<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ______________
COMMISSION FILE NUMBER: 000-27577
HARRIS INTERACTIVE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 16-1538028
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
135 CORPORATE WOODS, ROCHESTER, NY 14623
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (716) 272-8400
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On September 30, 2000, 34,264,004 shares of the Registrant's Common Stock, $.001
par value, were outstanding.
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HARRIS INTERACTIVE INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
Part I: Financial Information
<S> <C>
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2000 and June 30, 2000 1
Condensed Consolidated Statements of Operations for the three months ended
September 30, 2000 and September 30, 1999 2
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 2000 and September 30, 1999 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 5
Part II: Other Information
Item 1: Legal Proceedings 9
Item 2: Changes in Securities and Use of Proceeds 9
Item 3: Defaults Upon Senior Securities 9
Item 4: Submission of Matters to a Vote of Security Holders 9
Item 5: Other Information 9
Item 6: Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
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HARRIS INTERACTIVE INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,142 $ 23,932
Marketable securities 52,486 48,960
Accounts receivable 9,953 10,056
Costs and estimated earnings in excess
of billings on uncompleted contracts 3,710 3,780
Other current assets 1,660 2,072
------------------ ----------------
Total current assets 78,951 88,800
Property, plant and equipment, net 15,703 13,640
Goodwill, less accumulated amortization of $482 at September 30, 2000
and $456 at June 30, 2000 1,068 1,094
Other assets 948 918
------------------ ----------------
Total assets $ 96,670 $104,452
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,918 $ 4,243
Accrued expenses 2,690 2,958
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,819 2,901
----------------- ----------------
Total current liabilities 9,427 10,102
Stockholders' equity:
Common stock, $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 34,264,004 shares at September 30,
2000 and 34,111,434 shares at June 30, 2000 34 34
Additional paid-in capital 129,303 129,113
Unamortized deferred compensation (1,875) (2,075)
Accumulated other comprehensive loss (4) (133)
Accumulated deficit (40,215) (32,589)
----------------- ----------------
Total stockholders' equity 87,243 94,350
----------------- ----------------
Total liabilities and stockholders' equity $ 96,670 $104,452
================== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
<S> <C> <C>
Revenues from services $ 12,053 $ 9,364
Cost of services 6,301 6,307
------------------- -------------------
Gross profit 5,752 3,057
Operating expenses:
Internet database development 2,517 905
Sales and marketing 1,913 793
General and administrative 10,086 5,121
------------------- -------------------
Operating loss (8,764) (3,762)
Interest and other income (expense), net 1,138 (71)
------------------- -------------------
Net loss (7,626) (3,833)
Accrued dividends on preferred stock - (294)
------------------- -------------------
Net loss available to holders of common stock $ (7,626) $ (4,127)
=================== ===================
Basic and diluted net loss per share $ (0.22) $ (0.38)
=================== ===================
Weighted average shares outstanding - basic
and diluted 34,196,558 10,911,850
=================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTMEBER 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,626) $(3,833)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization 1,650 763
Amortization of deferred compensation 200 101
Amortization of premium and discount on marketable securities (138)
Loss on disposal of fixed assets 47
Decrease (increase) in -
Accounts receivable 103 (1,257)
Costs and estimated earnings in excess of
billings on uncompleted contracts 70 (699)
Other current assets 412 (391)
Other assets (30) (10)
(Decrease) increase in -
Accounts payable (325) 1,876
Accrued expenses (268) 705
Billings in excess of costs and estimated
earnings on uncompleted contracts (82) (219)
-------------- ----------------
Net cash used in operating activities (5,987) (2,964)
-------------- ----------------
Cash flows from investing activities:
Purchase of marketable securities (11,420)
Proceeds from maturities of marketable securities 8,165
Capital expenditures (3,776) (2,877)
Proceeds from sale of fixed assets 42
-------------- ----------------
Net cash used in investing activities (6,989) (2,877)
-------------- ----------------
Cash flows from financing activities:
Increase in short-term borrowings 4,709
Net proceeds from issuance of preferred stock 990
Issuance of common stock and stock options 190 347
-------------- ----------------
Net cash provided by financing activities 190 6,046
-------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (4)
-------------- ----------------
Net increase in cash and cash equivalents (12,790) 205
Cash and cash equivalents at beginning of period 23,932 108
-------------- ----------------
Cash and cash equivalents at end of period $11,142 $ 313
============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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HARRIS INTERACTIVE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Harris Interactive Inc. (the "Company") is a leading global market
research firm, using Internet-based and traditional methodologies to
provide our clients with information about the views, behaviors and
attitudes of people worldwide. Known for our HARRIS POLL(TM), the Company
has over 40 years experience in providing clients with market research and
polling services including custom, multi-client and service bureau
research, in addition to customer relationship management services.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. The
consolidated balance sheet as of June 30, 2000 has been prepared from the
audited consolidated financial statements of the Company.
