10-K 1 l42979e10vk.htm FORM 10-K e10vk
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended June 30, 2011
or
o
  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. LOGO)
(Exact Name of Registrant as Specified in its Charter)
 
     
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
  16-1538028
(I.R.S. Employer
Identification No.)
161 Sixth Avenue,
New York, New York
(Address of principal executive offices)
  10013
(zip code)
 
Registrant’s telephone number, including area code:
(212) 539-9600
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class   Name of Each Exchange on Which Registered
 
Common Stock, $0.001 par value per share
  The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act:
NONE
 
INDICATE BY CHECK MARK IF THE REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
INDICATE BY CHECK MARK IF THE REGISTRANT IS NOT REQUIRED TO FILE REPORTS pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 þ     No o
 
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS SUBMITTED ELECTRONICALLY AND POSTED ON ITS CORPORATE WEB SITE, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED FILER, OR A SMALLER REPORTING COMPANY. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer  o
  Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if a smaller reporting company)    
 
INDICATE BY CHECK MARK WHETHER REGISTRANT IS A SHELL COMPANY (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of voting and non-voting common equity securities held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, December 31, 2010, was $58,998,977.
 
On September 23, 2011, 55,651,735 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 on November 1, 2011, 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.
 


 

 
HARRIS INTERACTIVE INC.
 
FORM 10-K
 
FOR THE FISCAL YEAR ENDED JUNE 30, 2011
 
INDEX
 
                 
        Page
 
 
Part I:        
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995     3  
  Item 1:     Business     3  
  Item 1A:     Risk Factors     9  
  Item 1B:     Unresolved Staff Comments     15  
  Item 2:     Properties     15  
  Item 3:     Legal Proceedings     16  
 
Part II:
  Item 5:     Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     17  
  Item 6:     Selected Financial Data     19  
  Item 7:     Management’s Discussion and Analysis of Financial Condition and Results of Operations     20  
  Item 7A:     Quantitative and Qualitative Disclosures About Market Risk     36  
  Item 8:     Financial Statements and Supplementary Data     38  
  Item 9:     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     82  
  Item 9A:     Controls and Procedures     82  
  Item 9B:     Other Information     83  
 
Part III:
  Item 10:     Directors, Executive Officers and Corporate Governance     83  
  Item 11:     Executive Compensation     83  
  Item 12:     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     84  
  Item 13:     Certain Relationships and Related Transactions, and Director Independence     84  
  Item 14:     Principal Accountant Fees and Services     84  
 
Part IV:
  Item 15:     Exhibits and Financial Statement Schedules     84  
Signatures     86  
 EX-10.1.17
 EX-10.4.17
 EX-10.4.20
 EX-10.4.52
 EX-10.4.53
 EX-10.4.54
 EX-10.4.55
 EX-10.06.36
 EX-21
 EX-23
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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The discussion in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this Annual Report on 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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding expectations, beliefs, plans, objectives, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as, “may”, “should”, “expects”, “plans”, “anticipates”, “feel”, “believes”, “estimates”, “predicts”, “potential”, “continue”, “consider”, “possibility”, or the negative of these terms or other comparable terminology. All forward-looking statements included in this document are based on the information available to Harris Interactive (the “Company”) on the date hereof, and the Company 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 Annual Report on Form 10-K and as set forth in other reports or documents the Company files from time to time with the Securities and Exchange Commission (the “SEC”). Risks and uncertainties also include the continued volatility of the global macroeconomic environment and its impact on the Company and its clients, the Company’s ability to sustain and grow its revenue base, the Company’s ability to maintain and improve cost efficient operations, the impact of reorganization and restructuring and related charges, quarterly variations in financial results, actions of competitors, our ability to develop and maintain products and services attractive to the market, our ability to remain in compliance with the financial covenants in our credit agreement, and uncertainties surrounding compliance with certain Nasdaq listing requirements.
 
Note: All dollar amounts shown below are in thousands of U.S. Dollars, unless otherwise noted.
 
Item 1.   Business
 
References herein to “we,” “our”, “us”, “its”, the “Company” or “Harris Interactive” refer to Harris Interactive Inc. and its subsidiaries, unless the context specifically requires otherwise. Harris Interactive® and The Harris Poll® are U.S. registered trademarks of Harris Interactive Inc. This Annual Report on Form 10-K also may include other trademarks, trade names, and service marks of Harris Interactive and of other parties.
 
Corporate Overview
 
Harris Interactive was founded in 1975 in upstate New York as the Gordon S. Black Corporation, however, its roots date back to the founding of Louis Harris and Associates in New York City in 1956. Today, Harris Interactive is an international, full-service, consultative market research firm widely known for The Harris Poll (one of the world’s longest-running, independent opinion polls) and for pioneering online market research methods. Harris Interactive primarily serves clients worldwide through its offices in North America and Europe, and through a global network of independent market research firms.
 
Our corporate headquarters are located in New York City. Our fiscal year ends June 30th.
 
Mergers, Acquisitions and Sale of Business
 
The Gordon S. Black Corporation was founded in 1975 as a New York corporation. It formed and became part of the Delaware corporation now known as Harris Interactive in 1997. Since that time, our acquisitions have included:
 
  •  February 1996 — Louis Harris and Associates, Inc., headquartered in New York,
 
  •  February 2001 — the custom research division of Yankelovich Partners, Inc., headquartered in Norwalk, Connecticut,


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  •  August 2001 — Market Research Solutions Limited, a privately-owned U.K. company headquartered in Oxford, England,
 
  •  September 2001 — M&A Create Limited, a privately-owned company headquartered in Tokyo, Japan,
 
  •  November 2001 — Total Research Corporation, a Delaware corporation headquartered in Princeton, New Jersey,
 
  •  March 2004 — Novatris, S.A., a share corporation organized and existing under the laws of France,
 
  •  September 2004 — Wirthlin Worldwide, Inc., a privately-held California corporation headquartered in Reston, Virginia,
 
  •  April 2007 — MediaTransfer AG Netresearch & Consulting (“MediaTransfer”), a privately-held German stock corporation headquartered in Hamburg, Germany,
 
  •  August 2007 — Decima Research Inc. (“Decima”), a corporation incorporated in Ontario, Canada, and
 
  •  August 2007 — Marketshare Limited, a company incorporated under the laws of Hong Kong, and Marketshare Pte Ltd, a company incorporated under the laws of Singapore (collectively, “Marketshare”). In July 2011, we disclosed our plans to cease operations in Asia by September 30, 2011.
 
In May 2005, we completed the sale of our Japanese subsidiaries, M&A Create Limited, Adams Communications Limited, and Harris Interactive Japan, K.K., in a management buy-out. In August 2007, we sold our Rent and Recruit business, which was engaged primarily in providing facilities for and conducting focus group interviews.
 
Business Overview
 
Harris Interactive is a professional services firm that serves clients in many industries and many countries. We provide full service market research and polling services which include ad-hoc and customized qualitative and quantitative research, service bureau research (conducted for other market research firms), and long-term tracking studies.
 
We conduct market research projects for clients in many industries, including the automotive, transportation, travel, tourism, energy, professional services, consumer goods, restaurants, retail, financial services, healthcare, public affairs and policy, technology, media and telecommunications industries. We also offer consultative solutions in areas such as market assessment, product development, brand and communications, stakeholder relationships, reputation management, and youth and education.
 
We conduct a significant portion of our market research using online data collection. We also conduct data collection through, among others, mail and telephone surveys, focus groups, and personal interviews. During fiscal 2011, our telephone data collection was conducted through our telephone data collection centers in the United Kingdom, Canada, Hong Kong and Singapore, and through outsourced providers in India and, to a lesser extent, Costa Rica. In August 2011, we sold our U.K. telephone data collection center to a third-party. By September 30, 2011, we anticipate that our telephone data collection centers in Hong Kong and Singapore will be closed.


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Our Products and Services
 
Custom Research
 
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 to ensure that the final data collected will meet the client’s needs. Based on the client’s requirements, we then determine the proper data collection process (such as a mail, telephone or online survey, focus groups, personal interviews, or any combination thereof), sampling scheme (the demographics and number of people to be surveyed) and survey design or focus group protocol.
 
  •  Data Collection — Field data collection is conducted through online or telephone interviewing, by mail or in person, by holding focus group meetings, or any combination of the above. Multiple quality assurance processes are employed to ensure that the survey data are accurately reported and that the correct number and type of interviews have been 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 sample design and questionnaire development techniques help ensure that appropriate information is collected and that the information satisfies the specific inquiries of our clients. We have developed in-depth data collection techniques to enhance the integrity and reliability of our sample database. Our survey methodology is intended to ensure that responses are derived from the appropriate decision-makers in each category. As a result, we have a solid foundation for delivering data and insight that meets our clients’ needs.
 
Tracking Study Research
 
We apply our expertise to the design, execution and maintenance of custom, online tracking studies for clients in a broad range of industries and around the globe. Tracking studies regularly ask identical questions to similar demographic groups within a constant interval (once a month, once a quarter, etc.) to feed business decision-makers with dynamic data and intelligence that enables them to:
 
  •  Measure, sustain and improve customer loyalty,
 
  •  Gather market and customer intelligence relative to the brand and category,
 
  •  Detect emerging market trends and/or potential competitive threats,
 
  •  Assess the impact of marketing on customer behaviors and attitudes, and
 
  •  Identify opportunities for growth.
 
Service Bureau Research
 
We provide our market research industry clients with mixed-mode data collection, panel development services, and syndicated and tracking research consultation through our service bureau group.
 
Research and Development
 
We have not incurred expenditures for the three fiscal years ended June 30, 2011 that would be classified as research and development as defined by accounting principles generally accepted in the United States of America (“GAAP”) under the Financial Accounting Standards Board (“FASB”) guidance for research and development expenses.


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Our Intellectual Property and Other Proprietary Rights
 
We believe that the Harris brand and its associated intellectual property provide us with many competitive advantages. To protect our brand and our intellectual property, we rely on a combination of patent, copyright, trademark and trade-secret laws, as well as confidentiality, non-disclosure, non-compete and license agreements, and clearly defined standard terms and conditions in our sales contracts.
 
Our Clients
 
At June 30, 2011, we had approximately 1,400 clients. No single client accounted for more than 10% of our consolidated revenue.
 
Our Competition and Competitive Advantages
 
We compete with numerous market research firms, as well as corporations and individuals that perform market research studies on an isolated basis, many of which have market shares or financial and marketing resources larger than our own. Our competitors include, but are not limited to, Synovate (owned by Aegis Group plc), GfK AG, Ipsos SA, and TNS and Millward Brown (both owned by WPP Group plc).
 
We believe we have a number of competitive advantages, including:
 
  •  Our Highly Skilled Employees — many of whom are recognized by their peers as leaders in the field of market research or in the particular industry sectors in which they specialize.
 
  •  Our Strong Brand — we believe that Harris Interactive and The Harris Poll are two of the best known and most trusted names for U.S. market research and public opinion polling today. We have expanded The Harris Poll throughout Europe and expect to continue our relationships with The Financial Times (London), International Herald Tribune, and France 24 (Paris), in order to raise awareness of the Harris Interactive brand on a global scale.
 
