| HARRIS INTERACTIVE INC Item 1A Risk Factors Risks Related to Our Business If we are unable to maintain adequate size and demographic composition of our existing Internet panel, or if we are required to spend substantial funds to do so, our business, financial condition and results of operations will suffer |
| Our success is highly dependent on our ability to obtain and retain an adequate number of panelists in our Internet panel and its specialty sub-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, or • we are unable to attract an adequate number of replacement panelists and specialty sub-panel members |
| There are no industry or other benchmarks for determining the optimal size and composition of an Internet panel |
| Among other factors, panelist response rates differ with differing survey content, and the frequency with which panelists are willing to respond to survey invitations is variable |
| Although we believe that our current panel is adequate for the foreseeable future to accommodate our clients’ broad-based survey requests in the markets we serve, circumstances could change due to the factors described above |
| Additionally, we are not always able to accommodate client requests related to limited populations with particular demographic characteristics |
| We constantly reassess our panel size and demographics as survey requests are made and, based upon availability of existing panelists to fulfill project requests, determine our need to recruit additional panelists over time |
| In general, 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 |
| Our business will be unable to grow and will suffer if we have an insufficient number of panelists to respond to our surveys, if our panel becomes unreliable due to reduced size or if it is no longer representative of the general population |
| 12 _________________________________________________________________ [72]Table of Contents 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 use our HIpoints, HIstakes and instant results programs to provide incentives to encourage participation in our surveys and to maintain the size of our Internet panel |
| If these programs lose their effectiveness in the future, a reduction in size or responsiveness of the panel could result |
| A breach of our Internet security measures, security concerns, or liability arising from the use of the personal information of our Internet panel, could adversely affect our business |
| 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 |
| 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 and impair our ability to attract potential clients |
| We could be subject to liability claims by our online panelists for any misuse of personal information |
| These claims could result in costly litigation |
| We could also incur additional costs and expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated by a governmental body |
| 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 |
| For example, as part of our surveys panelists sometimes access, through our websites or linkages to client websites, content provided by our clients, such as advertising copy, that may be incomplete or contain inaccuracies |
| We also recruit panelists to participate in research sponsored and hosted by our clients on the client’s website, and we cannot completely control breaches of privacy policies, warranties, or other claims that may be made by those third parties |
| We may be accused of sending bulk unsolicited email and have our email blocked by one or more Internet service providers (“ISP’s”) and, therefore, be unable to conduct online data collection |
| Although we carry general and professional liability insurance, our insurance may not cover potential liability claims for publishing or distributing content over the Internet, 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 |
| Failure to maintain our reputation and name recognition could impair our ability to remain competitive We believe that maintaining our good reputation and name recognition is critical to attracting and expanding our current client base as well as attracting and retaining qualified employees |
| If our reputation and name are damaged through our participation in surveys involving controversial topics or if the results of our surveys are inaccurate or are misused or used out of context by one of our clients, we may become less competitive or lose market share |
| 13 _________________________________________________________________ [73]Table of Contents Any failure in the performance of our Internet-based technology infrastructure could harm our business |
| Because a greater proportion of our business than those of many of our competitors involves Internet-based data collection, our business may suffer a greater impact due to any Internet-related system failure |
| Any future Internet-related system delays or failures, including network, software or hardware failures, that cause 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, could impair our reputation, and have a material adverse effect on our business, financial condition and results of operations |
| Our systems and operations are vulnerable to damage or interruption from fire, earthquake, flooding, power loss, telecommunications failure, break-ins and similar events |
| The redundancy of our systems may not be adequate, as we depend upon third-party suppliers to protect our systems and operations from the events described above |
| We have experienced technical difficulties and downtime of individual components of our systems in the past, and we believe that technical difficulties and downtime may occur from time to time in the future |
| The impact of technical difficulties and downtime may be severe |
| We have developed, however have not fully implemented, a 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 |
| 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 ISP’s |
| These providers have experienced significant outages in the past, from time to time may block certain communications, and in the future could experience outages, delays and other difficulties unrelated to our systems |
| Major components of the Internet backbone itself could fail due to terrorist attack, war or natural disaster |
| Our business is particularly vulnerable to such failure because not only would we suffer the effects experienced by businesses in general, we would be unable to perform Internet surveys, which are the core of much of our business |
| We thus would have to find alternative means to conduct surveys or would be unable to effectively service the needs of many of our clients |
| 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 methodologies, 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 name, our brand recognition and business would likely suffer |
| We would have to make substantial financial expenditures to promote and rebuild our brand identity |