These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Annual Report on Form 10-K (File No. 000-27577), filed by
the Company with the Securities and Exchange Commission on September 27,
2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share are computed based on the weighted
average number of common shares outstanding during the period. In arriving
at the net loss available to holders of common stock, preferred stock
dividends of $294 were added in fiscal 2000. Upon conversion of the
preferred stock in conjunction with the initial public offering, all
rights to accrued and unpaid dividends were terminated. All potentially
dilutive securities were excluded from the calculation of diluted net loss
per share, as the effect would be anti-dilutive.
COMPREHENSIVE LOSS
The components of the Company's total comprehensive loss ($000s) were:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
September 30, September 30,
2000 1999
------------------- -------------------
<S> <C> <C>
Net loss $ (7,626) $ (3,833)
Foreign currency translation
adjustments (4) -
Unrealized gain on marketable securities 133 -
------------------- -------------------
Total comprehensive loss $ (7,497) $ (3,833)
=================== ===================
</TABLE>
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE DISCUSSION IN THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS FORM 10-Q THAT
ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING
EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON THE
INFORMATION AVAILABLE TO HARRIS INTERACTIVE INC. ON THE DATE HEREOF, AND HARRIS
INTERACTIVE ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENT.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED HEREIN. THE
RISK FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS HARRIS INTERACTIVE INC.
FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, SUCH AS OUR
10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 2000,
SHOULD ALSO BE REVIEWED.
OVERVIEW
We provide market research and polling products and services to a broad range of
companies, non-profit organizations and governmental agencies. Since 1956, we
have provided these services utilizing traditional market research and polling
methodologies, such as direct mail, telephone-based surveys, mall intercepts,
focus groups and in-person interviews. In September 1997, we began developing
our Internet panel and building the technology infrastructure to provide online
market research and polling services. In November 1997, we introduced our first
Internet-based market research and polling products and services.
We generally perform traditional and Internet-based custom research services on
a fixed fee basis in response to client-generated requests. We sell our
multi-client research products on a periodic subscription basis, typically
quarterly or annually. Harris Interactive Service Bureau performs research for
other market research firms on a project-by-project basis in response to
requests from those firms. We provide customer relationship services on an
outsourced basis to our clients on a project-by-project basis.
Through fiscal 1998, all of our revenues were derived from custom research
projects using traditional market research and polling methodologies. In fiscal
1999, revenues from those sources represented 90% of our total revenues, while
revenues from Internet-based products represented 10% of total revenues. In
fiscal 2000, revenues from traditional market research and polling methodologies
represented 59% of total revenues, while revenues from Internet-based products
represented 41% of total revenues. During the first three months of fiscal 2001,
revenues from Internet-based products surpassed revenues from traditional market
research and polling methodologies, representing 58% of total revenue while
traditional market research and polling methodologies revenues represented 42%.
We consider all of the revenues from a project to be Internet-based whenever 50%
or more of the surveys used in the completed project were completed by online
panelists over the Internet. As we anticipated, revenues derived from
Internet-based custom research, multi-client products and Harris Interactive
Service Bureau research now represent the dominant portion of our total
revenues.
Since June 30, 2000 the number of our Internet clients has grown from 363 to
425, representing an increase of over 17%. Additionally, our Internet database
of online panelists has also grown from approximately 6.6 million online
panelists at June 30, 2000 to over 7.0 million at September 30, 2000.
Revenues under fixed fee arrangements are recognized on a percentage of
completion method based on the ratio of costs incurred to total estimated
costs. These revenues include amounts billed to our clients to cover
subcontractor costs and other direct expenses. Provision for estimated
contract losses, if any, is made in the period such losses are determined.
Subscription revenues are recognized upon delivery of the research product.
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Gross margin represents revenues less variable project costs and associated
direct labor. Variable project costs related to market research utilizing
traditional methodologies include interviewer payroll, subcontractor charges,
participant incentives, telecommunication charges and mailing costs. In
contrast, variable costs related to Internet-based market research are nominal.
Direct labor costs consist primarily of survey design, analysis, and reporting
costs and are comparable for both traditional and Internet-based methodologies.
