall pay to Executive base compensation in the form of salary ("Base
Compensation") in the amount of $330,000 per annum for the period from and
1
<PAGE>
including the Commencement Date through and including June 30, 2004, and in the
amount of $350,000 per annum thereafter. The salary shall be payable in periodic
installments in accordance with Company's regular payroll practices for its
executive personnel at the time of payment, but in no event less frequently than
monthly. The Compensation Committee of the Board shall review Base Compensation
periodically for the purpose of determining whether Base Compensation should be
adjusted; provided, however, that Executive's Base Compensation shall not be
less than the applicable amount set forth in this Section 3.1.
3.2 PERFORMANCE BONUS. As additional compensation for the services rendered
by Executive to Company, Executive shall be eligible for a performance bonus
payable in full at the same time as payment of other executive bonuses by the
Company (generally targeted for payment within ninety (90) days after the end of
the relevant fiscal year of the Company). The performance bonus award criteria
shall be based on the same Company performance guidelines as those established
for the Chief Operating Officer and the Chief Executive Officer, and the bonus
amount shall be in the highest tier of bonuses awarded in applicable period
pursuant to those award criteria (being the same tier as used to determine any
additional bonuses paid to the Chief Operating Officer and Chief Executive
Officer for the same period).
3.3 EMPLOYEE BENEFITS. During the Term, Executive shall be entitled to
participate in such of Company's employee benefit plans and benefit programs,
including medical, hospitalization, dental, disability, accidental death and
dismemberment and travel accident plans and programs, as may from time to time
be provided by Company for its senior executives generally. In addition, during
the Term Executive shall be eligible to participate in all pension, retirement,
savings and other employee benefit plans and programs maintained from time to
time by Company for the benefit of its senior executives generally. Company
shall have no obligation, however, to maintain any particular program or level
of benefits referred to in this Section 3.3.
3.4 OTHER BENEFITS. During the Term, the Company shall provide Executive
with an automobile allowance of $1,000.00 per month for the use of an automobile
owned or leased by him in accordance with the policies and procedures
established by the Company from time to time for executive employees.
3.5 VACATION. In view of his more than twenty year service to the Company,
Executive shall be entitled to the normal and customary amount of paid vacation
provided to senior executive officers of the Company, but in no event less than
25 days during each 12 month period. Any vacation days that are not taken in a
given 12 month period shall accrue and carry over from year to year up to a
maximum of 25 days. The Executive may be granted leaves of absence with or
without pay for such valid and legitimate reasons as the Board in its sole and
absolute discretion may determine, and is entitled to the same sick leave and
holidays provided to other senior executive officers of Company.
3.6 EXPENSE REIMBURSEMENT. Company shall reimburse Executive for all
reasonable and documented expenses incurred by him in connection with the
performance of Executive's duties hereunder in accordance with its regular
reimbursement policies as in effect from time to time.
3.7 LIFE INSURANCE. Company shall continue to maintain the Executive's
existing $250,000 term life insurance policy during the Term so long as such
coverage continues to be available to the Company at a cost no greater than the
last premium paid prior to the Commencement Date; provided, however, if such
cost increases, Company will so advise Executive and will continue to maintain
such insurance if Executive pays the cost in excess of the last premium paid
prior to the Commencement Date. Executive may continue to designate the
beneficiary of the policy and Company shall treat the cost of the insurance paid
by the Company as compensation to the Executive for tax and other business
purposes. Company shall not be required to maintain such life insurance if such
coverage is not reasonably available for purchase by the Company.
SECTION 4. TERMINATION OF EMPLOYMENT
-------------------------
4.1 DEATH OF EXECUTIVE. If Executive dies during the Term, Company shall
not thereafter be obligated to make any further payments hereunder other than
amounts for (i) Base Compensation, (ii) any Performance Bonus earned before the
date of death (including a prorated Performance Bonus for the period ending
before death calculated by annualizing the short period before death), (iii)
expense reimbursement, (iv) other amounts which have accrued as of the date of
Executive's death in accordance with generally accepted accounting principles,
and (v) the non-competition payment described in Section 5.4 (collectively, the
"Accrued Obligations", which, for purposes of this Agreement in situations other
than death, shall reference the date of termination).
4.2 DISABILITY OF EXECUTIVE. If Executive is permanently disabled (as
defined in Company's long-term disability insurance policy then in effect), then
the Board shall have the right to terminate Executive's employment upon 30 days'
prior written notice to Executive at any time during the continuation of such
disability ("Disability"). In the event Executive's employment is terminated for
Disability in accordance with this Section 4.2, Company shall not thereafter be
obligated to make any further payments hereunder other than Accrued Obligations
through the date of such termination.
2
<PAGE>
4.3 TERMINATION FOR CAUSE. Executive's employment hereunder shall terminate
immediately upon notice that the Board is terminating Executive for Cause (as
defined herein), in which event Company shall not thereafter be obligated to
make any further payments hereunder other than Accrued Obligations. "Cause"
shall be limited to the following:
(i) willful failure to substantially perform Executive's duties
as described in Section 1.2 after demand for substantial performance is
delivered by Company in writing that specifically identifies the manner in which
Company believes Executive has not substantially performed Executive's duties
and Executive's failure to cure such non-performance within ten (10) days after
receipt of the Company's written demand; provided, however, that a failure to
perform such duties during the remedy period set forth in Section 4.4(b)(i)
hereof following the issuance of a Notice of Termination (as herein defined) by
Executive for Good Reason shall not be Cause unless an arbitrator acting
pursuant to Section 6.1 hereof finds Executive to have acted in bad faith in
issuing such Notice of Termination;
(ii) willful misconduct that is materially and demonstrably
injurious to Company or any of its subsidiaries; or
(iii) conviction or plea of guilty or nolo contendere to a felony
or to any other crime which involves moral turpitude or, if not including moral
turpitude, provided the act giving rise to such conviction or plea is materially
and demonstrably injurious to the Company or any of its subsidiaries;
(iv) material violation of (x) Company's policies relating to
sexual harassment, substance or alcohol abuse, (y) Section 5 of this Agreement,
or (z) other Company polices set forth in Company manuals or written statements
of policy provided that in the case of this clause (z) that such violation is
materially and demonstrably injurious to Company and continues for more then
three (3) days after written notice thereof is given to Executive by the Board;
and
(v) material breach of any material provision of this Agreement
by Executive, which breach continues for more than ten days after written notice
thereof is given by the Board to Executive.
Cause shall not exist under this Section 4.3 unless and until Company has
delivered to Executive a copy of a resolution duly adopted by a majority of the
members of the Board then in office, at a meeting of the Board duly called and
held for such purpose or by written consent, finding that Cause exists in the
good faith opinion of the Board. This Section 4.3 shall not prevent Executive
from challenging in any arbitration proceeding or court of competent
jurisdiction the Board's determination that Cause exists, or that Executive has
failed to cure any act (or failure to act), to the extent permitted by this
Agreement, that purportedly formed the basis for the Board's determination.
Company must provide written notice to Executive that it is intending to
terminate Executive's employment for Cause within one hundred and twenty (120)
days after the Board has actual knowledge of the occurrence of the latest event
it believes constitutes Cause.
4.4 TERMINATION WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON.
(a) The Company reserves the right to terminate Executive's employment
at any time. If, however, (i) Executive's employment is terminated by Company
other than at the end of the Term (as the same may have been extended pursuant
to Section 2.1 of this Agreement) for any reason other than Cause under Section
4.3, death, or Disability, or (ii) Executive's employment is terminated by
Executive for Good Reason other than at the end of the Term (as the same may
have been extended pursuant to Section 2.1 of this Agreement), then Company
shall pay to Executive the Accrued Obligations through the date of termination,
and shall continue to make payments (or, in the case of benefits, provide an
economic equivalent) to Executive as required by Sections 3.1, 3.3, 3.4, and 3.7
of this Agreement through and including the date of expiration of the Term (as
the same may have been extended pursuant to Section 2.1 of this Agreement).
(b) "Good Reason" shall mean the following:
(i) material breach of Company's obligations hereunder, including
any assignment of duties not part of duties normally performed by persons
holding the position of chief scientist or chief technology officer of
comparable companies unless previously agreed to in writing by Executive,
provided that Executive shall have given reasonably specific written notice
thereof to Company, and Company shall have failed to remedy the circumstances
within sixty (60) days thereafter;
(ii) any decrease in Executive's salary as it may have increased
during the Term, except for decreases that are in conjunction with decreases in
executive salaries by the Company generally and that do not result in a decrease
in Executive's annual salary below $330,000 per annum on or before June 30, 2004
and $350,000 thereafter;
(iii) the failure of Executive to be appointed to all of the
positions set forth in Section 1.2(a), ie., Executive Vice President, Chief
Scientist, and Chief Technology Officer, or the failure of the Board to nominate
Executive for
3
<PAGE>
election as a member of the Board, provided, however, the failure of the
stockholders to elect Executive to the Board if he has been duly nominated for
election at the annual meeting of stockholders of the Company shall not
constitute Good Reason;
(iv) the relocation of Executive's principal office to a location
more than twenty-five (25) miles from Rochester, New York; provided, however,
that Executive's principal office shall not be deemed to be relocated by virtue
of Executive being required to spend up to five (5) working days per month on
average in the Company's and its subsidiary's other offices;
(v) the failure of any successor in interest of Company to be
bound by the terms of this Agreement in accordance with Section 6.4 hereof; or
(vi) substantial interference by the Board or Chief Executive
Officer with Executive's performance of Executive's duties, which interference
results in the inability of Executive to substantially perform Executive's
duties hereunder, provided that Executive shall have given reasonably specific
written notice thereof to the Board, such situation shall not have been
corrected within thirty (30) days, and the Board shall have determined, in its
sole discretion, that such interference exists and results in the inability of
Executive to substantially perform Executive's duties hereunder.