  •  Our Online Panel — our online panel consists of individuals from around the world who have voluntarily agreed to participate in our various online research studies. Our panel enables us to:
 
  •  project results to large segments of the population, such as “all U.S. voters” or “all British adults”,
 
  •  conduct a broad range of studies across a wide set of industries,
 
  •  rapidly survey very large numbers of the general population, and
 
  •  survey certain low-incidence, hard-to-find subjects.
 
  •  Our Specialty Sub-Panels — we have developed numerous specialty sub-panels of hard-to-find respondents, including: Affluent, Chronic Illness, Mothers and Expectant Mothers, Physicians, Pet Companion, Technology Decision-Makers, and Youth. Our clients value our ability to survey these hard to find subjects. Many of our clients have asked us to develop specialty sub-panels exclusively for their use.
 
  •  Our Global Enterprise Solutions Portfolio — a comprehensive tool-box of research techniques, methodologies, and models that can be applied by marketing experts to help develop strategy, implement tactics, and assess their impact in the marketplace. These tools also can be used to analyze markets, develop new products and services, create and/or measure brand positioning and awareness, and measure and/or improve customer loyalty.
 
Financial Information about Geographic Areas
 
We are comprised principally of operations in North America and Europe. Non-U.S. market research is comprised of operations in United Kingdom, Canada, France and Germany. During fiscal 2011, we also maintained operations in Hong Kong and Singapore, along with a representative office in mainland China, all of which we anticipate will cease by September 30, 2011. Revenue from services is attributable to the country in which the work is performed. There were no intercompany transactions that materially affected the financial statements, and all intercompany sales have been eliminated upon consolidation.


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Our business model for offering custom market research is consistent across the geographic regions in which we operate. Geographic management facilitates local execution of our global strategies. We maintain global leaders with responsibility across all geographic regions for the majority of our critical business processes, and the most significant performance evaluations and resource allocations are made on a global basis by our chief operating decision-maker. Accordingly, we have concluded that we have one reportable segment.
 
We have prepared the financial results for geographic information on a basis that is consistent with the manner in which management internally disaggregates information to assist in making internal operating decisions. We have allocated common expenses among these geographic regions differently than we would for stand-alone information prepared in accordance with GAAP. Geographic operating income (loss) may not be consistent with measures used by other companies.
 
Geographic information from continuing operations for the fiscal years ended June 30 was as follows (amounts in thousands):
 
                         
    2011     2010     2009  
 
Revenue from services
                       
United States
  $ 92,885     $ 96,942     $ 112,821  
United Kingdom
    22,864       28,398       32,454  
Canada
    23,160       20,653       19,939  
Other European countries
    21,755       17,554       14,536  
Asia
    4,600       4,868       4,584  
                         
Total revenue from services
  $ 165,264     $ 168,415     $ 184,334  
                         
Operating income (loss)(1)
                       
United States
  $ (2,298 )   $ 2,371     $ (41,406 )
United Kingdom
    (4,371 )     (627 )     (3,431 )
Canada
    (1,330 )     (2,277 )     (5,539 )
Other European countries
    1,627       919       (5,048 )
Asia
    (615 )     (909 )     (1,025 )
                         
Total operating loss
  $ (6,987 )   $ (523 )   $ (56,449 )
                         
Long-lived assets
                       
United States
  $ 1,641     $ 2,964     $ 4,879  
United Kingdom
    976       1,300       1,039  
Canada
    431       1,093       1,693  
Other European countries
    243       210       301  
Asia
    156       59       103  
                         
Total long-lived assets
  $ 3,447     $ 5,626     $ 8,015  
                         
Deferred tax assets (liabilities)
                       
United States
  $     $     $  
United Kingdom
                283  
Canada
    (1,706 )     (1,709 )     (2,018 )
Other European countries
    (183 )     (307 )     (512 )
Asia
                 
                         
Total deferred tax assets (liabilities)
  $ (1,889 )   $ (2,016 )   $ (2,247 )
                         


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(1) Operating loss for fiscal 2009 included a $40,250 goodwill impairment charge. The charge was allocated to our geographic locations, specifically, $28,888 to the United States, $3,315 to the United Kingdom, $2,435 to Canada, $4,873 to other European countries, and $739 to Asia.
 
During fiscal 2011, 2010 and 2009, 56.2%, 57.6% and 61.2%, respectively, of our total consolidated revenue was derived from our U.S. operations, and 43.8%, 42.4% and 38.8%, respectively, of our total consolidated revenue was derived from our non-U.S. operations.
 
See “Item 1A. Risk Factors” below for a description of certain risks attendant to our non-U.S. operations.
 
Backlog
 
At June 30, 2011, we had a revenue backlog, also referred to as secured revenue, of approximately $45,922, as compared to a revenue backlog of approximately $44,929 at June 30, 2010. We estimate that substantially all of the backlog at June 30, 2011 will be recognized as revenue from services during the fiscal year ending June 30, 2012, based on our experience from prior years.
 
Employees
 
At June 30, 2011, we employed a total of 733 full-time individuals on a worldwide basis, 402 of whom were employed in the United States. In addition, we employed 187 part-time and hourly individuals on a worldwide basis for data gathering and processing activities, 35 of whom were employed in the United States. Temporary employees and hourly call center staff are not included in these headcount numbers.
 
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 our executive officers as of September 28, 2011. These individuals have been appointed by and are serving at the pleasure of the board of directors of the Company (the “Board”).
 
             
Name   Age   Position
 
Al Angrisani
    62     Interim Chief Executive Officer
Michael de Vere
    38     President, U.S. Business Groups
Marc H. Levin
    38     Executive Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary
Todd Myers
    42     Interim Head of Technology, Operations and Panel, and Senior Vice President
Eric W. Narowski
    42     Interim Chief Financial Officer, Principal Accounting Officer, and Senior Vice President, Global Controller
 
Al Angrisani is our Interim Chief Executive Officer, a position he has held since June 2011. Mr. Angrisani also currently serves as Chairman and Chief Executive Officer of Angrisani Turnarounds, LLC, an advisory firm for underperforming companies. Mr. Angrisani served as President and Chief Executive Officer of Greenfield Online, a provider of global consumer attitudes about products and services, from September 2005 until it was acquired by the Microsoft Corporation in October 2008, and then provided consulting services to Microsoft Corporation related to the acquisition until September 2009. Between November 2001 and April 2004, Mr. Angrisani served as President and Chief Operating Officer of Harris Interactive. Prior to this role, he served as President and Chief Executive Officer of Total Research Corporation from July 1998 through the Company’s merger with Harris Interactive in November


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2001. Earlier in his career, Mr. Angrisani served as President Reagan’s U.S. Assistant Secretary of Labor and Chief of Staff, and as a Vice President of Chase Manhattan Bank in New York.
 
Michael de Vere is our President, U.S. Business Groups, a position he has held since June 2011. From January 2011 to June 2011, Mr. de Vere served as our President, U.S. Client Services. From September 2010 to January 2011, Mr. de Vere led our U.S. Healthcare group. From August 2009 to September 2010, Mr. de Vere led our Global Sales and Marketing function and our U.S. Technology, Media & Entertainment group. Prior to joining us, Mr. de Vere served as Chief Operations Officer for Radius Financial, Inc. from March 2008 to August 2009. From February 1999 to March 2008, Mr. de Vere served in progressively senior roles at J.D. Power and Associates, most recently as Executive Director of Proprietary Research.
 
Marc H. Levin is our Chief Administrative Officer, a position he has held since June 2011. He continues to serve as Executive Vice President, General Counsel and Corporate Secretary. He served as our Senior Vice President, General Counsel, and Corporate Secretary from April 2009 to April 2010. He also served as our interim Head of Human Resources from January 2010 to April 2010. Prior to joining us, Mr. Levin spent five years at TNS, most recently as Senior Vice President and General Counsel, North America. Before joining TNS, Mr. Levin was a senior associate in the New York City office of the law firm Thacher Proffitt & Wood, where he specialized in corporate and securities law.
 
Todd Myers is our Interim Head of Technology, Operations and Panel, and Senior Vice President, a position he has held since June 2011. He continues to serve as a Senior Vice President of the Company. From December 2009 to June 2011, Mr. Myers served as our Senior Vice President, Global Operations. Prior to joining us, Mr. Myers spent more than three years at TNS, serving as Senior Vice President of North American Operations from August 2009 to December 2009 and as Senior Vice President, Operations, from June 2006 to August 2009. Before joining TNS, Mr. Myers served in senior operations roles at Opinion Research Corporation, Roper Starch Worldwide and Response Analysis Corporation.
 
Eric W. Narowski is our Interim Chief Financial Officer, a position he has held since June 2011. He continues to serve as our Principal Accounting Officer and Senior Vice President, Global Controller, positions he has held since February 2006 and October 2007, respectively. From November 2009 to October 2010, he also served as our interim Chief Financial Officer. From January 2000 to October 2007, Mr. Narowski served as our Vice President, Corporate Controller. Mr. Narowski joined us in July 1997 as our Controller, and is a New York State Certified Public Accountant.
 
Available Information
 
Information about our products and services, shareholder information, press releases and SEC filings can be found on our website at www.harrisinteractive.com. Through our website, we make available free of charge the documents and reports we file with the SEC, including our annual reports 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 websites (or the websites of our subsidiaries) does not constitute part of this Annual Report on Form 10-K.
 
The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
 
Item 1A.   Risk Factors
 
Factors That May Affect Future Performance.
 
We operate in a very competitive and rapidly changing environment that involves numerous risks and uncertainties, some of which are beyond our control. In addition, we and our clients are affected by global economic conditions. The following section discusses many of these risks and uncertainties, but is not intended to be all-inclusive.


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Risks Related to Our Business
 
Our business is vulnerable to fluctuations in general economic conditions.
 
Our business 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 global macroeconomic conditions decline and our clients seek to control variable costs, new bookings tend to slow, existing bookings become increasingly vulnerable to subsequent cancellations and delays, and our sales backlog may convert to revenue more slowly than it has historically. Any of the above factors may result in a material adverse impact to our growth, revenues, and earnings.
 
Failure to maintain our brand reputation and recognition could impair our ability to remain competitive.
 
We believe that maintaining our good brand reputation and 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, among others, 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.
 
If we are unable to maintain adequate capacity and demographic composition of our existing online panel, our business, financial condition and results of operations may be adversely affected.
 
Our success is highly dependent on our ability to maintain sufficient capacity of our online panel and its specialty sub-panels. Our ability to do this may be harmed if we lose panel capacity or are unable to attract and maintain an adequate number of replacement panelists and specialty sub-panel members. There are currently no industry or other benchmarks for determining the optimal size and composition of an online panel. Among other factors, panelist response rates vary with differing survey content, and the frequency with which panelists are willing to respond to survey invitations is variable. 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. We are not always able to accommodate client requests to survey low-incidence, limited populations with specific demographic characteristics. If our need to recruit panelists or specialty sub-panel members increases significantly, our operating costs will rise. Further, our business will be adversely affected if we do not achieve sufficient response rates with our existing panelists or our panel narrows and we are unable to spend the funds necessary to recruit additional panelists.
 
We face competitive pressures within our industry and must continuously replace completed work with new projects.
 
The market research industry includes many competitors, some of which are much larger than we are, have a greater global presence, and/or have specialized products and services we do not offer. There can be no assurance that we will be able to successfully compete against current and future competitors and our failure to do so could result in loss of market share, diminished value in our products and services, reduced pricing, and increased marketing expenditures. Furthermore, we may not be successful if we cannot compete effectively on quality of our services, timely delivery of information, customer service, and the ability to offer products and services to meet changing market needs or prices.
 