We anticipate that our gross margins will continue to increase as the percentage
of revenues we generate from Internet-based products and services increases.
Operating expenses consist primarily of Internet database development costs,
sales and marketing, and general and administrative expenses. Internet database
development costs are the expenses we incur in connection with the ongoing
development of our Internet panel, primarily through our strategic alliance with
Excite@Home. Those costs are expensed as incurred. Sales and marketing expenses
consist primarily of personnel and marketing program expenses, public relations
advertising and promotion costs, commissions and telemarketing costs and other
related expenses. General and administrative expenses consist of salaries,
payroll taxes, benefits and related costs for both technology infrastructure
development and general corporate functions, occupancy costs and depreciation.
Interest and other income is primarily comprised of income from investments in
each period.
We are required to and have in the past recognized compensation expense when we
grant options or sell shares to employees or certain other persons at a price
less than the fair market value of the shares at the date of grant or sale. In
the case of option grants, the difference between the fair market value of the
common stock and the exercise price on the grant date of the option is amortized
as compensation expense over the vesting period for the option. In the case of a
sale of common stock, the compensation expense is recognized on the date of
sale. In connection with such transactions, during the first quarter of fiscal
2001 and fiscal 2000, we recognized compensation expense of approximately $0.2
million and $0.1 million, respectively.
Our net losses were $7.6 million and $3.8 million in the first quarter of fiscal
2001 and fiscal 2000, respectively. Net losses were higher in the first quarter
of fiscal 2001 due to the continued expansion of our business resulting in the
addition of new personnel, increased marketing expenses, and higher costs
associated with ongoing development of new products, services, and the
technology infrastructure and Internet database necessary for our continuing
transition from traditional to Internet-based market research.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated our results of
operations expressed as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
<S> <C> <C>
Revenues from services 100% 100%
Cost of services 52 67
-------------- ---------------
Gross profit 48 33
Operating expenses:
Internet database development 21 10
Sales and marketing 16 8
General and administrative 84 55
-------------- ---------------
Operating loss (73) (40)
Interest and other income (expense), net 9 (1)
-------------- ---------------
Net loss (64) (41)
============== ===============
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES FROM SERVICES. Total revenues increased 29% to $12.1 million for the
quarter ended September 30, 2000, from $9.4 million for the quarter ended
September 30, 1999. This increase was due to increased usage of our
Internet-based market research products and services, which contributed $7.0
million to total revenues, offset by a decline in traditional market research.
Internet revenues constituted 58% of total revenues in the first quarter of
fiscal 2001 as compared to 29% of total revenues in the first quarter of fiscal
2000.
GROSS PROFIT. Gross profit for the quarter ended September 30, 2000 was $5.8
million or 48% of revenues compared with $3.1 million or 33% of revenues for the
quarter ended September 30, 1999. The increase in gross profit resulted
primarily from the significant growth of high-margin Internet revenues relative
to overall revenue growth.
INTERNET DATABASE DEVELOPMENT. Internet database development costs were $2.5
million for the quarter ended September 30, 2000 compared with $0.9 million in
the quarter ended September 30, 1999. The increase of $1.6 million, or 178%, was
due to costs associated with The Planet Project Global Poll as well as the
continued expansion of our online panel at a rate consistent with strategic
objectives. As announced in September 2000, we have partnered with other
technology companies to conduct The Planet Project Global Poll, a four day,
worldwide poll being conducted in mid-November, across all continents in eight
languages. This survey will be the largest of its type ever conducted and will
greatly increase our knowledge and expertise related to global research and will
add significantly to the number of cooperative respondents worldwide.
SALES AND MARKETING. Sales and marketing expenses for the quarter ended
September 30, 2000 were $1.9 million, or 16%, of revenues, compared with $0.8
million or 8% of revenues for the quarter ended September 30, 1999 . The
increase in sales and marketing expenses of $1.1 million, or 138%, is primarily
attributable to our hiring of sales and marketing personnel as well as an
increase in marketing efforts required to support our multi-client research
products and Harris Interactive Service Bureau expansion.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses were $10.1
million, or 84%, of revenues for the quarter ended September 30, 2000 compared
with $5.1 million, or 55%, of revenues for the quarter ended September 30, 1999.
The increase in general and administrative expenses was primarily attributable
to increased staffing and related expenses to support the rapid growth in
business, as well as the expansion of our office facilities.