(vii) Executive must provide notice to the Company that he is
intending to terminate Executive's employment for Good Reason within one hundred
and twenty (120) days after Executive has actual knowledge of the occurrence of
the latest event he believes constitutes Good Reason, which termination notice
shall specify a termination date within thirty (30) days after the date of such
notice except for termination under subsection (i) or (vi) in which case the
termination date shall be as provided in such subsection. Executive's right to
terminate Executive's employment hereunder for Good Reason shall not be affected
by Executive's subsequent Disability provided that the notice of intention to
terminate is given prior to the onset of such Disability. Subject to compliance
by Executive with the notice provisions of this Section 4.4, Executive's
continued employment prior to terminating employment for Good Reason shall not
constitute consent to, or a waiver of rights with respect to, any act or failure
to act constituting Good Reason. In the event Executive delivers to the Company
a Notice of Termination for Good Reason, Executive agrees to appear before a
meeting of the Board called and held for such purpose (after reasonable notice)
and specify to the Board the particulars as to why Executive believes adequate
grounds for termination for Good Reason exist. No action by the Board, other
than the remedy of the circumstances within the time periods specified in
Section this 4.4, shall be binding on Executive.
4.5 TERMINATION BY EXECUTIVE WITHOUT GOOD REASON. In the event Executive's
employment is voluntarily terminated by Executive without Good Reason, Company
shall not be obligated to make any further payments to Executive hereunder other
than Accrued Obligations, excluding the portion of Accrued Obligations related
to Performance Bonus, through the date of such termination.
4.6 MITIGATION. Executive shall not be required to mitigate amounts payable
under this Section 4 by seeking other employment or otherwise, and there shall
be no offset against amounts due Executive under this Agreement on account of
subsequent employment except as specifically provided herein.
SECTION 5. NON-COMPETITION AND CONFIDENTIALITY
-----------------------------------
5.1 NON-COMPETITION
(a) During the period that Executive is employed by the Company, and
for a period of one year after the first to occur of (i) the Company's
termination of Executive's employment pursuant to Section 4.2 or 4.3 of this
Agreement, (ii) the Executive's termination of his employment other than for
Good Reason, and (iii) the end of the Term (as extended pursuant to Section 2.1
of this Agreement (the "Non-Competition Period"), Executive shall not, directly
or indirectly, own, manage, operate, join, control, participate in, invest in or
otherwise be connected or associated with, in any manner, including, without
limitation, as an officer, director, employee, distributor, independent
contractor, independent representative, partner, consultant, advisor, agent,
proprietor, trustee or investor, any Competing Business; provided, however, that
ownership of 4.9% or less of the stock or other securities of a corporation, the
stock of which is listed on a national securities exchange or is quoted on the
NASDAQ Stock Market's National Market, shall not constitute a breach of this
Section 5, so long as the Executive does not in fact have the power to control,
or direct the management of, or is not otherwise engaged in activities with,
such corporation.
(b) For purposes hereof, the term "Competing Business" shall mean any
business or venture which is substantially similar to the whole or any
significant part of the business conducted by Company.
4
<PAGE>
(c) Notwithstanding the above, the non-competition obligation in
Section 5.1(a) shall not apply if the Company fails to make the payment required
by Section 5.4 of this Agreement.
5.2 NO SOLICITATION. During the Noncompetion Period, the Executive shall
not, directly or indirectly, including on behalf of, for the benefit of, or in
conjunction with, any other person or entity, (i) solicit, assist, advise,
influence, induce or otherwise encourage in any way, any employee of Company to
terminate such employee's relationship with Company for any reason, or assist
any person or entity in doing so, or employ, engage or otherwise contract with
any employee or former employee of Company in a Competing Business or any other
business unless such former employee shall not have been employed by Company for
a period of at least one year and no solicitation prohibited hereby shall have
occurred prior to the end of such one-year period, (ii) interfere in any manner
with the relationship between any employee and Company, or (iii) contact,
service or solicit any existing clients, customers or accounts of Company on
behalf of a Competing Business, either as an individual on Executive's own
account, as an investor, or as an officer, director, partner, joint venturer,
consultant, employee, agent or salesman of any other person or entity.
5.3 CONFIDENTIAL INFORMATION
(a) "Confidential Information" shall mean all proprietary or
confidential records and information, including, but not limited to,
development, marketing, purchasing, organizational, strategic, financial,
managerial, administrative, manufacturing, production, distribution and sales
information, distribution methods, data, specifications, technologies, methods,
and processes (including the Transferred Property as hereinafter defined)
presently owned or at any time hereafter developed by Company, or its agents,
consultants, or otherwise on its behalf, or used presently or at any time
hereafter in the course of the business of Company, that are not otherwise part
of the public domain.
(b) Executive hereby sells, transfers and assigns to Company, or to
any person or entity designated by Company, all of Executive's entire right,
title and interest in and to all inventions, ideas, methods, developments,
disclosures and improvements (the "Inventions"), whether patented or unpatented,
and copyrightable material, and all trademarks, trade names, all goodwill
associated therewith and all federal and state registrations or applications
thereof, made, adopted or conceived by solely or jointly, in whole or in part
prior to or during the Term which (i) relate to methods, apparatus, designs,
products, processes or devices sold, leased, used or under construction or
development by Company or (ii) otherwise relate to or pertain to the business,
products, services, functions or operations of the Company (collectively, the
"Transferred Property"). Executive shall make adequate written records of all
Inventions, which records shall be Company's property and shall communicate
promptly and disclose to Company, in such forms Company requests, all
information, details and data pertaining to the aforementioned Inventions.
Whether during the Term or thereafter, Executive shall execute and deliver to
Company such formal transfers and assignments and such other papers and
documents as may be required of Executive to permit Company, or any person or
entity designated by Company, to file and prosecute patent applications
(including, but not limited to, records, memoranda or instruments deemed
necessary by Company for the prosecution of the patent application or the
acquisition of letters patent in the United states, foreign counties or
otherwise) and, as to copyrightable material, to obtain copyrights thereon, and
as to trademarks, to record the transfer of ownership of any federal or state
registrations or applications.
(c) All Confidential Information is considered secret and will be
disclosed to the Executive in confidence, and Executive acknowledges that, as a
consequence of Executive's employment and position with Company, Executive may
have access to and become acquainted with Confidential Information. Except in
the performance of Executive's duties as an employee of Company, Executive shall
not, during the term and at all times thereafter, directly or indirectly for any
reason whatsoever, disclose or use any such Confidential Information. All
records, files, drawings, documents, equipment and other tangible items (whether
in electronic form or otherwise), wherever located, relating in any way to or
containing Confidential Information, which Executive has prepared, used or
encountered or shall in the future prepare, use or encounter, shall be and
remain Company's sole and exclusive property and shall be included in the
Confidential Information. Upon termination of this Agreement, or whenever
requested by Company, Executive shall promptly deliver to Company any and all of
the Confidential Information and copies thereof, not previously delivered to
Company, that may be in the possession or under the control of the Executive.
The foregoing restrictions shall not apply to the use, divulgence, disclosure or
grant of access to Confidential Information to the extent, but only to the
extent, (i) expressly permitted or required pursuant to any other written
agreement between Executive and Company, (ii) such Confidential Information has
been publicly disclosed (not due to a breach by the Executive of Executive's
obligations hereunder, or by breach of any other person, of a fiduciary or
confidential obligation to Company) or (iii) the Executive is required to
disclose Confidential Information by or to any court of competent jurisdiction
or any governmental or quasi-governmental agency, authority or instrumentality
of competent jurisdiction, provided, however, that the Executive shall, prior to
any such disclosure, immediately notify Company of such requirements and
provided further, however, that the Company shall have the right, at its
expense, to object to such disclosures and to seek confidential treatment of any
Confidential Information to be so disclosed on such terms as it shall determine.