No one client accounts for more than 10% 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 from both existing and new clients, and these competitive pressures may make it more difficult for us to do so and to sustain and grow our revenues. Additionally, a portion of our business involves longer-term tracking studies, which are often renewable on an annual basis. Non-renewal of a large tracking study can have an immediate disproportionate impact on our revenues, and we may have a lag time in replacing the non-renewed tracking study or adjusting our cost structure to reflect the effects of the non-renewal.


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Our outstanding debt obligations and ability to comply with related covenants could impact our financial condition or future operating results.
 
At June 30, 2011, we had $10.8 million outstanding under our credit agreement, which provides for an amortizing term loan with quarterly payments and, subject to certain conditions, the availability of a maximum amount of $5.0 million under a revolving credit facility. However, we were not in compliance with certain financial covenants under our credit agreement at June 30, 2011 largely due to the magnitude of restructuring and other charges incurred during fiscal 2011. These covenant violations were permanently waived on September 27, 2011 as more fully described below under “Subsequent Events — Amendment Agreement and Waiver” and in Note 24, “Subsequent Events”, to our consolidated financial statements included in this Annual Report on Form 10-K.
 
The affirmative, negative and financial covenants of our credit agreement could limit our future financial flexibility and could adversely impact our ability to conduct our business. Additionally, a failure to comply with these covenants could result in acceleration of all amounts outstanding under our credit agreement, which would materially impact our financial condition unless accommodations could be negotiated with our lenders. No assurance can be given that we would be successful in doing so in this current financial climate, or that any accommodations that we were able to negotiate would be on terms as favorable as those presently contained in our credit agreement.
 
The associated debt service costs of the borrowing arrangement under our credit agreement will continue to be reflected in operating results. The outstanding debt may limit the amount of cash or additional credit available to us, which could restrain our ability to expand or enhance products and services, respond to competitive pressures, or pursue future business opportunities requiring substantial investments of additional capital.
 
A breach of our online security measures, security concerns, or liability arising from the use of the personal information of our online panel, could adversely affect our business.
 
A failure in our online 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.
 
Online 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 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 their 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 must continue to attract and retain highly skilled employees.
 
Our future success will depend, in large part, on our ability to continue to attract, retain and motivate highly skilled technical, managerial, marketing, sales and client support personnel. Research 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 number 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. Therefore, employees must be recruited in competition with other industries. In the past, competition for highly skilled employees has


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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.
 
We may require additional cash resources which may not be available on favorable terms or at all.
 
We believe that our existing cash balances, projected cash flow from operations, and the borrowing capacity we have under our revolving line of credit will be sufficient to meet our expected cash requirements for the next twelve months.
 
We may, however, require additional cash resources due to unanticipated business conditions, to repay indebtedness or to pursue future business opportunities requiring substantial investments of additional capital. If our existing financial resources are insufficient to satisfy our requirements, which would occur if we fail to achieve our fiscal 2012 budget as approved by the Board, we may seek to obtain additional borrowings or to monetize non-core assets. We cannot guarantee that we will be able to do so on acceptable terms or at all. In addition, the incurrence of additional indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would further restrict our operations. Further, our ability to access our revolving line of credit is subject to our compliance with the terms and conditions of our credit agreement, including financial covenants, the details of which are described in Note 11, “Borrowings”, to our consolidated financial statements included in this Annual Report on Form 10-K. There can be no assurance that we will remain in compliance with such terms and conditions.
 
Our international operations expose us to a variety of operational risks which could negatively impact our future revenue and growth.
 
Our operating results are subject to the risks inherent in international business activities, including general political and economic conditions in each country, changes in market demand as a result of tariffs and other trade barriers, challenges in staffing and managing foreign operations, changes in regulatory requirements, compliance with numerous foreign laws and regulations, differences between U.S. and foreign tax rates and laws, currency exchange fluctuations, problems in collecting accounts receivable and longer collection periods, issues related to repatriation of earnings of foreign subsidiaries, Internet access restrictions, protecting intellectual property rights in international jurisdictions, political instability, and anti-U.S. sentiment or terrorist activity against U.S. 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 the growth of our European online panel. If we were to 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 rely on services provided by off-shore providers, the disruption of which could adversely impact our business
 
We rely on off-shore providers in India and to a lesser extent, in Costa Rica, to provide certain of our programming and data processing services, as well as telephone and online data collection. In the case of India, we rely heavily on a single off-shore provider. Political or economic instability in countries where 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 jurisdictions where we operate that would restrict or limit the benefits of off-shore operations, the enactment of which could further harm our business. If any of these risks were to be realized and assuming that similar off-shore provider relationships could not be established, our results of operations and financial condition could be materially affected.


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If we are unable to enforce and protect our intellectual property rights our competitive position may be harmed.
 
We rely on a combination of copyright, trademark, trade secret, confidentiality, non-compete and other contractual provisions to protect our intellectual property rights. Despite our efforts to protect our intellectual property rights, unauthorized third parties may obtain and use technology or other information that we regard as proprietary. Our intellectual property rights may not survive a legal challenge to their validity or provide significant protection for us. The laws of certain countries do not protect our proprietary rights to the same extent as the laws of the United States. Accordingly, we may not be able to protect our intellectual property in such countries against unauthorized third-party copying or use, which could adversely affect our competitive position.
 
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 may 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 our clients’ or other third parties’ 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 their websites, and we cannot necessarily control breaches of privacy policies, warranties, or other terms by those third parties. Additionally, we may be accused of sending bulk unsolicited email and have our email blocked by one or more Internet service providers and, therefore, our online data collection efforts may suffer.
 
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.
 
Any failure in the performance of our technology infrastructure could harm our business.
 
Any 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, 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. Also, the redundancy of our systems may not be adequate. 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 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.
 
Risks Related to Our Common Stock
 
Our business may be harmed if we cannot maintain our listing on the Nasdaq Global Select Stock Market.
 
Variations in our operating results may cause our stock price to fluctuate. 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. Other factors, such as general market conditions and investor’s perceptions of our longer term prospects, also may cause fluctuations in the price of our common stock.


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To maintain our listing on the Nasdaq Global Select Market we must satisfy certain minimum financial and other continued listing standards, including, among other requirements:
 
  •  minimum $10,000,000 stockholders’ equity,
 
  •  minimum 750,000 publicly traded shares,
 
  •  minimum $5,000,000 market value of publicly held shares,
 
  •  $1.00 per share minimum bid price, and
 
  •  two registered and active market makers.
 
On June 13, 2011, we received a letter from Nasdaq (the “Notice”) notifying us that for 30 consecutive trading days preceding the date of the Notice, the bid price of our common stock had closed below the $1.00 per share minimum required for continued trading on the Nasdaq Global Select Market. The Notice also stated that we have 180 calendar days, or until December 12, 2011, to achieve a closing bid price for our common stock of $1.00 or greater for at least 10 consecutive business days. There can be no assurance that this will occur, or that any appeal of a decision to de-list our common stock will be successful. Any failure to meet the minimum bid price requirement must continue for 30 consecutive business days and may be cured within 180 days after notification by Nasdaq of non-compliance by meeting the standard for 10 or, in Nasdaq’s discretion, 20 or more consecutive business days. If we fail to meet these requirements, we would have the option to apply to transfer our securities to the Nasdaq Capital Market, which would provide us with an additional 180 days to meet the $1.00 minimum bid requirement. If we fail to meet the minimum bid requirement after that additional 180 days have elapsed, Nasdaq may provide written notification to us regarding the de-listing of our common stock. At that time, we would have the right to request a hearing to appeal the Nasdaq de-listing determination.
 
If our common stock loses its status on the Nasdaq Global Select Market in the future and we are not successful in obtaining a listing on the Nasdaq Capital Market, shares of our common stock would likely trade in the over-the-counter market bulletin board, commonly referred to as the “pink sheets,”. If our stock were to trade on the over-the-counter market, selling our common stock could be more difficult because smaller quantities of share would likely be bought and sold, transaction could be delayed, and security analysts’ coverage of us may be reduce. In addition, in the event our common stock is do-listed, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from affecting transactions in our common stock, further limiting the liquidity or our common stock. These factors could have a material adverse effect on the trading price, liquidity, value and marketability of our common stock.
 
Our operating results may fluctuate from period to period and may not meet the expectations of securities analysts or investors or forward-looking statements we have made, which may cause the price of our common stock to decline.
 
Our quarterly and annual operating results may fluctuate in the future as a result of many factors, some of which are outside our control, including declines in general economic conditions or the budgets of our clients, changes in the demand for market research and polling products and services, currency fluctuations, the timing of client projects, and competition in the industry, and others which are partially within our control, including the amount of new business generated, effective management of the professional services aspects of our business, including utilization and realization rates, the mix of domestic and international business, and the timing of the development, introduction and marketing of new products and services. An inability to generate sufficient earnings and cash flow may impact our operating and other activities. The potential fluctuations in our operating results could cause period-to-period comparisons of operating results not to be meaningful and may provide an unreliable indication of future operating results. Furthermore, our operating results may not meet the expectations of securities analysts or investors in the future or forward-looking statements we have made. If this occurs, the price of our stock would likely decline.


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Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid.
 
The trading prices of our common stock could be subject to significant fluctuations in response to, among other factors, variations in operating results, developments in the industries in which we do business, general economic conditions, general market conditions, changes in the nature and composition of our stockholder base, changes in securities analysts’ recommendations regarding our securities, and our performance relative to securities analysts’ expectations for any quarterly period. Further, even though our stock is quoted on the Nasdaq Global Select Market, our stock has had and may continue to have low trading volume and high volatility. The historically low trading volume of our stock makes it more likely that a significant fluctuation in volume, either up or down, will significantly impact the stock price. Because of the relatively low trading volume of our stock, our stockholders may have difficulty selling our common stock. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Such volatility may adversely affect the market price of our common stock.
 
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 the Board into three classes, eliminates the right of stockholders to act by written consent without a meeting, and provides the Board with the power to issue shares of preferred stock without stockholder approval. The preferred stock could have voting, dividend, liquidation, and other rights established by the Board that are superior to those of our common stock. 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.
 
The Board 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 50% 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.
 
Item 1B.   Unresolved Staff Comments
 
None.
 
Item 2.   Properties
 
Our corporate headquarters and principal United States operating facility is located at 161 Sixth Avenue, New York, New York, under an operating lease that expires in April 2012. We also lease offices in the following locations:
 
  •  Rochester, New York;
 
  •  Princeton, New Jersey;
 
  •  Norwalk, Connecticut;
 
  •  Reston, Virginia;
 
  •  Minneapolis, Minnesota;
 
  •  Grand Rapids and Ann Arbor, Michigan;


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  •  Portland, Oregon;
 
  •  Washington, District of Columbia;
 
  •  Brentford and Hazel Grove, United Kingdom;
 
  •  Ottawa and Toronto, Ontario;
 
  •  Montreal, Quebec;
 
  •  Paris, France;
 
  •  Hamburg and Munich, Germany;
 
  •  Hong Kong and Shanghai, China; and
 
  •  Singapore.
 
We lease all of our facilities and believe our current facilities are adequate to meet our needs for the foreseeable future. We continually assess the adequacy of our space needs relative to the size and scope of our business and have, from time to time, reduced our leased space accordingly. We believe that additional or alternative facilities can be leased to meet our future needs on commercially reasonable terms.
 