INTEREST AND OTHER INCOME (EXPENSE), NET. Net interest and other income totaled
$1.1 million for the quarter ended September 30, 2000 compared with $0.1
million, net expense, for the quarter ended September 30, 1999. The increase in
interest income was primarily due to increased cash and marketable securities
balances from a private placement of Class B preferred stock in October 1999 and
completion of our initial public offering in December 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through bank financing and, more
recently, issuances of our common and preferred stock. In December 1999 we
completed our initial public offering of 6,670,000 shares of our common stock
(including 870,000 shares sold pursuant to the exercise of the Underwriters'
over-allotment option), which generated net proceeds of $85.5 million.
Net cash used in operating activities was $6.0 million for the first quarter of
fiscal 2001, and $3.0 million for the same period during fiscal 2000. Net cash
used in operating activities in each of these periods was primarily the result
of net operating losses.
Net cash used in investing activities was $7.0 million for the first quarter
of fiscal 2001 and $2.9 million for the same period in the prior year. The
increase was primarily attributable to the purchase of investment securities
with the proceeds from our initial public offering of common stock, pending
the use of these proceeds for working capital, the expansion of our Internet
panel and other purposes. Additionally, capital expenditures during the first
quarter of fiscal 2001 increased by $0.9 million, or 31%, to $3.8 million,
compared with $2.9 million during the first quarter of fiscal 2000. The
increase was primarily associated with Internet infrastructure development,
as well as facilities and equipment.
Net cash provided by financing activities was $0.2 million for the first quarter
of fiscal 2001 and $6.0 million for the same period during fiscal 2000. In
fiscal 2001, our financing activities consisted of the exercise of stock
options. During the first quarter of fiscal 2000, our financing activity
consisted primarily of short-term borrowings and proceeds received from the
issuance of 10,000 shares of Class B Preferred Stock.
Our capital requirements depend on numerous factors, including market acceptance
of our products and services, the resources we allocate to the continuing
development of our Internet infrastructure and Internet panel, marketing and
selling of our services, our promotional activities and other factors. While
management anticipates continuing expenditures for property, plant and equipment
and working capital requirements throughout fiscal 2001, these expenditures are
expected to be lower than in fiscal 2000.
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<PAGE>
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In the normal course of business, the Company is at times subject to pending and
threatened legal actions and proceedings. After reviewing pending and threatened
actions and proceedings with counsel, management believes that the outcome of
such actions or proceedings is not expected to have a material adverse effect on
the financial position or results of operations.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 6, 1999, the Securities and Exchange Commission declared effective
the Company's Registration Statement on Form S-1 (No. 333-87311). Pursuant to
this Registration Statement, the Company completed an initial public offering of
6,670,000 shares of its common stock (including 870,000 shares sold pursuant to
the exercise of the Underwriters' over-allotment option) at an initial public
offering price of $14.00 per share or an aggregate offering of $93.4 million
(the "Offering"). The Offering was managed by Lehman Brothers, U.S. Bancorp
Piper Jaffray, Volpe Brown Whelan & Company, E*Offering Corp. and Fidelity
Capital Markets. Proceeds to the Company from the Offering, after deduction of
the Underwriters' discount and commission, totaled approximately $85.5 million,
net of offering costs of approximately $1.4 million.
The Company issued and sold an aggregate of 152,570 shares of its common stock
to employees during the first quarter of fiscal 2001, upon the exercise of
options granted under the Company's 1997 stock option plan, at prices ranging
from $.47 to $3.70 per share, for an aggregate cash consideration of $190,484.
As to each employee of the Company who was issued the common stock described in
this paragraph, the Company relied on Rule 701 under the Securities Act of 1933,
as amended. Each person was granted an option to purchase shares of the
Company's common stock pursuant to a written contract between such person and
the Company, and the Company was eligible to use Rule 701 at the time the
options herein reported as exercised were originally granted in accordance with
Rule 701(b).
During the period from December 6, 1999 through September 30, 2000, the Company
used a portion of the proceeds from its public offerings as follows: (i)
approximately $31.3 million of net cash used for working capital and general
corporate purposes, including capital expenditures, (ii) approximately $6.1
million of net cash used for the expansion of our Internet panel and (iii) $0.5
million of net cash used in connection with the repayment of short-term
borrowings.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) - Exhibits:
- 11 Statement regarding computation of per share earnings
- 27 Financial Data Schedule
(b) - Reports on Form 8-K
None
- 10 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized,
November 14, 2000 Harris Interactive Inc.
By/s/ BRUCE A. NEWMAN
Bruce A. Newman
Chief Financial Officer
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