5
<PAGE>
5.4 CONSIDERATION FOR SECTION 5 COVENANTS. As consideration for Executive's
agreement to be bound by the obligations contained in this Section 5, Company
shall pay Executive the sum of Five Hundred Thousand Dollars ($500,000.00) in a
lump sum within thirty (30) days after the the first to occur of (i) the
Company's termination of Executive's employment pursuant to Section 4.2 or 4.3
of this Agreement, (ii) the Executive's termination of his employment other than
for Good Reason, (iii) the Employee's death, and (iv) the end of the Term (as it
may have been extended pursuant to Section 2.1 of this Agreement).
5.5 ACKNOWLEDGEMENT; REMEDIES; SURVIVAL OF THIS AGREEMENT
(a) Executive acknowledges that violation of any of the covenants and
provisions set forth in Section 5 of this Agreement would cause Company
irreparable damage and agrees that Company's remedies at law for a breach or
threatened breach of any of the provisions of this Agreement would be inadequate
and, in recognition of this fact, in the event of a breach or threatened breach
by Executive of any of the provisions of this Agreement, it is agreed that, in
addition to the remedies at law or in equity, Company shall be entitled, without
the posting of a bond, to equitable relief in the form of specific performance,
a temporary restraining order, temporary or permanent injunction, or any other
equitable remedy which may then be available for the purposes of restraining
Executive from any actual or threatened breach of such covenants. Without
limiting the generality of the foregoing, if Executive breaches or threatens to
breach this Section 5 hereof, such breach or threatened breach will entitle
Company (i) to terminate its obligations to make further payments otherwise
required under this Agreement, and (ii) to enjoin Executive from disclosing any
Confidential Information to any Competing Business, to enjoin any Competing
Business from retaining Executive or using any such Confidential Information,
and to enjoin Executive from rendering personal services to or in connection
with any Competing Business. The rights and remedies of the parties hereto are
cumulative and shall not be exclusive, and each such party shall be entitled to
pursue all legal and equitable rights and remedies and to secure performance of
the obligations and duties of the other under this Agreement, and the
enforcement of one or more of such rights and remedies by a party shall in no
way preclude such party from pursuing, at the same time or subsequently, any and
all other rights and remedies available to it.
(b) The provisions of this Section 5 shall survive the termination of
Executive's employment with Company.
SECTION 6. MISCELLANEOUS
-------------
6.1 ARBITRATION. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Rochester,
New York, in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. The parties consent to the
authority of the arbitrator, if the arbitrator so determines, to award fees and
expenses (including legal fees) to the prevailing party in the arbitration.
Notwithstanding the foregoing, Company shall be entitled to enforce the
provisions of Section 5 hereof through proceedings brought in a court of
competent jurisdiction as contemplated by Section 6.8 hereof.
6.2 SEVERABILITY; REASONABLENESS OF AGREEMENT. If any term, provision or
covenant of this Agreement or part thereof, or the application thereof to any
person, place or circumstance shall be held to be invalid, unenforceable or void
by an arbitrator or court of competent jurisdiction, the remainder of this
Agreement and such term, provision or covenant shall remain in full force and
effect, and any such invalid, unenforceable or void term, provision or covenant
shall be deemed, without further action on the part of the parties hereto,
modified, amended and limited, and the arbitrator or court shall have the power
to modify, amend and limit any such term, provision or covenant, to the extent
necessary to render the same and the remainder of the Agreement valid,
enforceable and lawful. In this regard, the Executive understands that the
provisions of Section 5 may limit Executive's ability to earn a livelihood in a
business similar or related to the business of Company, but nevertheless agrees
and acknowledges that (i) the provisions of Section 5 are reasonable and
necessary for the protection of Company, and do not impose a greater restraint
than necessary to protect the goodwill or other business interest of Company,
(ii) such provisions contain reasonable limitations as to the time and the scope
of activity to be restrained, and (iii) the payment Executive is receiving
pursuant to Section 5.4 is adequate to fully compensate Executive for any lost
opportunity due to the operation of Section 5. In consideration of the foregoing
and in light of Executive's education, skills and abilities, Executive agrees
that all defenses by Executive to the strict enforcement of such provisions are
hereby waived by Executive.
6.3 KEY EMPLOYEE INSURANCE. Company in its sole discretion shall have the
right at its expense to purchase insurance on the life of Executive, in such
amounts as it shall from time to time determine, of which Company shall be the
beneficiary. Executive shall submit to such physical examinations as may
reasonably be required and shall otherwise cooperate with Company in obtaining
such insurance.
6.4 ASSIGNMENT; BENEFIT. This Agreement shall not be assignable by
Executive, other than Executive's rights to payments or benefits hereunder,
which may be transferred only by will or the laws of descent and distribution.
Upon Executive's death, this Agreement and all rights of Executive hereunder
shall inure to the benefit of and be enforceable by Executive's beneficiary or
beneficiaries, personal or legal representatives, or estate, to the extent any
such person succeeds to Executive's
6
<PAGE>
interests under this Agreement. No rights or obligations of Company under this
Agreement may be assigned or transferred except that, to the extent not
otherwise automatically provided by operation of law, Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of Company
to expressly assume and agree to perform this Agreement in the same manner and
to the same extent that Company would be required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean
Company as hereinbefore defined and any successor to its business and/or assets
(by merger, purchase or otherwise) which executes and delivers the agreement
provided for in this Section or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law.
6.5 NOTICES. All notices hereunder shall be in writing and shall be deemed
sufficiently given (i) if hand-delivered, on the date of delivery, (ii) if sent
by documented overnight delivery service, on the first business day after
deposit with such service for overnight delivery, and (iii) if sent by
registered or certified mail, postage prepaid, return receipt requested, on the
third business day after deposit in the U.S. mail, in each case addressed as set
forth below or at such other address for either party as may be specified in a
notice given as provided herein by such party to the other. Any and all service
of process and any other notice in any such action, suit or proceeding shall be
effective against any party if given as provided in this Agreement; provided
that nothing herein shall be deemed to affect the right of any party to serve
process in any other manner permitted by law.
(a) If to Company:
Harris Interactive Inc.
135 Corporate Woods
Rochester, New York 14623
Attention: Chief Financial Officer
With Copies To:
Beth Ela Wilkens, Esq.
Harris Beach LLP
99 Garnsey Road
Pittsford, New York 14534
If to Executive:
Leonard Bayer
38 Gaslight Lane
Rochester, NY 14610
With Copies To:
Gordon Dickens, Esq.
Woods Oviatt Gilman LLP
700 Crossroads Building
2 State Street
Rochester, NY 14614
6.6 TERMINATION PROCEDURES. Except as otherwise provided in this Agreement,
any termination of Executive's employment by the Company or by Executive during
the Term (other than termination pursuant to death) shall be communicated by
written Notice of Termination to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so
indicated.
6.7 ENTIRE AGREEMENT; MODIFICATION; REPLACEMENT OF PRIOR AGREEMENT. This
Agreement replaces the Prior Agreement, which shall be of no further force and
effect. This Agreement constitutes the entire agreement between the parties
hereto with respect to the matters contemplated herein and supersedes all prior
agreements and understandings with respect thereto. No amendment, modification,
or waiver of this Agreement shall be effective unless in writing. Neither the
failure nor any delay on the part of any party to exercise any right, remedy,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, remedy, power or privilege preclude any
other or further exercise of the same or of any other right, remedy, power, or
privilege with respect to such occurrence or with respect to any other
occurrence.
6.8 GOVERNING LAW. This Agreement is made pursuant to, and shall be
construed and enforced in accordance with, the laws of the State of New York and
the federal laws of the United States of America, to the extent applicable,
without giving effect to otherwise applicable principles of conflicts of law.
Subject to Section 6.1 of this Agreement, the parties hereto expressly
7
<PAGE>
consent to the jurisdiction of any state or federal court located in Monroe
County, New York, and to venue therein, and consent to the service of process in
any such action or proceeding by certified or registered mailing of the summons
and complaint therein directed to Executive or Company, as the case may be, at
its address as provided in Section 6.6 hereof.
6.9 PREVAILING PARTY. Should either party breach the terms of this
Agreement, the prevailing party who seeks to enforce the terms and conditions of
this Agreement shall be entitled to recover its attorneys fee and disbursements.
6.10 WITHHOLDING. All payments hereunder shall be subject to any required
withholding of Federal, state and local taxes pursuant to any applicable law or
regulation.
6.11 HEADINGS; COUNTERPARTS; INTERPRETATION. The headings of paragraphs in
this Agreement are for convenience only and shall not affect its interpretation.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original and all of which, when taken together,
shall be deemed to constitute the same Agreement.
The Company and the Executive each acknowledge that it has been
represented by legal counsel in the negotiation and drafting of this Agreement,
that this Agreement has been drafted by mutual effort, and that no ambiguity in
this Agreement shall be construed against either party as draftsperson.
FURTHER ASSURANCES. Each of the parties hereto shall execute such
further instruments and take such other actions as the other party shall
reasonably request in order to effectuate the purposes of this Agreement.
6.12 ATTORNEYS FEES. The Company agrees to pay the reasonable
attorney's fees and disbursements incurred by Executive in the negotiation and
drafting of this Agreement.