| Moreover, there can be no assurance that third parties will not independently develop functionally equivalent or superior methodologies and technologies |
| 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 14 _________________________________________________________________ [74]Table of Contents 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 may seek to license 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 or lack of availability 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 |
| Our international growth is dependent in part upon expansion of our international Internet panel in key regions |
| Key components of our strategy are the extension of our Internet-based market research products and services to clients internationally, expansion of our Internet panel to include global online panelists and development of strategic alliances globally |
| If worldwide Internet usage does not continue to grow, we may be unable to attract international online panelists to our Internet panel or international clients for our Internet-based market research and polling products and services |
| Our inability to attract panel members in key regions, such as Western Europe and Asia, would necessitate the use of more costly traditional market research methodologies to serve the needs of our clients who do business internationally |
| Our ability to grow internationally will be adversely affected to the extent that our international panel does not grow commensurately with demand of our international clients |
| The optimal size of our panel in specific countries is subject to the same uncertainty as is applicable to our existing panel in the United States |
| Our international growth will be adversely affected if the marketplace does not continue to convert to Internet-based market research and polling |
| Although Internet-based research has achieved general acceptance in the United States, the success of our international business will depend in large part on our ability to continually develop and market Internet-based products and services that achieve broad market acceptance internationally |
| Our clients in the international markets we serve 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 |
| 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 rely on services provided by off-shore providers, the disruption of which could adversely impact our business |
| We rely on off-shore providers in countries such as Canada, India and Costa Rica, to provide certain of our programming services, as well as telephone and Internet data collection |
| Political or 15 _________________________________________________________________ [75]Table of Contents economic instability in countries from which such support services are provided, or a significant increase in the costs of such services, could adversely affect our business |
| From time to time laws and regulations are proposed in the United States that would restrict or limit the benefits of off-shore operations, and enactment of legal restrictions could harm our results of operations |
| If we are unable to overcome other risks associated with global operations, we will be unable to conduct business on a global level |
| Because many of our larger competitors have global operations, our expansion must, in part, be global |
| Our international operations have either lost money or not added significantly to our net income in recent years |
| Our operational, technical, and financial systems and controls will have to continue to adapt to a more diversified geographic base of operations |
| Managing and sustaining our international growth, and ensuring its profitability, will place significant demands on management |
| If we are unable to manage our growth effectively, we may not be able to successfully implement our business plan at projected levels |
| The following additional risks are inherent in doing business on a global level: • inability to comply with or enactment of more restrictive privacy laws, • 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 |
| For example, 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 |
| As we increase our global operations in the future, we may experience some or all of these risks, which may have a material adverse effect on our business, financial condition and results of operations |
| We 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 |
| Project managers with industry expertise are important to our ability to retain and expand our business |
| Intense 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 |
| In the past, we have from time to time experienced difficulty hiring and retaining qualified employees |
| There are few, if any, educational institutions that provide specialized training related to market research |
| Employees therefore must be recruited in competition with other industries and few of those who are recruited have direct or substantial experience with Internet-based research |
| In the past, competition for highly skilled employees has resulted in additional costs for recruitment, training, compensation and relocation or the provision of remote access to our facilities |
| We may continue in the future to experience difficulty in hiring and retaining employees with appropriate qualifications |
| 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 |
| Our quarterly operating results have in the past, and may in the future, fluctuate significantly and we may incur losses in any given quarter |
| 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 the 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 exchange 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: • effective management of the professional services aspects of our business, including utilization and realization rates, • our relative mix of revenues from Internet-based and traditional market research, • our ability to maintain the proper size and scope of our Internet panel necessary to develop and sell new products and services and generate expected revenues, and • development of our own 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 |
| 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 |
| 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 and applicable law could delay or prevent an acquisition of our company |
| Our restated certificate of incorporation provides for the division of our board of directors into three classes, eliminates the right of stockholders to act by written consent without a meeting, and provides our board of directors with the power to issue shares of preferred stock 17 _________________________________________________________________ [77]Table of Contents without stockholder approval |
| The preferred stock could have voting, dividend, liquidation, and other rights established by the board of directors that are superior to those of our common stock |