Information concerning each of our properties with material remaining lease obligations is as follows (amounts in thousands of U.S. Dollars):
 
                 
            Remaining
            Lease Obligation
Address   Location   Termination Date   June 30, 2011
 
161 Sixth Avenue
  New York, New York   April 2012     567  
39 Rue Crozatier
  Paris, France   September 2014     3,297  
1920 Association Drive
  Reston, Virginia   April 2015     580  
101 Merritt 7 Corporate Park
  Norwalk, Connecticut   May 2015     1,386  
60 Corporate Woods
  Rochester, New York   July 2015     5,497  
160 Elgin
  Ottawa, Ontario   February 2016     2,564  
1080 Beaver Hall Hill
  Montreal, Quebec   April 2016     1,075  
5 Independence Way
  Princeton, New Jersey   December 2018     4,800  
Great West Road
  Brentford, United Kingdom   June 2020     1,520  
 
Item 3.   Legal Proceedings
 
In the normal course of business, we are at times subject to pending and threatened legal actions and proceedings. After reviewing with counsel pending and threatened actions and proceedings, 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.


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Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our common stock is traded on the Global Select Market of Nasdaq under the symbol “HPOL”. The following table shows, the high and low sales prices per share of our common stock on the Nasdaq exchange for fiscal 2011 and 2010.
 
                                 
    Fiscal 2011   Fiscal 2010
    High   Low   High   Low
 
Quarter Ended:
                               
June 30
  $ 1.18     $ 0.70     $ 1.49     $ 0.99  
March 31
    1.44       0.82       1.55       1.02  
December 31
    1.31       0.80       1.26       0.80  
September 30
    1.10       0.70       1.10       0.37  
 
Holders
 
At September 23, 2011, our common stock was held by approximately 4,900 stockholders, reflecting stockholders of record or persons holding stock through nominee or street name accounts with brokers.
 
Dividends
 
We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain any future earnings for internal purposes, such as investing in our key strategic initiatives. Accordingly, we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
 
Issuer Purchases of Equity Securities
 
There were no repurchases of our equity securities for the three months ended June 30, 2011.


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Performance Graph
 
The graph below matches the cumulative 5-year total return of holders of our common stock with the cumulative total returns of the NASDAQ Composite index, the S&P Smallcap 600 index and a customized peer group of four companies that includes Aegis Group plc, GfK AG, Ipsos SA, and WPP Group plc. The graph tracks the performance of a $100 investment in our common stock, in each index and in the peer group (assuming the reinvestment of all dividends) from June 30, 2006 to June 30, 2011.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Harris Interactive Inc., The NASDAQ Composite Index,
The S&P Smallcap 600 Index and a Peer Group
 
(PERFORMANCE GRAPH)
 
                                                             
      6/06     6/07     6/08     6/09     6/10     6/11
Harris Interactive Inc. 
      100.00         93.86         35.26         7.19         18.60         14.91  
NASDAQ Composite
      100.00         122.33         108.31         86.75         100.42         132.75  
S&P Smallcap 600
      100.00         116.04         99.02         73.95         91.43         125.28  
Peer Group
      100.00         123.70         87.08         61.12         85.56         121.40  
                                                             
 
* $100 invested on 6/30/06 in stock or index, including reinvestment of dividends. Fiscal year ending June 30. Copyright© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
 
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
 
The cumulative total shareholder return graph and accompanying information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C promulgated by the SEC or the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act. The cumulative total shareholder return graph and accompanying information shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent Harris Interactive specifically incorporates it by reference.


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Item 6.   Selected Financial Data
 
The following selected consolidated financial data of Harris Interactive should be read in conjunction with Item 7, “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 Annual Report on Form 10-K. The selected consolidated financial data reported below includes the financial results of the following entities which we acquired as of the dates indicated: Decima (August 2007), Marketshare (August 2007), and MediaTransfer (April 2007). In addition, information reported for fiscal years 2007 and 2008 has been reclassified to reflect our Rent and Recruit operations as discontinued operations for all periods presented.
 
                                         
    For the Years Ended June 30,  
    2011     2010     2009     2008     2007  
    (In thousands, except share and per share amounts)  
 
Statement of Operations Data:
                                       
Revenue from services
  $ 165,264     $ 168,415     $ 184,334     $ 238,723     $ 211,803  
Operating expenses:
                                       
Cost of services
    108,887       107,266       115,235       140,578       122,052  
Selling, general and administrative
    51,932       54,335       65,678       83,084       72,590  
Depreciation and amortization
    6,040       6,714       7,610       8,526       5,295  
Gain on sale of assets
                            (788 )
Restructuring and other charges
    5,392       623       12,010       4,609       337  
Goodwill impairment charge
                40,250       86,497        
                                         
Total operating expenses
    172,251       168,938       240,783       323,294       199,486  
                                         
Operating income (loss)
    (6,987 )     (523 )     (56,449 )     (84,571 )     12,317  
Interest and other income
    (47 )     (58 )     (400 )     (1,119 )     (2,246 )
Loss on extinguishment of debt
          724                    
Interest expense
    1,359       2,029       3,433       1,951       290  
                                         
Income (loss) from continuing operations before income taxes
    (8,299 )     (3,218 )     (59,482 )     (85,403 )     14,273  
                                         
Provision (benefit) for income taxes
    154       (1,052 )     15,849       (661 )     5,319  
                                         
Income (loss) from continuing operations
    (8,453 )     (2,166 )     (75,331 )     (84,742 )     8,954  
Income from discontinued operations, net of tax
                      124       122  
                                         
Net income (loss) available to holders of common stock
  $ (8,453 )   $ (2,166 )   $ (75,331 )   $ (84,618 )   $ 9,076  
                                         
Basic net income (loss) per share:
                                       
Continuing operations
  $ (0.15 )   $ (0.04 )   $ (1.41 )   $ (1.60 )   $ 0.16  
Discontinued operations
                      0.00       0.00  
                                         
Basic net income (loss) per share
  $ (0.15 )   $ (0.04 )   $ (1.41 )   $ (1.60 )   $ 0.16  
                                         
Diluted net income (loss) per share:
                                       
Continuing operations
  $ (0.15 )   $ (0.04 )   $ (1.41 )   $ (1.60 )   $ 0.16  
Discontinued operations
                      0.00       0.00  
                                         
Diluted net income (loss) per share
  $ (0.15 )   $ (0.04 )   $ (1.41 )   $ (1.60 )   $ 0.16  
                                         
Weighted-average shares outstanding — basic
    54,566,590       54,089,971       53,547,670       52,861,354       56,133,355  
                                         
Weighted-average shares outstanding — diluted
    54,566,590       54,089,971       53,547,670       52,861,354       56,397,600  
                                         


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    For the Years Ended June 30,  
    2011     2010     2009     2008     2007  
    (In thousands, except share and per share amounts)  
 
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 14,224     $ 14,158     $ 16,752     $ 32,874     $ 28,911  
Marketable securities
  $     $     $ 1,010     $     $ 4,418  
Working capital
  $ 2,773     $ 7,430     $ 10,778     $ 32,489     $ 22,046  
Total assets
  $ 71,848     $ 73,130     $ 84,527     $ 187,049     $ 242,038  
Short-term borrowings
  $     $     $     $     $ 19,625  
Long-term borrowings
  $ 10,787     $ 15,581     $ 22,506     $ 29,431     $  
Total stockholders’ equity
  $ 11,472     $ 16,034     $ 18,123     $ 98,636     $ 172,356  
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
For our fiscal year ended June 30, 2011:
 
  •  Revenue from services was $165,264, down 1.9% from fiscal 2010. Excluding foreign currency exchange rate differences, revenue was down 2.9% from fiscal 2010. The decrease was primarily due to revenue declines in the U.K. and U.S.
 
  •  Our operating loss was $6,987, compared with an operating loss of $523 for fiscal 2010. Our fiscal 2011 operating loss included $5,392 in restructuring and other charges, compared with $623 for the same prior year period. The increase in our operating loss was caused mainly by the aforementioned revenue decline and the restructuring and other charges incurred during the fiscal year as more fully described below under “Restructuring and Other Charges”.
 
  •  We had $14,224 in cash at June 30, 2011, essentially flat compared with $14,158 at June 30, 2010.
 
  •  Our outstanding debt at June 30, 2011 was $10,787, down from $15,581 at June 30, 2010 as a result of quarterly principal payments made during fiscal 2011. However, we were not in compliance with certain financial covenants under our credit agreement at June 30, 2011 largely due to the magnitude of restructuring and other charges incurred during fiscal 2011, as described below under “Subsequent Events — Amendment Agreement and Waiver” and in Note 24, “Subsequent Events”, to our consolidated financial statements included in this Annual Report on Form 10-K.
 
Subsequent Events
 
Closure of Asian Operations
 
On July 18, 2011, our Board approved the closure of our operations in Hong Kong, Singapore and Shanghai. This decision was based on the Board’s determination that these operations did not adequately support our strategic objectives. We have not yet been able to make a meaningful determination of the range of estimated costs associated with, amounts to be incurred in connection with, and amounts of the charge that will result in future cash expenditures through the closure of these operations. The disposition plan could result in contract termination costs, severance related charges and other charges. Any such charges will be reflected in our unaudited consolidated financial statements for the fiscal quarter ending September 30, 2011.
 
Amendment Agreement and Waiver
 
On September 27, 2011, we entered into an amendment and waiver to our amended and restated credit agreement.
 
At June 30, 2011, we were not in compliance with the leverage and interest coverage ratio covenants contained in our amended and restated credit agreement largely due to the magnitude of restructuring and other charges incurred during the fiscal year ended June 30, 2011. Pursuant to the amendment and waiver, these covenant violations were permanently waived and we regained compliance with the terms of our

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amended and restated credit agreement. The amendment and waiver includes both the addition and modification of certain definitions, terms, financial covenants, and reporting requirements. Obligations under our amended and restated credit agreement continue to be secured by our domestic assets and 66% of the equity interests in first tier foreign subsidiaries.
 
Our credit facilities under our amended and restated credit agreement consist of our previously existing term loan, which matures September 30, 2013, and a revolving line of credit. A maximum amount of $5,000 remains available under the revolving line of credit, subject to our satisfaction of certain conditions. Until we achieve trailing twelve month adjusted EBITDA of $5,000, borrowings under the revolving line of credit are limited to the lesser of $2,000 or our net U.S. accounts receivable, defined as our U.S. accounts receivable plus our U.S. unbilled accounts receivable, less our deferred revenue. The principal amount outstanding under the term loan, $10,787 at June 30, 2011, and the payment terms of the term loan remain unchanged. Pursuant to the amendment and waiver, the manner in which outstanding amounts accrue interest remains unchanged, except that the Eurodollar Applicable Rate and ABR Applicable Rate (each as defined in our amended and restated credit agreement) are fixed at 5.50% and 4.50%, respectively, through March 31, 2012.
 
The amendment and waiver also impacts certain financial covenants, as follows:
 
  •  The Consolidated Interest Coverage Ratio and Consolidated Total Leverage Ratio (each as defined in our amended and restated credit agreement) covenants are suspended for the fiscal quarters ending September 30, 2011, December 31, 2011 and March 31, 2012. During each of those fiscal quarters, we are subject to a trailing twelve month adjusted EBITDA covenant of $4,548, $3,817 and $4,424, respectively.
 