IN WITNESS WHEREOF, THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED AS OF THE
DATE FIRST ABOVE WRITTEN.
[SIGNATURE PAGE FOLLOWS]
8
<PAGE>
HARRIS INTERACTIVE INC.
BY: LEONARD R. BAYER
-----------------------------------------
TITLE: EXECUTIVE VICE PRESIDENT, CHIEF TECHNOLOGY OFFICER
--------------------------------------------------
/S/ LEONARD R. BAYER
- ---------------------------------
LEONARD R. BAYER
9
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.32
<SEQUENCE>5
<FILENAME>l03090aexv10w32.txt
<DESCRIPTION>EXHIBIT 10.32
<TEXT>
<PAGE>
EXHIBIT 10.32
September 6, 2002 (Revised 9/21/02)
George Terhanian
Harris Interactive
60 Corporate Woods
Rochester, NY 14623
Dear George,
We are pleased to confirm our offer to you as President, Global Internet
Research, working out of the U.K. You will be reporting to Al Angrisani for P&L
and all other European operational activities and to Gordon Black for the
evolution of European internet strategy and panel development. The effective
date of the transfer will be September 1, 2002.
JOB RESPONSIBILITIES
While in the U.K., you will serve in the capacity of President, Global Internet
Research. Your responsibilities are described in the attached "Position
Description". The "Position Description" may be revised by the Company from time
to time. Any changes will be with your full knowledge.
ASSIGNMENT DURATION
The duration of your assignment will be up to 3 years, commencing September 1,
2002 and continuing through August 31, 2005. It is understood this agreement
will have an annual renewal provision, at which time the Company will determine
the disposition of your assignment in the U.K.
BELOW ARE THE SPECIFICS REGARDING YOUR TRANSFER AND COMPENSATION PACKAGE:
- -------------------------------------------------------------------------
Base Compensation
- -----------------
You will continue to be paid and administered out of the United States at the
annual salary of $200,000 US earned and payable on a bi-weekly basis effective
August 5, 2002. .
Bonus Plan
- ----------
Your bonus for fiscal year 2002/2003 will be based on a value added revenue
target and earnings before interest and taxes (EBIT). Appendix `A' will provide
you with the specifics of the plan for achieving and exceeding the EBIT target.
Benefits
- --------
You will be enrolled under the health plan provided through the U.K Please work
with John Murphy regarding your health plan enrollment process. Because of the
need for you to see your physician in the U.S., we will continue to keep you on
the U.S. health care plan, in addition to the U.K. plan through December 31,
2002. All other benefits will continue to be covered under the U.S. plans.
STOCK OPTIONS
This offer includes an option to purchase 125,000 shares of Harris Interactive
Inc. common stock, of which one fourth of the options vest after the first full
year of employment and the balance vesting monthly over the next 36 months. The
option price was approved by the Board of Directors on August 13, 2002 at the
fair market price of $2.30 per share.
CAR ALLOWANCE
The Company shall provide you with an automobile allowance of $700.00 per month
for the use of an owned or leased automobile.
Holiday Entitlement
- -------------------
While employed in the U.K., your annual holiday entitlement will be 20 working
days in addition to the normal 8 English Bank and Public Holidays.
Holiday entitlement will be earned and calculated on the basis of one-twelfth of
the 20 days for each full month of continuous service in the holiday year. The
holiday year is from July 1 to June 30. If you terminate during the holiday
year, your entitlement will be paid based on what you earned up to the date of
termination, less all holidays already taken in that year. If you have taken
more holidays than earned, you will have that amount deducted from your final
salary.
1
<PAGE>
Upon return to the U.S., your vacation eligibility will be adjusted to that
applicable for your numbers of years of service per the Harris Interactive
policy.
Relocation Expense
- ------------------
The Company will reimburse your household goods moving expenses to the U.K., not
to exceed $ 5,000.
Apartment Allowance
- -------------------
You will be provided with an apartment allowance of up to a maximum of $ 2,000
USD/month.
HOME LEAVE
You will be reimbursed for (2) round trip economy class airfares to the U.S. per
year. Your anniversary date of employment in the U.K. will be used to determine
your annual leaves.
TAX EQUALIZATION
The Company shall provide income tax preparation and filing assistance during
your assignment in the U.K. and final preparation and filing upon returning to
the U.S.
NON COMPETE AGREEMENT
You agree to comply with the Company's non-compete clause as indicated below:
You agree that, while you were an employee and for a period of one year after
the effective date of termination from Harris Interactive, you shall not,
directly or indirectly, as a director, officer, employee, agent, partner or
equity owner (except as owner of less than 1% of the shares of the publicly
traded stock of a corporation) of any entity, engage in any of the following
activities with respect to any product or service sold by the Company at any
time during the undersigned's employment, or any product or service similar to,
competitive with, or intended to compete with any such product or service:
Sell, develop, distribute, solicit or contact with a view to selling any such
product or service, for, from or to any clients or customers of the Company with
whom I have been engaged with as of the time of termination (including any
client to whom the Company has sold services or products in the two years prior
to termination and any prospective client or customer for whom a bid has been
prepared within the previous six months).
You further agree that while you were an employee and for a period of one year
after the effective date of termination from the Company, you will not induce or
attempt to induce any employee, agent or consultant of the Company or any
subsidiary to terminate his or her association with the Company or any
affiliates.
If any of the restrictions on competitive activities contained in the Agreement
shall for any reason be held by a court of competent jurisdiction to be
excessively broad as to duration, geographical scope, activity or subject, such
restrictions shall be construed so as to thereafter be limited or reduced to be
enforceable to the extent compatible with applicable law; it being understood
that by the execution of this Agreement, the parties hereto regard such
restrictions as reasonable and compatible with their respective rights and
expectations. You agree that the Company's legal remedies for a breach of this
provision shall be inadequate and that in addition to all other remedies
available to the Company at law or in equity, the Company shall be entitled to
obtain injunctive relief to enforce this provision.
CONFIDENTIALITY OF INFORMATION AND NON-DISCLOSURE POLICY
As an employee of the Company, you have access to confidential business,
products, processes, and customer information proprietary to the Company and its
customers. By signing this agreement you will continue to be bound to the
provisions of the attached Confidentiality of Information and Non-Disclosure
Policy that you signed on May 5, 2000.
TERMINATION OF EMPLOYMENT
Should your employment be terminated by the Company, within the term of this
agreement, for any reason other than cause, the Company will reimburse you for
reasonable relocation expenses associated with your personal and household goods
move back to Rochester, New York. The Company will also provide you with a
severance payment equal to six (6) months of your base salary at the time of
termination.
EXPENSE REIMBURSEMENT
The Company shall reimburse you for all reasonable and documented expenses
incurred in connection with the performance of your job duties and in accordance
with the Company's reimbursement policies in effect at the time.
You will be required to submit a monthly expense report to Payroll for temporary
living expenses, apartment allowance and car allowance to receive reimbursement.
Please submit the reports to the attention of Kim DeYoung in the Finance
organization.
2
<PAGE>
George, you are one of the first individuals to be transferred to another
country as a Harris Interactive employee. We will do everything we can to made
the transition smooth and ask that you share with us your experience so we can
pave the way for others to follow. Please keep in close contact with me on
anything you need or want to discuss.
These are exciting times and we look forward to providing a new juncture in your
career path and having you playing a key role for the Company as we venture into
the international markets.
Please indicate your acceptance of this offer by signing below and returning
this letter to me.
Sincerely,
/s/ Dennis K. Bhame
Dennis K. Bhame
EVP - Human Resources
Harris Interactive Inc.
I accept this offer as stated above.
/s/ George Terhanian
- ------------------------
George Terhanian
3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.33
<SEQUENCE>6
<FILENAME>l03090aexv10w33.txt
<DESCRIPTION>EXHIBIT 10.33
<TEXT>
<PAGE>
EXHIBIT 10.33
Harris Interactive Inc.
130 Corporate Woods
Rochester, New York 14624
Albert Angrisani
5 Independence Way
Princeton, New Jersey 08543
Dear Mr. Angrisani:
Please reference the Employment Agreement (the "Agreement") dated as of
August 5, 2001 between you and Harris Interactive Inc. (the "Company"). Section
3.1 of the Agreement provides for payment to you of Base Compensation, the
amount of which is to be reviewed periodically by the Compensation Committee of
the Company's Board of Directors.
We hereby advise you that the Compensation Committee has reviewed your Base
Compensation, and has approved an increase in such Base Compensation to $375,000
per annum, effective July 1, 2003.
/s/ James A. Riedman
----------------------------
James A. Riedman
Chairman
Compensation Committee
1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.34
<SEQUENCE>7
<FILENAME>l03090aexv10w34.txt
<DESCRIPTION>EXHIBIT 10.34
<TEXT>
<PAGE>
EXHIBIT 10.34
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT dated as of January 1, 1999 between Total Research
Corporation, a Delaware corporation ("Company"), and Terri Flanagan
("Executive").