| Our board of directors also adopted a stockholder rights plan, pursuant to which we declared and paid a dividend of one right for each share of common stock outstanding as of March 29, 2005, and one right attaches to each share issued thereafter until a specified date |
| Unless redeemed by us prior to the time the rights are exercised, upon the occurrence of certain events, the rights will entitle the holders to receive upon exercise of each right shares of our preferred stock, or shares of an acquiring entity, having a value equal to the exercise price of the right divided by 50prca of the then market price of our common stock |
| The issuance of the rights could have the effect of delaying or preventing a change in control of our company |
| 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 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 |
| We have in the past and may in the future acquire or make investments in complementary businesses, services, products or technologies |
| If we choose not to pursue acquisitions, are unable to identify suitable acquisition candidates or are unable to acquire them at reasonable prices and/or on reasonable terms, our rate of growth may slow |
| If we choose to pursue acquisitions, some material risks we may face include: • 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 clients 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 |
| Risks Related to Our Industry The market research industry is vulnerable to general economic conditions |
| The market research industry tends to be adversely affected by slow or depressed business conditions in the market as a whole |
| Many of our clients treat all or a portion of their market research expenditures as discretionary |
| As general economic conditions decline and our clients seek to control variable costs, projects to be performed by us may be delayed or cancelled, and new sales bookings may slow |
| As a result, our growth and earnings may be adversely impacted |
| 18 _________________________________________________________________ [78]Table of Contents We face intense competitive pressures within the market research and polling industry and from others who have the ability to collect data over the Internet |
| The market research and polling industry includes many competitors, some of whom are much larger than we are or have specialized products and services we do not offer |
| Consolidation within the industry may result in some of our competitors acquiring Internet data collection capabilities through mergers and acquisitions |
| Such consolidation may result in a loss of business to our Service Bureau |
| In addition, many other companies have, or are developing, large databases of individuals with whom they can communicate via the Internet |
| Such companies may themselves, or in arrangements with other market research firms, choose to provide competitive data collection services |
| As others increase their ability to offer Internet-based data collection services, and as our competitors develop alternative products, we may come under increasing pressures in selling and pricing our products and services |
| No one client accounts for more than 10prca 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, and these competitive pressures may make it more difficult for us to do so and to sustain and grow our revenues |
| Changes in government regulation could limit our Internet activities or result in additional costs of doing business on the Internet |
| 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 |
| For example: • A significant majority of US state legislatures have enacted laws regulating the distribution of unsolicited email |
| Such laws could force changes in the manner in which we are able to recruit and communicate with panelists |
| • Our business may be restricted by the development of various US federal and state “do not call” lists and other privacy regulations that permit consumers to protect themselves from unsolicited telemarketing telephone calls |
| In 2003, the Federal Trade Commission (“FTC”) amended its rules to establish a national “do not call” registry |
| Although “do not call” list regulations do not currently apply to market research phone calls, new legislation or regulation could eliminate the current market research exemption |
| If “do not call” list regulations become applicable to market research phone calls, our results of operations may be adversely affected by the loss of revenues from telephone-based market research |
| CAN-SPAM imposes a number of restrictions and requirements related to commercial communications over the Internet |
| CAN-SPAM also gives more legal ammunition for ISP’s to take spammers to court, allows the FTC to impose fines and gives state attorneys general the power to bring lawsuits |
| HIPAA imposes a number of restrictions and requirements designed to safeguard personal health information |
| As Healthcare is the largest line of business that we serve, from time to time, HIPAA could have the effect of increasing our costs and restricting our ability to gather and disseminate information, which could ultimately have a negative effect on our revenues |
| 19 _________________________________________________________________ [79]Table of Contents • Certain foreign countries in which we do business, such as China, censor or control our communication with our online panelists |
| Such limitations may hinder our ability to effectively conduct market research in a way that meets the needs of our clients |
| 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, among others, 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 • 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 |
| Changes in industry practices could limit our Internet activities |
| 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 |
| ISP’s also have the ability to disrupt our communications with our panel |
| Although we believe that we maintain high standards for the recruitment of members into our database, communications with our panelists and use of information provided by our respondents, some ISP’s and/or self-appointed industry regulators may not agree |
| As a result, our communications with our panelists may be disrupted from time to time |
| In such instances, our ability to collect data using traditional market research methodologies may be adversely impacted by the continued decline in response rates to surveys conducted over the telephone |
| 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 competitors continue to improve their technology and methodologies as they gain more experience with the Internet |
| Our business may suffer over time if we fail to have, create or acquire equal or superior technologies and methodologies |
| 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 |