  •  For fiscal quarters commencing on or after April 1, 2012, we will again be subject to the Consolidated Interest Coverage Ratio and Consolidated Total Leverage Ratio covenants contained in our amended and restated credit agreement.
 
  •  Cash paid to fund restructuring and other charges incurred on or before September 30, 2011 are limited to amounts agreed upon as contained in the amendment and waiver.
 
  •  We must maintain minimum global cash of $7,000 and U.S. cash of $1,000 through June 30, 2012, at which time we will again be subject to only a minimum global cash requirement of $5,000.
 
For further discussion of the risks and uncertainties surrounding our availability of additional cash resources, our outstanding debt obligations, and our ability to comply with related covenants, see “Risk Factors — Risks Related to Our Business” above.
 
Restructuring and Other Charges
 
Restructuring
 
Fiscal 2011
 
During the second and fourth quarters of fiscal 2011, we took actions designed to re-align the cost structure of our U.K. operations. Specifically, we reduced headcount at our U.K. facilities by a total of 27 full-time employees and incurred $834 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in December 2010 and April 2011 and all actions were completed at those respective times. Related cash payments were completed in June 2011.
 
During the third and fourth quarters of fiscal 2011, we took actions designed to re-align the cost structure of our U.S. operations. Specifically, we reduced headcount at our U.S. facilities by a total of 21 full-time employees and incurred $330 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in December 2010 and April 2011 and all actions were completed at those respective times. Related cash payments were completed in June 2011.


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During the fourth quarter of fiscal 2011, we reduced our occupancy of leased office space at our Norwalk, Connecticut, Brentford, United Kingdom, and Portland, Oregon facilities. We incurred $1,942 in lease exit costs associated with the remaining lease obligations, all of which involve cash payments. All actions associated with the leased office space reductions were completed in June 2011, and all cash payments will be completed in June 2020.
 
Fiscal 2009
 
During the third quarter of fiscal 2009, we took actions to re-align the cost structure of our U.S. and U.K. operations. Specifically, the Company reduced headcount at our U.S. facilities by 92 full-time employees and announced plans to reduce headcount at our U.K. facilities by 25 full-time employees. One-time termination benefits associated with the U.S. and U.K. actions were $2,656 and $389, respectively, all of which involved cash payments. The reductions in staff were communicated to the affected employees in March 2009. All actions were completed by March 2009 in the U.S. and May 2009 in the U.K. The related cash payments were completed by June 2009 in the U.K. and March 2010 in the U.S.
 
At March 31, 2009, we reviewed the estimate of anticipated sublease rental income for our Rochester, New York office located at 135 Corporate Woods. This review, prompted by adverse changes in real estate market conditions, resulted in a decrease to our estimate of the portion of the remaining lease obligation period over which we expect to derive sublease rental income. This change in estimate resulted in a charge of $35 in the third quarter of fiscal 2009.
 
Previously, during the second quarter of fiscal 2009, we took actions to re-align the cost structure of our U.S. operations. Specifically, we reduced headcount at our U.S. facilities by 78 full-time employees and incurred $2,261 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in October and December 2008. All actions were completed by December 2008 and the related cash payments were completed in December 2009.
 
Additionally during the second quarter of fiscal 2009, we substantially vacated leased space at 135 Corporate Woods. We incurred $493 in charges related to the remaining operating lease obligation, all of which involved cash payments. All actions associated with this vacated space were completed by December 2008. The related cash payments were completed in June 2010.
 
At December 31, 2008, we reviewed the estimates of anticipated sublease rental income for our Grandville, Michigan and Norwalk, Connecticut offices, which were included in restructuring charges taken during the third quarter of fiscal 2008 in conjunction with our reduction of leased space at these facilities. This review, prompted by adverse changes in real estate market conditions within each of these locales, resulted in a decrease to our estimate of the portion of the remaining lease obligation period over which we expect to derive sublease rental income. This change in estimate resulted in a charge of $366 for the three months ended December 31, 2008.
 
Summary of Restructuring Charges and Reserves
 
The following table summarizes the restructuring charges recognized in our consolidated statements of operations for the fiscal years ended June 30:
 
                         
    2011     2010     2009  
 
Termination benefits
  $ 1,165     $     $ 5,306  
Lease commitments
    1,942             894  
Reversals of prior accruals
                (543 )
                         
    $ 3,107     $     $ 5,657  
                         


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The following table summarizes activity during fiscal 2011 with respect to our remaining reserves for the restructuring activities described above and those undertaken in prior fiscal years:
 
                                                 
    Balance,
                            Balance,
 
    July 1,
    Costs
    Changes in
    Cash
    Non-Cash
    June 30,
 
    2010     Incurred     Estimate     Payments     Settlements     2011  
 
Termination benefits
  $     $ 1,165     $ 45     $ (788 )   $     $ 422  
Lease commitments
    408       1,942             (138 )           2,212  
                                                 
Remaining reserve
  $ 408     $ 3,107     $ 45     $ (926 )   $     $ 2,634  
                                                 
 
The changes in estimate noted above were the result of certain outplacement benefits that expired unused.
 
Other Charges
 
Other charges reflected in the “Restructuring and other charges” line shown on our consolidated statements of operations for the fiscal years ended June 30, 2011, 2010 and 2009 included the following:
 
  •  Post-employment payments to former senior executives — In connection with their departures from the Company during fiscal 2011, we reached negotiated settlements with Kimberly Till, Pavan Bhalla, and Enzo Micali. Under the separation agreements, cash payments to Ms. Till are due to be completed in August 2013, while cash payments to Messrs. Bhalla and Micali are due to be completed in December 2011 and January 2012, respectively. In connection with their departures from the Company during fiscal 2009, Gregory T. Novak, Ronald E. Salluzzo, and David B. Vaden became entitled to certain contractually obligated cash payments. The cash payments to Messrs. Novak, Salluzzo, and Vaden were completed in December 2010, December 2009 and February 2010, respectively.
 
  •  Consultant fees — During fiscal 2009, we incurred fees for services rendered by a consulting firm related to, among others, performance improvement initiatives, bank negotiations, and an interim CFO arrangement, the details of which are described in Note 21, “Related-Party Transactions,” to our consolidated financial statements included in this Annual Report on Form 10-K.
 
  •  Other — For fiscal 2011, “Other” included costs associated with reorganizing the operational structure of our Canadian and U.K. operations, as well as immaterial prior period adjustments related to our Asia operations. For fiscal 2010, “Other” included costs associated with reorganizing the operational structure of our Asian operations and costs incurred to close our telephone-based data collection center in Brentford, United Kingdom. For fiscal 2009, “Other” included bad debt expense for a note receivable for which collectability became doubtful, recruitment fees for senior executives, and legal fees associated with the waiver and amendments to our credit agreement due to certain financial covenant violations.
 
                         
    2011     2010     2009  
 
Post-employment payments to former senior executives
  $ 1,312     $     $ 1,997  
Consultant fees
                3,095  
Other
    973       623       1,261  
                         
    $ 2,285     $ 623     $ 6,353  
                         
 
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 our financial statements in fiscal 2011 include:
 
  •  Revenue recognition,
 
  •  Impairment of other intangible assets,


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  •  Impairment of long-lived assets,
 
  •  Income taxes,
 
  •  Stock-based compensation,
 
  •  HIpoints loyalty program, and
 
  •  Contingencies and other accruals.
 
In each situation, management is required to make estimates about the effects of matters or future events that are inherently uncertain.
 
Revenue Recognition
 
We recognize revenue from services on a proportional performance basis. In assessing contract performance, both input and output criteria are reviewed. Costs incurred are used as an objective input measure of performance. The primary input of all work performed under these arrangements is labor. As a result of the relationship between labor and cost, there is normally a direct relationship between the costs incurred and the proportion of the contract performed to date. Costs incurred as an initial proportion of expected total costs is used as an initial proportional performance measure. This indicative proportional performance measure is always subsequently validated against more subjective criteria (i.e. relevant output measures) such as the percentage of interviews completed, percentage of reports delivered to a client and the achievement of any project milestones stipulated in the contract. In the event of divergence between the objective and more subjective measures, the more subjective measures take precedence since these are output measures.
 
Clients are obligated to pay based upon services performed, and in the event that a client cancels the contract, the client is responsible for payment for services performed through the date of cancellation. Losses expected to be incurred, if any, on jobs in progress are charged to income as soon as it becomes probable that such losses will occur. Invoices to clients in the ordinary course are generated based upon the achievement of specific events, as defined by each contract, including deliverables, timetables, and incurrence of certain costs. Such events may not be directly related to the performance of services. Revenues earned on contracts in progress in excess of billings are classified as unbilled receivables. Amounts billed in excess of revenues earned are classified as deferred revenue.
 
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 our operations.
 
Impairment of Intangible Assets
 
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to the estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger a review for impairment include the following:
 
  •  Significant under-performance relative to historical or projected future operating results;
 
  •  Significant changes in the manner of our use of acquired assets or the strategy for our overall business;
 
  •  Significant negative industry or economic trends;
 
  •  Significant decline in our stock price for a sustained period; and
 
  •  Significant decline in our market capitalization relative to net book value.
 
We are required to amortize intangible assets with estimable useful lives over their respective estimated useful lives to the estimated residual values and to review intangible assets with estimable useful lives for impairment in accordance with the FASB guidance for property, plant, and equipment.


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Impairment of Long-Lived Assets
 
We account for the impairment or disposal of long-lived assets in accordance with the FASB guidance for property, plant, and equipment. Events that trigger a test for recoverability include material adverse changes in the projected revenues and expenses, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. A test for recoverability also is performed when we have committed to a plan to sell or otherwise dispose of an asset group and the plan is expected to be completed within a year. Recoverability of an asset group is evaluated by comparing its carrying value to the future net undiscounted cash flows expected to be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, an impairment loss is recognized. The impairment loss is measured by the amount by which the carrying amount of the asset group exceeds the estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over its remaining useful life. Restoration of a previously-recognized long-lived asset impairment loss is not allowed.
 
We estimate the fair value of an asset group based on market prices (i.e., the amount for which the asset could be bought by or sold to a third party), when available. When market prices are not available, we estimate the fair value of the asset group using the income approach and/or the market approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, approved business plans, expected growth rates and cost of capital, among others. We also make certain assumptions about future economic conditions, interest rates, and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods.
 
Changes in assumptions or estimates could materially affect the determination of fair value of an asset group, and therefore could affect the amount of potential impairment of the asset. The following assumptions are key to our income approach:
 
  •  Business Projections — We make assumptions about the level of demand for our services in the marketplace. These assumptions drive our planning assumptions for revenue growth. We also make assumptions about our cost levels. These assumptions are key inputs for developing our cash flow projections. These projections are derived using our internal business plans.
 
  •  Growth Rate — The growth rate is the expected rate at which an asset group’s earnings stream is projected to grow beyond the planning period.
 
  •  Economic Projections — Assumptions regarding general economic conditions are included in and affect our assumptions regarding revenue from services. These macroeconomic assumptions include inflation, interest rates and foreign currency exchange rates.
 
Income Taxes
 
We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for future tax consequences attributable to operating loss carryforwards and differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases for operating profit and tax liability carryforward.
 