BACKGROUND
----------
Executive is presently serving as the President, Customer Loyalty Division
of the Company under an Employment Agreement with Company effective January 2,
1997 (the "Original Employment Agreement"). Company desires to have Executive
continue in the employment of the Company beyond the June 30, 1999 termination
date in the Original Employment Agreement, and Executive wishes to remain in the
employment of the Company beyond such date, on the terms and conditions
contained in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and intending to be legally bound hereby, the parties hereto
agree as follows:
CAPACITY AND DUTIES
EMPLOYMENT; ACCEPTANCE OF EMPLOYMENT. Company hereby employs Executive and
executive hereby accepts employment by Company for the period and upon the terms
and conditions hereinafter set forth.
CAPACITY AND DUTIES.
Executive shall initially serve as President of the Customer Loyalty Division of
Company. Executive shall perform the duties and have the responsibilities of a
Division President as described in the "Position Description" previously
delivered to Executive, as such "Position Description" may be revised by Company
from time to time. Executive shall perform such other duties and shall have such
authority consistent with his position as may from time to time be specified by
the Chief Executive Officer of Company. Executive may be appointed by the Chief
Executive Officer to another senior level position, provided such appointment
does not result in a reduction in Executive's compensation and benefits under
this Agreement. Executive shall report directly to the Chief Executive Officer,
and shall perform Executive's duties for Company principally at Company's
principal executive offices, presently in Princeton, New Jersey, except for
periodic travel that may be necessary or appropriate in connection with the
performance of Executive's duties hereunder.
Executive shall devote Executive's full working time, energy, skill and best
efforts to the performance of Executive's duties hereunder, in a manner that
will faithfully and diligently further the business and interests of Company,
and shall not be employed by, or participate or engage in or in any manner be a
part of the management or operation of, any business enterprise other than
Company without the prior written consent of the Board of Directors of Company
(the "Board"). Notwithstanding the above, Executive shall be permitted, to the
extent such activities do not interfere or conflict with the performance by
Executive of Executive's duties and responsibilities hereunder, (i) to manage
Executive's personal, financial and legal affairs, and (ii) to serve on civic,
charitable or professional boards or committees (it being expressly understood
and agreed that Executive's continuing to serve on any such board and/or
committees on which Executive is serving, or with which Executive is otherwise
associated (each of which has been disclosed to Company in writing prior to the
execution of Executive's Agreement), as of the Commencement Date (as defined
below), shall be deemed not to interfere with the performance by Executive of
Executive's duties and responsibilities under this Agreement).
Executive represents and warrants to Company that Executive is under no
contractual or other restriction or obligation which conflicts with, violates or
is inconsistent with the execution of this Agreement, the performance of
Executive's duties hereunder, or the other rights of Company hereunder.
During the Term, Executive shall be entitled to participate as a member of the
Company's Management Council. The Management Council shall consist of Executive
and certain other senior officers of the Company and shall serve as an advisory
and consultative body on such significant strategic and operating issues as the
Chairman or President of the Company determine to present to the Management
Council prior to decisions on such issues being made by the President, the
Executive Committee or the Board of Directors.
TERM OF EMPLOYMENT
TERM. The term of Executive's employment hereunder shall commence on the date
hereof (the "Commencement Date") and continue until June 30, 2000, as further
extended or unless sooner terminated in accordance with the other provisions
hereof (the "Term"). Except as hereinafter provided, on expiration of the
initial Term, the Term shall be automatically extended for one additional year
unless either party shall have given to the other party written notice of
nonrenewal of this Agreement at least six
1
<PAGE>
months prior to such expiration date. After the initial Term, the Term shall be
automatically extended for successive one year Terms unless written notice of
nonrenewal is given by either party to the other at least six (6) months prior
to the expiration of the then current Term. If written notice of termination is
given as provided above, Executive's employment under this Agreement shall
terminate on the last day of the then-current Term.
COMPENSATION
BASIC COMPENSATION. As Compensation for Executive's services during the Term,
Company shall pay to Executive a salary effective January 1, 1999 in the amount
specified on Exhibit A, attached hereto and made a part hereof. The Executive
shall continue to receive Executive's salary at the rate presently in effect
under the Original Employment Agreement through December 31, 1998. The salary
shall be payable in periodic installments in accordance with Company's regular
payroll practices for its executive personnel at the time of payment, but in no
event less frequently than monthly. Executive's annual salary, as determined in
accordance with this Section 3.1, is hereinafter referred to as Executive's
"Base Salary."
PERFORMANCE BONUS. As additional compensation for the services rendered by
Executive to Company pursuant to this Agreement for fiscal periods commencing
July 1, 1998, the Executive shall be entitled to participate in the Senior
Management Compensation Plan, attached hereto and incorporated hereby as Exhibit
A (the "Compensation Plan").
EMPLOYEE BENEFITS. During the Term, Executive shall be entitled to participate
in such of Company's employee benefit plans and benefit programs, including
medical, hospitalization, dental, disability, accidental death and dismemberment
and travel accident plans and programs, as may from time to time be provided by
Company for its senior executives generally. In addition, during the Term
Executive shall be eligible to participate in all pension, retirement, savings
and other employee benefit plans and programs maintained from time to time by
Company for the benefit of its senior executives generally. Company shall have
no obligation, however, to maintain any particular program or level of benefits
referred to in this Section 3.3.
OTHER BENEFITS. During the Term, the Company shall provide Executive with an
automobile allowance of $500.00 per month for the use of an automobile owned or
leased by Executive in accordance with the policies and procedures established
by the Company from time to time for executive employees.
VACATION. Executive shall be entitled to the normal and customary amount of paid
vacation provided to senior executives of the Company generally, but in no event
less than 20 days during each 12 month period, beginning on July 1, 1998. Any
vacation days that are not taken in a given 12 month period shall accrue and
carry over from year to year up to a maximum of 20 days. The Executive may be
granted leaves of absence with or without pay for such valid and legitimate
reasons as the Board in its sole and absolute discretion may determine, and is
entitled to the same sick leave and holidays provided to other senior executive
officers of Company.
EXPENSE REIMBURSEMENT. Company shall reimburse Executive for all reasonable and
documented expenses incurred by him in connection with the performance of
Executive's duties hereunder in accordance with its regular reimbursement
policies as in effect from time to time.
STOCK OPTION AGREEMENT. Company acknowledges the prior grant to Executive of
250,000 stock options (the "Option Shares") made pursuant to the Original
Employment Agreement under which, subject to the terms thereof, the Option
Shares are scheduled to vest on June 30, 1999.
TERMINATION OP EMPLOYMENT
DEATH OF EXECUTIVE. If Executive dies during the Term, Company shall not
thereafter be obligated to make any further payments hereunder other than
amounts (including Base Salary, bonuses, expense reimbursement, etc.) accrued as
of the date of Executive's death in accordance with generally accepted
accounting principles (the "Accrued Obligations," which, for purposes of this
Agreement in situations other than death, shall reference the date of
termination).
DISABILITY OF EXECUTIVE. If Executive is permanently disabled (as defined in
Company's long-term disability insurance policy then in effect), then The Board
shall have the right to terminate Executive's employment upon 30 days prior
written notice to Executive at any time during the continuation of such
disability. In the event Executive's employment is terminated for disability in
accordance with this Section 4.2, Company shall not thereafter be obligated to
make any further payments hereunder other than (i) Accrued Obligations through
the date of such termination and (ii) continued Base Salary and benefits, until
the earlier of (x) such time as payments to Executive commence under Company's
long-term disability insurance policy then in effect, or (y) the expiration of
the then current Term.
TERMINATION FOR CAUSE. Executive's employment hereunder shall terminate
immediately upon notice that the Board is terminating Executive for Cause (as
defined herein), in which event Company shall not thereafter be obligated to
make any further payments of Base Salary, bonus or other payments. "Cause" shall
be limited to the following:
willful failure to substantially perform Executive's duties as described in
Section 1.2 (other than such failure resulting from
2
<PAGE>
Executive's physical or mental illness, or the failure of Executive to perform
such duties during the remedy period set forth in Section 4.4 hereof following
the issuance of a Notice of Termination (as herein defined) by Executive for
Good Reason, unless an arbitrator acting pursuant to Section 6.2 hereof finds
Executive to have acted in bad faith in issuing such Notice of Termination),
after (x) demand for substantial performance is delivered by Company in writing
that identifies the manner in which Company believes Executive has not
substantially performed Executive's duties and (y) Executives' failure to cure
such nonperformance within ten days after receipt of such written demand.
willful misconduct that is materially and demonstrably injurious to Company or
any of its subsidiaries;
conviction or plea of guilty or nolo contendere to a felony or to any other
crime which involves moral turpitude or, if not involving moral turpitude, the
act giving rise to such conviction or plea is materially and demonstrably
injurious to the Company or any of its subsidiaries; material violation of (x)
Company's policies relating to sexual harassment, substance or alcohol abuse or
the disclosure or misuse of Confidential Information (as hereinafter defined),
or (y) other Company polices set forth in Company manuals or written statements
of policy provided in the case of this clause (y) that such violation is
materially and demonstrably injurious to Company and continues for more than
three (3) days after written notice thereof is given to Executive by the Board;
and material breach of any provision of this Agreement by Executive, which
breach continues for more then ten days after written notice thereof is given by
the Board to Executive.
Cause shall not exist under this Section 4.3 unless and until Company has
delivered to Executive a copy of a resolution duly adopted by a majority of the
Board at a meeting of the Board called and held for such purpose (or by
unanimous written consent of the Board), finding that such Cause exists in the
good faith opinion of the Board. This Section 4.3 shall not prevent Executive
from challenging in any arbitration proceeding or court of competent
jurisdiction the Board's determination that Cause exists or that Executive has
failed to cure any act (or failure to act), to the extent permitted by this
Agreement, that purportedly formed the basis for the Board's determination.
Company must provide notice to Executive that it is intending to terminate
Executive's employment for Cause within one hundred and twenty (120) days after
the Board has actual knowledge of the occurrence of the event it believes
constitutes Cause.
TERMINATION WITHOUT CAUSE BY EXECUTIVE FOR GOOD REASON.
If (i) Executive's employment is terminated by Company for any reason (other
than (x) Cause or (y) disability of Executive) or (ii) Executive's employment is
terminated by Executive for Good Reason, then Company shall within thirty (30)
days of termination of employment pay to Executive a lump sum cash payment equal
to Executive's Base Salary for a period equal to the greater of (x) the date of
termination of employment through the date that is one (1) year after the date
of delivery of a proper notice of termination of employment or nonrenewal of the
Agreement or (y) the then remaining Term (the "Severance Payment"). Further, in
the event of termination by Company under such circumstances Company shall
maintain in full force and effect, for the continued benefit of Executive,
Executive's spouse and Executive's dependents for the remaining balance of the
unexpired Term as of the date of termination the medical, hospitalization,
dental and life insurance programs in which Executive, Executive's spouse and
Executive's dependents were participating immediately prior to the date of such
termination at substantially the level in effect and upon substantially the same
terms and conditions (including without limitation contributions required by
Executive for such benefits) as existed immediately prior to the date of
termination (except to the extent thereafter reduced for senior executives of
Company generally); provided, that if Executive, Executive's spouse or
Executive's dependents cannot continue to participate in the Company programs
providing such benefits, the Company shall arrange to provide Executive,
Executive's spouse and Executive's dependents with the economic equivalent of
such benefits which they otherwise would have been entitled to receive under
such plans and programs, provided that such benefits shall terminate upon the
date or dates Executive receives coverage and benefits which are substantially
similar, taken as a whole, without waiting period or pre-existing condition
limitations, under the plans and programs of a subsequent employer. Upon making
the payments described in this Section 4.4, Company shall have no further
obligation to Executive hereunder.
Notwithstanding the foregoing, if Executive's employment is terminated (i) by
Company without Cause but due to Executive's failure for four consecutive
calendar quarters to attain all the performance goals as outlined in the
Compensation Plan or (ii) by Executive for Good Reason under Section 4.4(c)(vi)
provided Executive terminates employment under Section 4.4(c)(vi) within ten
(10) days of the Company's delivery of the revised performance goals to
Executive, the Severance Payment shall be reduced by fifty percent (50%).
"Good Reason" shall mean the following:
material breach of Company's obligations hereunder, provided that Executive
shall have given reasonably specific written notice thereof to Company, and
Company shall have failed to remedy the circumstances within 60 days thereafter;
any decrease in Executive's salary below the amount set forth in the
Compensation Plan (except for decreases that are in conjunction with decreases
in salaries generally) or any material reduction in the general nature of
Executive's duties or authority to a level inconsistent with a senior executive
position, unless previously agreed to in writing by Executive; the failure of
Executive to be appointed initially to the positions set forth in Section
1.2(a);
the relocation of Executive's principal place of employment to a location more
than thirty (30) miles from Princeton, New Jersey; the failure of any successor
in interest of Company to be bound by the terms of this Agreement in accordance
with Section 6.5 hereof;
3
<PAGE>
The financial Bonus Goals established by the Company in the Senior Management
Compensation Plan for any fiscal year are more than 125% of the financial Bonus
Goals for the preceding fiscal year and are not approved in writing by the Chief
Executive Officer or, if Albert Angrisani is not then serving as Chief Executive
Officer, approved by a majority of the participants in the Compensation Plan; or
Executive's termination of the Agreement after Company notice of nonrenewal
under Section 2.1.
Executive must provide notice to Company that Executive is intending to
terminate Executive's employment for Good Reason within one hundred and twenty
(120) days after Executive has actual knowledge of the occurrence of an event he
believes constitutes Good Reason. Executive's right to terminate Executive's
employment hereunder for Good Reason shall not be affected by Executive's
Disability. Subject to compliance by Executive with the notice provisions of
Section 4.4(c)(i), Executive's continued employment prior to terminating
employment for Good Reason shall not constitute consent to, or a waiver of
rights with respect to, any act or failure to act constituting Good Reason. In
the event Executive delivers to the Company a Notice of Termination for Good
Reason, Executive agrees to appear before a meeting of the Board called and held
for such purpose (after reasonable notice) and specify to the Board the
particulars as to why Executive believes adequate grounds for termination for
Good Reason exist. No action by the Board, other than the remedy of the
circumstances within the time periods specified in Section 4.4(c)(i), shall be
binding on Executive.
CHANGE IN CONTROL.
------------------
If, during the Term, there should be a Change of Control (as defined herein),
and within one year thereafter either (i) Executive's employment should be
terminated for any reason other than for Cause or (ii) Executive terminates
Executive's employment for Good Reason (other than under Section 4.4(c)(vi)),
Company shall, on or before Executive's last day of full-time employment
hereunder, pay to Executive, the amounts set forth in Section 4.4 above,
provided that it is the intention of the parties that the payments under this
Section 4.5 shall not constitute "excess parachute payments" within the meaning
of Section 280G of the Internal Revenue Code of 1986, as amended. Accordingly,
notwithstanding anything in this Agreement to the contrary, if any of the
amounts otherwise payable under this Section would constitute "excess parachute
payments," or if the independent accountants acting as auditors for Company on
the date of the Change in Control determine that such payments may constitute
"excess parachute payments," then the amounts otherwise payable under this
Agreement shall be reduced to the maximum amounts that may be paid without any
such payments constituting, or potentially constituting, "excess parachute
payments."
Upon the occurrence of a Change in Control, any stock options previously granted
to Executive that are not then exercisable, ie. unvested, shall immediately vest
and become exercisable by Executive. The Company shall execute all necessary
amendments to the applicable stock option plans and agreements provided such
amendments are permitted by law and will not adversely affect the tax status or
qualification of the plan as an Incentive Stock Option Plan or Non-qualified
Stock Option Plan.
Upon making the payments described in this Section 4.5, Company shall have no
further obligation to Executive hereunder.
A "Change in Control" of Company shall be deemed to have occurred if
(1)at any time after the date hereof there shall occur (i) any consolidation
or merger of Company in which Company is not the continuing or surviving
corporation or pursuant to which the shares of common stock of Company ("Common
Stock") would be converted into cash, securities or other property, or (ii) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of assets accounting for 50% or more of total assets or
50% or more of the total revenues of Company, other than, in case of either (i)
or (ii) a consolidation or merger with, or transfer to, a corporation or other
entity of which, or of the parent entity of which, immediately following such
consolidation, merger or transfer, (x) more than 50% of the combined voting
power of the then outstanding voting securities of such entity entitled to vote
generally in the election of directors (or other determination of governing
body) is then beneficially owned (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934) by all or substantially all of the individuals
and entities who were such owners of Common Stock immediately prior to such
consolidation, merger or transfer in substantially the same proportion, as among
themselves, as their ownership of Common Stock immediately prior to such sale
consolidation, merger or transfer, or (y) a majority of the directors (or other
governing body) consists of members of the Board of Directors of Company In
office on the date hereof for purposes of (2) below or approved as provided in
(2) below;
(2)at any time after the date hereof (x) members of the Board of Directors of
Company in office on the date hereof (including any designated as contemplated
by Section 4.2 of the Stock Purchase Agreement made as of April 16,1998 between
Company and David Brodsky) plus (y) any new director (excluding a director
designated by a person or group who has entered into an agreement with Company
to effect a transaction described in Section 4.5(d)(1)) whose election by the
Board of Directors of Company or nomination for election by Company's
stockholders was approved by (i) Executive (if a director) or (ii) a vote of at
least a majority of the directors then still in office who either were directors
on the date hereof or whose election or nomination for election was previously
so approved, shall cease for any reason to constitute a majority of the Board;
or
4
<PAGE>
(3)at any time after the date hereof, the stockholders of Company approve a
complete liquidation or dissolution of Company, except in connection with a
recapitalization or other transaction which does not otherwise constitute a
Change of Control for purposes of Section 4.5(a)(l) above.