The FASB guidance for income taxes requires the establishment of a valuation allowance to reflect the likelihood of the realization of deferred tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We evaluate the weight of the available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The decision to record a valuation allowance requires varying degrees of judgment based upon the nature of the item giving rise to the deferred tax asset. The amount of the deferred tax asset


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considered realizable is based on significant estimates, and it is at least reasonably possible that changes in these estimates in the near term could materially affect our financial condition and results of operations.
 
We apply the FASB guidance for uncertain tax positions, which contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Although we believe we have adequately provided for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate and also include the related interest and penalties.
 
Stock-Based Compensation
 
We account for stock-based compensation in accordance with the FASB guidance for stock-based compensation. For share-based payments granted subsequent to July 1, 2005, compensation expense based on the grant date fair value is recognized in our consolidated statements of operations over the requisite service period. In determining the fair value of stock options, we use the Black-Scholes option pricing model, which employs the following assumptions:
 
  •  Expected volatility — based on historical volatilities from daily share price observations for our stock covering a period commensurate with the expected term of the options granted.
 
  •  Expected life of the option — based on the vesting terms of the respective option and a contractual life of ten years, calculated using the “simplified method” as allowed by ASC 718-10 and corroborated through review of the expected life assumptions of publicly-traded market research companies.
 
  •  Risk-free rate — based on the implied yield available at the time the options were granted on U.S. Treasury zero coupon issues with a remaining term equal to the expected life of the option when granted.
 
  •  Dividend yield — based on our historical practice of electing not to pay dividends to our stockholders.
 
Expected volatility and the expected life of the options granted, both of which impact the fair value of the option calculated under the Black-Scholes option pricing model, involve management’s best estimates at that time. The weighted-average assumptions used to value options during the fiscal years ended June 30, 2009, 2010 and 2011, respectively, are set forth in Note 14, “Stock-Based Compensation,” to our consolidated financial statements contained in this Annual Report on Form 10-K.
 
The fair value of restricted stock awards is based on the price per share of our common stock on the date of grant. We grant options to purchase our stock at fair value as of the date of grant. We recognize compensation expense for only the portion of options or restricted shares that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee termination behavior and the vesting period of the respective stock options or restricted shares. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
 
HIpoints Loyalty Program
 
Our HIpoints loyalty program is designed to reward respondents who register for our online panel, complete online surveys and refer others to join our online panel. The earned points are non-transferable


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and may be redeemed for gifts from a specific product folio at any time prior to expiration. Points awarded under the HIpoints program expire after nine months of account inactivity. We maintain a reserve for our obligations with respect to future redemption of outstanding points based on the expected redemption rate of the points. This expected redemption rate is based on our actual redemption rates since the inception of the program. An actual redemption rate that differs from the expected redemption rate could have a material impact on our results of operations.
 
Contingencies and Other Accruals
 
From time to time, we record accruals for severance costs both in connection with formal restructuring programs and in the normal course, lease costs associated with excess facilities, contract terminations, and asset impairments as a result of actions we undertake to streamline our organization, reposition certain businesses and reduce ongoing costs. Estimates of costs to be incurred to complete these actions, such as future lease payments, sublease income, the fair value of assets, and severance and related benefits, are based on assumptions at the time the actions are initiated. To the extent actual costs differ from those estimates, reserve levels may need to be adjusted. In addition, these actions may be revised due to changes in business conditions that we did not foresee at the time such actions were approved. Additionally, we record accruals for estimated incentive compensation costs during each year. Amounts accrued at the end of each reporting period are based on our estimates and may require adjustment as the ultimate amount paid for these incentives are sometimes not finally determinable until the completion of our fiscal year end closing process.
 
Explanation of Key Financial Statement Captions
 
Revenue from Services
 
We recognize revenue from services on a proportional performance basis, as more particularly described above in “Critical Accounting Policies and Estimates — Revenue Recognition”.
 
Our revenue from services is derived principally from the following:
 
  •  Custom Research — including, but not limited to, customer satisfaction surveys, market share studies, new product introduction studies, brand recognition studies, reputation studies, and ad concept testing.
 
  •  Tracking Studies — studies that regularly ask identical questions to similar demographic groups within a constant interval (once a month, once a quarter, etc.) to provide business decision-makers with dynamic data and intelligence.
 
  •  Service Bureau Research — data collection and other services that we perform primarily for market research industry clients.
 
Cost of Services
 
Our direct costs associated with generating revenues principally consist of the following items:
 
  •  Project Personnel — Project personnel have four distinct roles: project management, survey design, data collection, and data analysis. We maintain project personnel in North America, Europe and Asia. We expect to have no project personnel in Asia by September 30, 2011. Labor costs are specifically allocated to the projects they relate to. We utilize a timekeeping system that tracks the time of project personnel as incurred for each specific revenue-generating project to determine the labor costs allocable to such project.
 
  •  Respondent Incentives — Our panelists receive both cash and non-cash incentives (through programs such as our HIpoints loyalty program) for participating in our surveys. We award cash incentives to our respondents for participating in surveys, which are earned when we receive timely and complete survey responses. Non-cash incentives in the form of points are awarded to respondents who register for our online panel, complete online surveys, and refer others to join


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  our online panel. The earned points are non-transferable and may be redeemed for gifts from a specific product folio at any time prior to their expiration.
 
  •  Data Processing — We manage the processing of survey data using our own employees. We also engage third-party suppliers to perform data processing on an as-needed basis.
 
  •  Other Direct Costs — Other direct costs include direct purchases, principally labor and materials, related to data collection and analysis, and the amortization of software developed for internal use.
 
Selling, General and Administrative
 
Selling, general and administrative expense includes the following:
 
  •  payroll and related costs, including commissions, for sales and marketing professionals;
 
  •  payroll and related costs for staff in the areas of finance, human resources, information technology, legal, and executive management; and
 
  •  other indirect costs necessary to support the business, including among others, office rents, travel, stock-based compensation, and public company costs.
 
Operating Income (Loss)
 
We calculate operating income (loss) as revenue from services less total operating expenses. Operating income (loss) represents only those amounts that relate to our consolidated operations and does not include interest income and expense, amortization of debt issuance costs, or loss on extinguishment of debt.
 
Provision (Benefit) for Income Taxes
 
The provision for income taxes includes current and deferred income taxes. A valuation allowance is recorded when it is necessary to reduce a deferred tax asset to an amount that we expect to realize in the future. We continually review the adequacy of our valuation allowance and adjust it based on whether or not our assessment indicates that it is more likely than not that these benefits will be realized.


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Results of Operations
 
The following table sets forth the results of our operations, expressed both as a dollar amount and as a percentage of revenue from services, for the fiscal years ended June 30:
 
                                                 
    2011     %     2010     %     2009     %  
 
Revenue from services
  $ 165,264       100.0 %   $ 168,415       100.0 %   $ 184,334       100.0 %
Operating expenses:
                                               
Cost of services
    108,887       65.9       107,266       63.7       115,235       62.5  
Selling, general and administrative
    51,932       31.4       54,335       32.3       65,678       35.6  
Depreciation and amortization
    6,040       3.7       6,714       4.0       7,610       4.1  
Restructuring and other charges
    5,392       3.3       623       0.4       12,010       6.5  
Goodwill impairment charge
                            40,250       21.8  
                                                 
Operating loss
    (6,987 )     (4.2 )     (523 )     (0.3 )     (56,449 )     (30.6 )
Interest and other income
    (47 )     (0.0 )     (58 )     (0.0 )     (400 )     (0.2 )
Loss on extinguishment of debt
                724       0.4              
Interest expense
    1,359       0.8       2,029       1.2       3,433       1.9  
                                                 
Loss from operations before taxes
    (8,299 )     (5.0 )     (3,218 )     (1.9 )     (59,482 )     (32.3 )
                                                 
Provision (benefit) for income taxes
    154       (0.0 )     (1,052 )     (0.6 )     15,849       8.6  
                                                 
Net loss
  $ (8,453 )     (5.1 )   $ (2,166 )     (1.3 )   $ (75,331 )     (40.9 )
                                                 
 
Fiscal Year Ended June 30, 2011 Versus Fiscal Year Ended June 30, 2010
 
Revenue from services.  Revenue from services decreased by $3,151, or 1.9%, to $165,264 for fiscal 2011 compared with fiscal 2010. As more fully described below, revenue from services was impacted by several factors. Excluding foreign currency exchange rate differences, revenue from services in fiscal 2011 was down 2.9% compared with fiscal 2010.
 
North American revenue decreased by $1,550 to $116,045 for fiscal 2011 compared with fiscal 2010, a decrease of 1.3%. By country, North American revenue for fiscal 2011 was comprised of:
 
  •  Revenue from U.S. operations of $92,885, down 4.2% compared with $96,942 for fiscal 2010. This decline was driven mainly by declines of:
 
  •  9.8% in our Healthcare sector, driven by the revenue impact of bookings decreases experienced during the first nine months of fiscal 2011;
 
  •  10.7% in our Financial Services sector, driven mainly by the loss of a large tracking study;
 
  •  17.1% in our Consumer Goods, Restaurant and Retail sector, as a result of a non-recurring project that was sold and delivered during the fourth quarter of fiscal 2010; and
 
  •  6.4% in our Technology, Media and Telecom sector, driven mainly by the loss of a large tracking study.
 
  •  Revenue from Canadian operations of $23,160, up 12.1% compared with $20,653 for fiscal 2010. In local currency (Canadian Dollar), Canadian revenue increased by 5.7% compared with fiscal 2010. The increase was mainly attributable to revenue from work on a large tracking study that was won during the second quarter of fiscal 2011.


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European revenue decreased by $1,332 to $44,619 for fiscal 2011 compared with fiscal 2010, a decrease of 2.9%. By country, European revenue for fiscal 2011 was comprised of:
 
  •  Revenue from U.K. operations of $22,864, down 19.5% compared with $28,398 for fiscal 2010. In local currency (British Pound), U.K. revenue decreased by 20.4% compared with fiscal 2010. The decrease was due primarily to the revenue impact of a large tracking study that was not renewed during the second quarter of fiscal 2011, as well as challenging market conditions across several industry sectors. The loss of this tracking study will have a $7.7 million negative impact on annual U.K. revenue.
 
  •  Revenue from French operations of $14,092, up 19.8% compared with $11,764 for fiscal 2010. In local currency (Euro), French revenue increased by 18.8% compared with fiscal 2010. The increase was due primarily to continued success in selling to new and existing clients across several industry sectors.
 
  •  Revenue from German operations of $7,663, up 32.4% compared with $5,789 for fiscal 2010. In local currency (Euro), German revenue increased by 32.5% compared with fiscal 2010. Similar to our French operations, the increase was driven mainly by continued success in selling to new and existing clients across several industry sectors.
 
Revenue from Asia operations decreased by $268 to $4,600 for fiscal 2011, a decrease of 5.5% compared with fiscal 2010. The impact of foreign exchange rate differences on Asian revenue was inconsequential compared with fiscal 2010. The decrease in Asian revenue was driven primarily by a lack of adequate sales resources throughout fiscal 2011.
 
Cost of services.  Cost of services was $108,887 or 65.9% of total revenue for fiscal 2011, compared with $107,266 or 63.7% of total revenue for fiscal 2010. Cost of services as a percentage of revenue for fiscal 2011 was impacted by the differing types of custom research projects performed when compared with fiscal 2010.
 