TERMINATION BY EXECUTIVE WITHOUT GOOD REASON. In the event Executive's
employment is voluntarily terminated by Executive without Good Reason, Company
shall not be obligated to make any further payments to Executive hereunder other
than Accrued Obligations through the date of such termination.
FAILURE TO EXTEND. A failure by Company to extend this Agreement pursuant to
Section 2.1 shall not be treated as a termination of Executive's employment for
purposes of this Agreement.
MITIGATION. Executive shall not be required to mitigate amounts payable under
this Section 4 by seeking other employment or otherwise, and there shall be no
offset against amounts due Executive under this Agreement on account of
subsequent employment except as specifically provided herein.
NON-COMPETITION AND CONFIDENTIALITY
NON-COMPETITION.
During the Term and for a period of one year thereafter (the "Non-Competition
Period"), Executive shall not, directly or indirectly, own, manage, operate,
join, control, participate in, invest in or otherwise be connected or associated
with, in any manner, including, without limitation, as an officer, director,
employee, distributor, independent contractor, independent representative,
partner, consultant, advisor, agent, proprietor, trustee or investor, any
Competing Business located in any state or region (including foreign
jurisdictions) where Company conducts business; provided, however, that
ownership of 1% or less of the stock or other securities of a corporation, the
stock of which is listed on a national securities exchange or is quoted on the
NASDAQ Stock Market's National market, shall not constitute a breach of this
Section 5, so long as the Executive does not in fact have the power to control,
or direct the management of, or is not otherwise engaged in activities with,
such corporation.
For purposes hereof, the term "Competing Business" shall mean any business or
venture which is substantially similar to the whole or any significant part of
the business conducted by Company.
Notwithstanding the above, the Non-Competition Period shall be limited to the
period for which a Severance Payment is received under Section 4.4(a) above if
Executive's employment is terminated (i) by Company without Cause, (ii) by
Executive for Good Reason or (iii) as a result of nonrenewal of the Agreement by
Company.
If the Executive's employment is terminated for any reason other than the
reasons specified in Section 5.1(c) above and Executive is not entitled to a
Severance Payment under Section 4.4(a) as a result of such termination, the
Non-Competition Period shall continue for one (1) year after termination of
employment.
NO SOLICITATION. During the Term, including any unexpired portion thereof, and
for a period of one year thereafter, the Executive shall not, directly or
indirectly, including on behalf of, for the benefit of, or in conjunction with,
any other person or entity, (i) solicit, assist, advise, influence, induce or
otherwise encourage in any way, any employee of Company to terminate Executive's
relationship with Company for any reason, or assist any person or entity in
doing so, or employ, engage or otherwise contract with any employee or former
employee of Company in a Competing Business or any other business unless such
former employee shall not have been employed by Company for a period of at least
one year, (ii) interfere in any manner with the relationship between any
employee and Company or (iii) contact, service or solicit any existing clients,
customers or accounts of Company on behalf of a Competing Business, either as an
individual on Executive's own account, as an investor, or as an officer,
director, partner, joint venturer, consultant, employee, agent or sales man of
any other person or entity.
CONFIDENTIAL INFORMATION.
"Confidential Information" shall mean confidential records and information,
including, but not limited to, development, marketing, purchasing,
organizational, strategic, financial, managerial, administrative, manufacturing,
production, distribution and sales information, distribution methods, data,
specifications and processes (including the Transferred Property as hereinafter
defined) presently owned or at any time hereafter developed by Company or its
agents or consultants or used presently or at any time hereafter in the course
of the business of Company, that are not otherwise part of the public domain.
Executive hereby sells, transfers and assigns to Company, or to any person or
entity designated by Company, all of Executive's entire right, title and
interest in and to all inventions, ideas, methods, developments, disclosures and
improvements (the "Inventions"), whether patented or unpatented, and
copyrightable material, and all trademarks, trade names, all goodwill associated
therewith and all federal and state registrations or applications thereof, made,
adopted or conceived by solely or jointly, in whole or in part (collectively,
the "Transferred Property" prior to or during the Term which (i) relate to
methods, apparatus, designs, products, processes or devices sold, leased, used
or under construction or development by Company or (ii) otherwise relate to or
pertain to the business, products, services, functions or operations of the
Company. Executive shall make adequate written records of all Inventions, which
records shall be Company's property and shall communicate promptly and disclose
Company, in such forms Company requests, all information, details and data
pertaining to the aforementioned Inventions. Whether during the Term or
thereafter, Executive shall execute and deliver to Company such formal transfers
and assignments
5
<PAGE>
and such other papers and documents as may be required of Executive to permit
Company, or any person or entity designated by Company, to file and prosecute
patent applications (including, but not limited to, records, memoranda or
instruments deemed necessary by Company for the prosecution of the patent
application or the acquisition of letters patent in the United states, foreign
counties or otherwise) and, as to copyrightable material, to obtain copyrights
thereon, und as to trademarks, to record the transfer of ownership of any
federal or state registrations or applications.
All such Confidential Information is considered secret and will be disclosed to
the Executive in confidence, and Executive acknowledges that, as a consequence
of Executive's employment and position with Company, Executive may have access
to and become acquainted with Confidential Information. Except in the
performance of Executive's duties as an employee of Company, Executive shall
not, during the term and at all times thereafter, directly or indirectly for any
reason whatsoever, disclosure or use any such Confidential Information. All
records, files, drawings, documents, equipment and other tangible items,
wherever located, relating in any way to or containing Confidential Information,
which Executive has prepared, used or encountered or shall in the future
prepare, use or encounter, shall be and remain Company's sole and exclusive
property and shall be included in the Confidential Information. Upon termination
of Executive's agreement, or whenever requested by Company, Executive shall
promptly deliver to Company any and all of the Confidential Information and
copies thereof, not previously delivered to Company, that may be in the
possession or under the control of the Executive. The foregoing restrictions
shall not apply to the use, divulgence, disclosure or grant of access to
Confidential Information to the extent but only to the extent, (i) expressly
permitted or required pursuant to any other written agreement between Executive
and Company, (ii) such Confidential Information has been publicly disclosed (not
due to a breach by the Executive of Executive's obligations hereunder, or by
breach of any other person, of a fiduciary or confidential obligation to Company
or (iii) the Executive is required to disclose Confidential Information by or to
any court of competent jurisdiction or any governmental or quasi-governmental
agency, authority or instrumentality of competent jurisdiction, provided,
however, that the Executive shall, prior to any such disclosure, immediately
notify Company of such requirements and provided further, however, that the
Company shall have the right, at its expense, to object to such disclosures and
to seek confidential treatment of any Confidential Information to be so
disclosed on such terms as it shall determine.
ACKNOWLEDGEMENT; REMEDIES; SURVIVAL OF THIS AGREEMENT.
Executive acknowledges that violation of any of the covenants and provisions set
forth in this Agreement would cause Company irreparable damage and agrees that
Company's remedies at law for a breach or threatened breach of any of the
provisions of this Agreement would be inadequate and, in recognition of this
fact, in the event of a breach or threatened breach by Executive of any of the
provisions of this Agreement, it is agreed that, in addition to the remedies at
law or in equity, Company shall be entitled, without the posting of a bond, to
equitable relief in the form of specific performance, a temporary restraining
order, temporary or permanent injunction, or any other equitable remedy which
may then be available for the purposes of restraining Executive from any actual
or threatened breach of such covenants. Without limiting the generality of the
foregoing, if Executive breaches or threatens to breach this Section 5 hereof,
such breach or threatened breach will entitle Company to enjoin Executive from
disclosing any Confidential Information to any Competing Business, to enjoin any
Competing Business from retaining Executive or using any such Confidential
Information, to enjoin Employee form rendering personal services to or in
connection with any Competing Business. The rights and remedies of the parties
hereto are cumulative and shall not be exclusive, and each such party shall be
entitled to pursue all legal and equitable rights and remedies and to secure
performance of the obligations and duties of the other under this Agreement, and
the enforcement of one or more of such rights and remedies by a party shall in
no way preclude such party from pursuing, at the same time or subsequently, any
and all other rights and remedies available to it.
The provisions of this Agreement shall survive the termination of Executive's
employment with Company.
MISCELLANEOUS
CANCELLATION OF ORIGINAL EMPLOYMENT AGREEMENT. With the exception of the
obligation to pay salary, benefits and performance bonus for the period through
December 31, 1998, the Original Employment Agreement is hereby cancelled;
provided, however, that this Section 6.1 shall not be construed to limit or
terminate Executive's entitlement under the Original Employment Agreement to
amounts accrued for periods through the date of this Agreement, including,
without limitation, the 250,000 stock options granted thereunder.
ARBITRATION. Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in Princeton, New Jersey,
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction. The parties consent to the authority of the
arbitrator, if the arbitrator so determines, to award fees and expenses
(including legal fees) to the prevailing party in the arbitration.
Notwithstanding the foregoing, Company shall be entitled to enforce the
provisions of Section 5 hereof through proceedings brought in a court of
competent jurisdiction as contemplated by Section 6.9 hereof.
SEVERABILITY; REASONABLENESS OF AGREEMENT. If any term, provision or covenant of
this Agreement or part thereof, or the application thereof to any person, place
or circumstance shall be held to be invalid, unenforceable or void by a court of
competent jurisdiction, the remainder of this Agreement and such term, provision
or covenant shall remain in full force and effect, and any
6
<PAGE>
such invalid, unenforceable or void term, provision or covenant shall be deemed,
without further action on the part of the parties hereto, modified, amended and
limited, and the court shall have the power to modify, amend and limit any such
term, provision or covenant, to the extent necessary to render the same and the
remainder of the Agreement valid, enforceable and lawful. In this regard, the
Executive understands that the provisions of Section 5 may limit Executive's
ability to earn a livelihood in a business similar or related to the business of
Company, but nevertheless agrees and acknowledges that (i) the provisions of
Section 5 are reasonable and necessary for the protection of Company, and do not
impose a greater restraint than necessary to protect the goodwill or other
business interest of Company and (ii) such provisions contain reasonable
limitations as to the time and the scope of activity to be restrained. In
consideration of the foregoing and in light of Executive's education, skills and
abilities, Executive agrees that all defenses by Executive to the strict
enforcement of such provisions are hereby waived by Executive.
KEY EMPLOYEE INSURANCE. Company shall have the right at its expense to purchase
insurance on the life of Executive, in such amounts as it shall from time to
time determine, of which Company shall be the beneficiary. Executive shall
submit to such physical examinations as may reasonably be required and shall
otherwise cooperate with Company in obtaining such insurance.
ASSIGNMENT; BENEFIT. This Agreement shall not be assignable by Executive, other
than Executive's rights to payments or benefits hereunder, which may be
transferred only by will or the laws of descent and distribution. Upon
Executive's death, this Agreement and all rights of Executive hereunder shall
inure to the benefit of and be enforceable by Executive's beneficiary or
beneficiaries, personal or legal representatives, or estate, to the extent any
such person succeeds to Executive's interests under this Agreement. No rights or
obligations of Company under this Agreement may be assigned or transferred
except that Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that Company would be
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean Company as herein before defined and any
successor to its business and/or assets (by merger, purchase or otherwise) which
executes and delivers the agreement provided for in this Section 5.4 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
NOTICES. All notices hereunder shall be in writing and shall be sufficiently
given if hand-delivered, sent by documented overnight delivery service or
registered or certified mail, postage prepaid, return receipt requested or by
telegram or telefax (confirmed by U.S. mail), receipt acknowledged, addressed as
set forth below or at such other address for either party as may be specified in
a notice given as provided herein by such party to the other. Any such notice
shall be deemed to have been given as of the date received, in the case of
personal delivery, or on the date shown on the receipt or confirmation therefor,
in all other cases. Any and all service of process and any other notice in any
such action, suit or proceeding shall be effective against any party if given as
provided in this Agreement; provided that nothing herein shall be deemed to
affect the right of any party to serve process in any other manner permitted by
law.
If to Company
Total Research Corporation
Princeton Corporate Center
5 Independence Way
Princeton, NJ 08540
With copies to:
Thomas A. Belton, Esq.
Drinker Biddle & Reath LLP
105 College Road East
Princeton, NJ 08540
Peter G. Smith, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022-3903
If to Executive:
TERMINATION PROCEDURES. Any termination of Executive's employment by the Company
or by Executive during the Term (other than termination pursuant to death) shall
be communicated by written Notice of Termination to the other party hereto in
accordance with Section 5.5. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate
7
<PAGE>
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so
indicated.
ENTIRE AGREEMENT AND MODIFICATION. This Agreement constitutes the entire
agreement between the parties hereto with respect to the matters contemplated
herein and supersedes all prior agreements and understandings with respect
thereto. No amendment, modification, or waiver of this Agreement shall be
effective unless in writing. Neither the failure nor any delay on the part of
any party to exercise any right, remedy, power or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or privilege preclude any other or further exercise of the
same or of any other right, remedy, power, or privilege with respect to such
occurrence or with respect to any other occurrence.
GOVERNING LAW. This Agreement is made pursuant to, and shall be construed and
enforced in accordance with, the laws of the State of New Jersey and the federal
laws of the United States of America, to the extent applicable, without giving
effect to otherwise applicable principles of conflicts of law. The parties
hereto expressly consent to the jurisdiction of any state or federal court
located in New Jersey, and to venue therein, and consent to the service of
process in any such action or proceeding by certified or registered mailing of
the summons and complaint therein directed to Executive or Company, as the case
may be, at its address as provided in Section 6.6 hereof.
WITHHOLDING. All payments hereunder shall be subject to any required withholding
of Federal, state and local taxes pursuant to any applicable law or regulation.
HEADINGS; COUNTERPARTS. The headings of paragraphs in this Agreement are for
convenience only and shall not affect its interpretation. This Agreement may be
executed in two or more counterparts, each of which shall be deemed to be an
original and all of which, when taken together, shall be deemed to constitute
the same Agreement.
FURTHER ASSURANCES. Each of the parties hereto shall execute such further
instruments and take such other actions as the other party shall reasonably
request in order to effectuate the purposes of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
TOTAL RESEARCH CORPORATION
By /s/ Albert A. Angrisani
-------------------------
Title:
/s/ Theresa Flanagan
-------------------------
Executive
8
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>8
<FILENAME>l03090aexv23w1.txt
<DESCRIPTION>EXHIBIT 23.1
<TEXT>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-31776, No. 333-31778, No. 333-49336, No.
333-69056 and No. 333-72842) and the Registration Statements on Form S-3 (No.
333-73778 and No. 333-106759), of Harris Interactive Inc. of our reports dated
July 25, 2003 relating to the financial statements and financial statement
schedule, which appear in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Rochester, New York
September 26, 2003
1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.2
<SEQUENCE>9
<FILENAME>l03090aexv23w2.txt
<DESCRIPTION>EXHIBIT 23.2
<TEXT>
<PAGE>
EXHIBIT 23.2
REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULE
TO THE BOARD OF DIRECTORS OF HARRIS INTERACTIVE INC.
Our audits of the consolidated financial statements referred to in our report
dated July 25, 2003 appearing in the 2003 Annual Report on Form 10-K, also
included an audit of the financial statement schedule listed in Item 15(a)(2) of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/S/ PRICEWATERHOUSECOOPERS LLP
Rochester, New York
July 25, 2003
1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>10
<FILENAME>l03090aexv31w1.txt
<DESCRIPTION>EXHIBIT 31.1
<TEXT>
<PAGE>
EXHIBIT 31.1
CERTIFICATION
I, Gordon S. Black, Principal 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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions);
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; 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 over
financial reporting.
Date: September 26, 2003 Signature: /s/ GORDON S. BLACK
------------------------
Gordon S. Black
Chairman and Chief Executive Officer
(Principal Executive Officer)
1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>11
<FILENAME>l03090aexv31w2.txt
<DESCRIPTION>EXHIBIT 31.2
<TEXT>
<PAGE>
EXHIBIT 31.2
CERTIFICATION
I, Bruce A. Newman, Principal Financial 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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions);
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; 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 over financial reporting.
Date: September 26, 2003 Signature: /s/ BRUCE A. NEWMAN
------------------------
Bruce A. Newman
Chief Financial Officer, Secretary
And Treasurer
(Principal Financial Officer)
1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>12
<FILENAME>l03090aexv32w1.txt
<DESCRIPTION>EXHIBIT 32.1
<TEXT>
<PAGE>
EXHIBIT 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------
In connection with the Annual Report on Form 10-K of Harris Interactive Inc.
(the "Company") for the fiscal year ended June 30, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Gordon
S. Black, Chairman and Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge, the Report fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended, and the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Signature: /s/ GORDON S. BLACK
------------------------
Gordon S. Black
Chairman and Chief
Executive Officer
Dated: September 26, 2003
1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>13
<FILENAME>l03090aexv32w2.txt
<DESCRIPTION>EXHIBIT 32.2
<TEXT>
<PAGE>
EXHIBIT 32.2
Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------
In connection with the Annual Report on Form 10-K of Harris Interactive Inc.
(the "Company") for the fiscal year ended June 30, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Bruce
A. Newman, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to my knowledge the Report fully complies with the requirements of
Section 13(a) or15(d), as applicable, of the Securities Exchange Act of 1934, as
amended, and the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Signature: /s/ BRUCE A. NEWMAN
-----------------------
Bruce A. Newman
Chief Financial Officer,
Secretary and Treasurer
Dated: September 26, 2003
1
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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