Selling, general and administrative.  Selling, general and administrative expense for fiscal 2011 was $51,932 or 31.4% of total revenue, compared with $54,335 or 32.3% of total revenue for fiscal 2010. Selling, general and administrative expense was principally impacted by the following:
 
  •  a $607 decrease in facilities-related expense, driven primarily by space reductions taken during fiscal 2010;
 
  •  a $382 decrease in travel expense, driven primarily by our continued focus on controlling these costs;
 
  •  a $255 decrease in payroll-related expenses, driven primarily by headcount reductions made throughout fiscal 2011; and
 
  •  a $173 decrease in legal expenses, driven primarily by improved operational efficiency of our legal function.
 
The remainder of the decrease in selling, general and administrative expense was the result of decreases across a number of other operating expense categories because of our continued efforts to properly align our cost structure with the needs of our business.
 
Depreciation and amortization.  Depreciation and amortization was $6,040 or 3.7% of total revenue for fiscal 2011, compared with $6,714 or 4.0% of total revenue for fiscal 2010. The decrease in depreciation and amortization expense for fiscal 2011 when compared with the same prior year period was the result of fixed and intangible assets that became fully depreciated or amortized during fiscal 2011 combined with decreased capital spending as part of our overall focus on controlling costs.
 
Restructuring and other charges.  See above under “Restructuring and Other Charges” for further discussion regarding restructuring and other charges incurred during fiscal 2011 and 2010.


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Interest and other income.  Interest and other income was $47 or less than 1% of total revenue for fiscal 2011, compared with $58 or less than 1% of total revenue for fiscal 2010. The decrease in interest and other income was principally the result of a lower average cash balance during fiscal 2011 when compared with fiscal 2010.
 
Loss on extinguishment of debt.  During fiscal 2010, we incurred a loss on extinguishment of debt of $724, of which $550 represented unamortized debt issuance costs, as a result of amending and restating our credit agreement on June 30, 2010. We did not incur a similar loss during fiscal 2011. Further financial information about our amended and restated credit agreement is included in Note 11, “Borrowings,” to our consolidated financial statements contained in this Annual Report on Form 10-K.
 
Interest expense.  Interest expense was $1,359 or 0.8% of total revenue for fiscal 2011, compared with $2,029 or 1.2% of total revenue for fiscal 2010. The decrease in interest expense for fiscal 2011 as compared with fiscal 2010 reflects the impact of the decline in our outstanding debt as we continue to make required principal payments, as well as the decline in our effective interest rate as a result of amending our credit agreement in June 2010.
 
Income taxes.  We recorded an income tax provision of $154 for fiscal 2011, compared with an income tax benefit of $1,052 for fiscal 2010. The tax provision for fiscal 2011 was comprised primarily of tax expense related to income in certain of our foreign jurisdictions. The tax benefit for fiscal 2010 was principally due to a U.S. tax law change which resulted in the recognition of an additional tax benefit of $1,103. In addition, a valuation allowance of approximately $300 was recorded during the three months ended June 30, 2010 against the net deferred tax assets of the U.K. operations due to the impact of the global recession on revenues. A full valuation allowance continues to be recorded at June 30, 2011 against our deferred tax assets in the U.S., U.K., and Asia. We will continue to assess the realizability of our deferred tax assets in accordance with the FASB guidance for income taxes and will adjust the valuation allowances should all or a portion of the deferred tax assets become realizable in the future.
 
Fiscal Year Ended June 30, 2010 Versus Fiscal Year Ended June 30, 2009
 
Revenue from services.  Revenue from services decreased by $15,919, or 8.6%, to $168,415 for fiscal 2010 compared with fiscal 2009. As more fully described below, revenue from services was impacted by several factors. Foreign currency exchange rate differences had a neutral impact on revenue from services in fiscal 2010 compared with fiscal 2009.
 
North American revenue decreased by $15,165 to $117,595 for fiscal 2010 compared with fiscal 2009, a decrease of 11.4%. By country, North American revenue for fiscal 2010 was comprised of:
 
  •  Revenue from U.S. operations of $96,942, down 14.1% compared with $112,821 for fiscal 2009, primarily due to the impact of the global recession on revenue for the first half of fiscal 2010 and declines across several of our U.S. industry sectors partially as a result of the loss of a large tracking study and the reduction in size of another.
 
  •  Revenue from Canadian operations of $20,653, up 3.6% compared with $19,939 for fiscal 2009. In local currency (Canadian Dollar), Canadian revenue decreased by 5.8% compared with fiscal 2009. The decrease was primarily due to the impact of the global recession on revenue for the first half of fiscal 2010.
 
European revenue decreased by $1,039 to $45,951 for fiscal 2010 compared with fiscal 2009, a decrease of 2.2%. By country, European revenue for fiscal 2010 was comprised of:
 
  •  Revenue from U.K. operations of $28,398, down 12.5% compared with $32,454 for fiscal 2009. In local currency (British Pound), U.K. revenue decreased by 11.0% compared with fiscal 2009. The decrease was primarily due to the decrease in scope of a large tracking study.
 
  •  Revenue from French operations of $11,764, up 37.8% compared with $8,535 for fiscal 2009. In local currency (Euro), French revenue increased by 32.7% compared with fiscal 2009. The increase was primarily due to revenue generated from success in selling to new clients across several industry sectors.


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  •  Revenue from German operations of $5,789, down 3.5% compared with $6,001 for fiscal 2009. In local currency (Euro), German revenue decreased by 6.4% compared with fiscal 2009. German revenue was essentially flat for the first nine months of fiscal 2010 compared with the same prior year period. The overall decrease was driven by sales growth later in the fourth quarter of fiscal 2010, which had less time to convert to revenue within that same quarter.
 
Revenue from Asia operations increased by $284 to $4,868 for fiscal 2010, an increase of 6.2% compared with fiscal 2009. The impact of foreign exchange rate differences on Asian revenue was inconsequential compared with fiscal 2009. The increase in Asian revenue was driven primarily by the positive effects of the management changes we made in the region during fiscal 2010.
 
Cost of services.  Cost of services was $107,266 or 63.7% of total revenue for fiscal 2010, compared with $115,235 or 62.5% of total revenue for fiscal 2009. Cost of services as a percentage of revenue for fiscal 2010 was greater than fiscal 2009 principally due to the mix of research projects performed when compared with fiscal 2009.
 
Selling, general and administrative.  Selling, general and administrative expense for fiscal 2010 was $54,335 or 32.3% of total revenue, compared with $65,678 or 35.6% of total revenue for fiscal 2009. Selling, general and administrative expense was principally impacted by the following:
 
  •  a $5,675 decrease in payroll-related expense, driven primarily by headcount reductions taken during fiscal 2009;
 
  •  a $1,285 decrease in stock-based compensation expense, driven primarily by the forfeiture of stock options and restricted stock upon the departure of several senior executives during fiscal 2009 and 2010;
 
  •  a $765 decrease in office rent, driven by space reductions taken during fiscal 2009 and 2010; and
 
  •  a $698 decrease in travel expense, driven primarily by our continued focus on controlling these costs.
 
The remainder of the decrease in selling, general and administrative expense was the result of decreases across a number of other operating expense categories driven primarily by our continued focus on ensuring appropriate alignment of our cost structure relative to the needs of our business.
 
Depreciation and amortization.  Depreciation and amortization was $6,714 or 4.0% of total revenue for fiscal 2010, compared with $7,610 or 4.1% of total revenue for fiscal 2009. The decrease in depreciation and amortization expense for fiscal 2010 when compared with the same prior year period was the result of fixed and intangible assets that became fully depreciated or amortized during fiscal 2010 combined with decreased capital spending during both fiscal 2009 and 2010 as part of our overall focus on controlling costs.
 
Restructuring and other charges.  See above under “Restructuring and Other Charges” for further discussion regarding restructuring and other charges incurred during fiscal 2010 and 2009.
 
Goodwill impairment charge.  We did not incur a goodwill impairment charge during fiscal 2010. During fiscal 2009, we recognized a goodwill impairment charge of $40,250 at December 31, 2008. We completed our two-step goodwill impairment evaluation at that time, outside of our annual impairment evaluation date (June 30), after considering certain factors related to our business and the market research industry. Further financial information about goodwill impairment charges and related considerations is included in Note 8, “Goodwill,” to our consolidated financial statements contained in this Annual Report on Form 10-K.
 
Interest and other income.  Interest and other income was $58 or less than 1% of total revenue for fiscal 2010, compared with $400 or less than 1% of total revenue for fiscal 2009. The decrease in interest and other income was principally the result of having a lower average cash balance and lower rate of return during fiscal 2010 when compared with fiscal 2009.
 
Loss on extinguishment of debt.  We incurred a loss on extinguishment of debt of $724, of which $550 represented unamortized debt issuance costs, during fiscal 2010 as a result of amending and


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restating our credit agreement on June 30, 2010. We did not incur a similar loss during fiscal 2009. Further financial information about our amended and restated credit agreement is included in Note 11, “Borrowings,” to our consolidated financial statements contained in this Annual Report on Form 10-K.
 
Interest expense.  Interest expense was $2,029 or 1.2% of total revenue for fiscal 2010, compared with $3,433 or 1.9% of total revenue for fiscal 2009. Interest expense for fiscal 2009 included a $1,017 charge to reflect the ineffectiveness of our interest rate swap as a cash flow hedge as a result of the violation of certain financial covenants under our credit agreement. There was no such charge during fiscal 2010. The decrease in interest expense for fiscal 2010 as compared with fiscal 2009 resulted from the decline in our outstanding debt as we continue to make required principal payments.
 
Income taxes.  We recorded an income tax benefit of $1,052 for fiscal 2010, compared with an income tax provision of $15,849 for fiscal 2009. The tax benefit for fiscal 2010 was principally due to a U.S. tax law change which resulted in the recognition of an additional tax benefit of $1,103. In addition, a valuation allowance of approximately $300 was recorded during the three months ended June 30, 2010 against the net deferred tax assets of the U.K. operations due to the impact of the global recession on revenues. The tax provision for fiscal 2009 was principally impacted by the valuation allowance of $18,861 recorded against our U.S. deferred tax assets. A full valuation allowance was recorded at June 30, 2010 against both U.S. and U.K. deferred tax assets.
 
Significant Factors Affecting Company Performance
 
Key Operating Metrics
 
We closely track certain key operating metrics, specifically bookings and secured revenue. These key operating metrics enable us to measure the current and forecasted performance of our business relative to historical trends.
 
Key operating metrics, by quarter, for the fiscal years ended June 30, 2010 and 2011, were as follows (U.S. Dollar amounts in millions):
 
                                                                 
    Q1
  Q2
  Q3
  Q4
  Q1
  Q2
  Q3
  Q4
    FY2010   FY2010   FY2010   FY2010   FY2011   FY2011   FY2011   FY2011
 
Bookings
  $ 32.7     $ 53.2     $ 44.9     $ 35.7     $ 35.4     $ 55.3     $ 40.9     $ 34.6  
Secured revenue
  $ 42.5     $ 51.1     $ 52.9     $ 44.9     $ 45.0     $ 55.4     $ 56.5     $ 45.9  
 
Additional information regarding each of the key operating metrics noted above is as follows:
 
Bookings are defined as the contract value of revenue-generating projects that are anticipated to take place during the next four fiscal quarters for which a firm client commitment was received during the current period, less any adjustments to prior period bookings due to contract value adjustments or project cancellations during the current period.
 
Bookings for the three months ended June 30, 2011 were $34.6 million, compared with $35.7 million for the same prior year period. Excluding foreign exchange rate differences, bookings were down 9.8% over the same prior year period. Bookings in local currency for the three months ended June 30, 2011 compared with the same prior year period were principally impacted by the following:
 
  •  U.S. bookings increased by 0.7%, impacted mainly by increased sales in our Technology, Media and Telecom and Healthcare sectors, which were offset by decreases in our Financial Services and Consumer Goods, Restaurant and Retail sectors.
 
  •  Canadian bookings decreased by 8.9%, due primarily to declined sales in our Canadian service bureau business.
 
  •  U.K bookings decreased by 60.4%, due primarily to the loss of two large tracking studies in fiscal 2011.
 
  •  French and German bookings increased by 37.6% and 35.0%, respectively, both due primarily to increased sales at both new and existing clients.


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  •  Asian bookings decreased by 12.7%, due primarily to a shortage of adequate sales resources.
 
Monitoring bookings enhances our ability to forecast long-term revenue and to measure the effectiveness of our marketing and sales initiatives. However, we also are mindful that bookings often vary significantly from quarter to quarter. Information concerning our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenue over time. There are no third-party standards or requirements governing the calculation of bookings. New bookings involve estimates and judgments regarding new contracts and renewals, as well as extensions and additions to existing contracts. Subsequent cancellations, extensions and other matters may affect the amount of bookings previously reported.
 
Secured Revenue is defined as prior period secured revenue plus current period bookings, less revenue recognized on outstanding projects as of the end of the period.
 
Secured revenue helps us manage our future staffing levels more accurately and is also an indicator of the effectiveness of our marketing and sales initiatives. Based on our experience, projects included in secured revenue at the end of a fiscal period generally convert to revenue from services during the following twelve months.
 
Secured revenue for the three months ended June 30, 2011 was $45.9 million, compared with $44.9 million for the same prior year period. Excluding foreign currency exchange rate differences, secured revenue was down 2.0% over the same prior year period. The decrease was due primarily to the impact of bookings declines throughout fiscal 2011 when compared with fiscal 2010.
 
Liquidity and Capital Resources
 
Cash and Cash Equivalents
 
The following table sets forth net cash provided by (used in) operating activities, net cash used in investing activities and net cash used in financing activities, for the fiscal years ended June 30:
 
                         
    2011   2010   2009
 
Net cash provided by (used in) operating activities
  $ 3,983     $ 6,461     $ (4,334 )
Net cash used in investing activities
    (810 )     (631 )     (2,256 )
Net cash used in financing activities
    (4,555 )     (7,031 )     (8,015 )
 
Net cash provided by (used in) operating activities.  Net cash provided by operating activities was $3,983 for fiscal 2011, compared with $6,461 for fiscal 2010. The decrease in cash provided by operating activities was principally the result of an increase in fiscal 2011 net loss compared with fiscal 2010.
 
Net cash provided by operating activities was $6,461 for fiscal 2010, compared with $4,334 used in operating activities for fiscal 2009. The change was principally the result of a decrease in the net loss for fiscal 2010 when compared with fiscal 2009, along with timing differences in cash payments and receipts when compared with fiscal 2009.
 
Net cash used in investing activities.  Net cash used in investing activities was $810 for fiscal 2011, compared with $631 for fiscal 2010. Investing activities for fiscal 2010 included capital expenditures, which were offset by $998 in proceeds from the maturities and sales of marketable securities. Investing activities for fiscal 2011 consisted solely of capital expenditures.
 
Net cash used in investing activities was $631 for fiscal 2010, compared with $2,256 for fiscal 2009. The change from fiscal 2009 was principally the result of an increase in the net proceeds from the maturities and sales of marketable securities to $998 for fiscal 2010, partially offset by an increase in capital expenditures from $1,241 for fiscal 2009 to $1,629 for fiscal 2010 as a result of leasehold improvements made to our U.K. office space.
 
Net cash used in financing activities.  Net cash used in financing activities was $4,555 for fiscal 2011, compared with $7,031 for fiscal 2010. Cash used during both fiscal 2010 and 2011 was for required


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principal payments on our outstanding debt, partially offset by cash received from the purchase of shares by employees through our Employee Stock Purchase Plan and exercise of stock options. The required quarterly principal payments on our outstanding debt decreased from $1,731 to $1,199 in fiscal 2010 as a result of amending our credit agreement in June 2010.
 
Net cash used in financing activities was $7,031 for fiscal 2010, compared with $8,015 for fiscal 2009. This change was principally the result of a decrease in the costs associated with modifications to our credit agreement from $1,274 in fiscal 2009 to $296 in fiscal 2010.
 
Working Capital
 
At June 30, 2011, we had cash and cash equivalents of $14,224, compared with $14,158 at June 30, 2010. Available sources of cash to support known or reasonably likely cash requirements over the next 12 months include cash, cash equivalents and marketable securities on hand, additional cash that may be generated from our operations, and funds to the extent available through our credit facilities discussed below. While we believe that our available sources of cash, including funds available through our revolving line that are subject to certain minimum cash balance requirements, will support known or reasonably likely cash requirements over the next 12 months, including quarterly principal payments of $1,199 and interest payments due under our credit agreement, our ability to generate cash from our operations is dependent upon our ability to profitably generate revenue, which requires that we continually develop new business, both for growth and to replace completed projects. Although work for no one client constitutes more than 10% of our revenue, we have had to find significant amounts of replacement and additional revenue as client relationships and work for continuing clients change and will likely have to continue to do so in the future. Our ability to profitably generate revenue depends not only on execution of our business plans, but also on general market factors outside of our control. As many of our clients treat all or a portion of their market research expenditures as discretionary, our ability to profitably generate revenue is adversely impacted whenever there are adverse macroeconomic conditions in the markets we serve.
 
Our capital requirements depend on numerous factors, including but not limited to, market acceptance of our products and services, the resources we allocate to the continuing development of new products and services, our technology infrastructure and online panel, and the marketing and selling of our products and services. We are able to control or defer certain capital and other expenditures in order to help preserve cash if necessary. We expect to incur capital expenditures of between $2,500 and $3,000 during the fiscal year ending June 30, 2012.
 
Credit Facilities
 
The required principal repayments under our amended and restated credit agreement for each of the three succeeding fiscal years are set forth in Note 11, Borrowings,” to our consolidated financial statements included in this Annual Report on Form 10-K. At June 30, 2011, we had no outstanding borrowings under our revolving line of credit and $359 of outstanding letters of credit. The letters of credit reduce the remaining undrawn portion of the Revolving Line that is available for future borrowings.
 
At June 30, 2011, we were not in compliance with certain financial covenants under our amended and restated credit agreement largely due to the magnitude of restructuring and other charges incurred during fiscal 2011. On September 27, 2011, these covenant violations were permanently waived through an amendment agreement and waiver, as more fully described above under “Subsequent Events — Amendment Agreement and Waiver” and in Note 24, “Subsequent Events,” to our consolidated financial statements included in this Annual Report on Form 10-K.
 
Interest Rate Swap
 
The principal terms of our interest rate swap, as well as the impact of the covenant violations noted above on our interest rate swap, are described in Note 11, Borrowings,” to our consolidated financial statements included in this Annual Report on Form 10-K.


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Off-Balance Sheet Risk Disclosure
 
At June 30, 2011 and 2010, we did not have any transactions, agreements or other contractual arrangements constituting an “off-balance sheet arrangement” as defined in Item 303(a)(4) of Regulation S-K.
 
Contractual Obligations
 
Our consolidated contractual obligations and other commercial commitments at June 30, 2011 are as follows:
 
                                         
    Payments Due by Period  
          Less than
    1-3
    3-5
    More than
 
    Total     1 Year     Years     Years     5 Years  
 
Long-term debt obligations
  $ 10,787     $ 4,794     $ 5,993     $     $  
Interest obligations on long-term debt(1)
    1,168       798       370              
Operating lease obligations
    23,488       5,507       9,598       6,715       1,668  
Other long-term liabilities(2)
    107             107              
                                         
Total
  $ 35,550     $ 11,099     $ 16,068     $ 6,715     $ 1,668  
                                         
 
 
(1) Interest obligations shown above were derived using an interest rate of 8.82%. This rate is a combination of the 4.32% that is fixed by our interest rate swap, and the 4.50% additional spread based on a pricing grid tied to our Consolidated Total Leverage Ratio. These rates are more fully described in Note 11, “Borrowings,” to the consolidated financial statements contained in this Annual Report on Form 10-K.
 
(2) Amounts in the “1-3 Years” category represent liabilities associated with uncertain tax positions, determined in accordance with the FASB guidance for uncertain tax positions, as more fully described in Note 16, “Income Taxes,” to the consolidated financial statements contained in this Annual Report on Form 10-K.
 
Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted
 
See “Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted” in Note 3, “Summary of Significant Accounting Policies,” to our consolidated financial statements contained in this Annual Report on Form 10-K for a discussion of the impact of recently issued accounting pronouncements on our consolidated financial statements at June 30, 2011, for the fiscal year then ended, as well as the expected impact on our consolidated financial statements for future periods.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
We have two kinds of market risk exposures, interest rate exposure and foreign currency exposure. We have no market risk sensitive instruments entered into for trading purposes.
 
In light of recent economic conditions, we reviewed the cash equivalents and marketable securities held by us. We do not believe that our holdings have a material liquidity risk under current market conditions.
 
Interest Rate Exposure
 
At June 30, 2011, we had outstanding debt under our credit facilities of $10,787. The debt matures September 30, 2013 and bears interest at the floating adjusted LIBOR plus an applicable margin. Our interest rate swap fixes the floating adjusted LIBOR portion of the interest rate at 4.32% through


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September 30, 2013. The additional applicable margin is determined quarterly using a pricing grid based on our Consolidated Total Leverage Ratio. At June 30, 2011, the additional applicable margin was 4.50%, resulting in an effective interest rate of 8.82% on our outstanding debt.
 
Using a sensitivity analysis based on a hypothetical 1% increase in prevailing interest rates over a 12-month period, each 1% increase from prevailing interest rates at June 30, 2011 would have decreased the fair value of the interest rate swap by $107 and each 1% decrease from prevailing interest rates at June 30, 2011 would have increased the fair value of the interest rate swap by $112.
 
Foreign Currency Exposure
 
As a result of operating in foreign markets, our financial results could be affected by significant changes in foreign currency exchange rates. We have international sales and operations in North America, Europe and Asia. We expect to cease operations in Asia by September 30, 2011. Therefore, we are subject to foreign currency rate exposure. Non-U.S. transactions are denominated in the functional currencies of the respective countries in which our foreign subsidiaries reside. Our consolidated assets and liabilities are translated into U.S. Dollars at the applicable exchange rates in effect as of the balance sheet date. Consolidated income and expense items are translated into U.S. Dollars at the average exchange rates for each period presented. Accumulated net translation adjustments are recorded in the accumulated other comprehensive income component of stockholders’ equity. We measure our risk related to foreign currency rate exposure on two levels, the first being the impact of operating results on the consolidation of foreign subsidiaries that are denominated in the functional currencies of their home countries, and the second being the extent to which we have instruments denominated in foreign currencies.
 
Foreign exchange translation gains and losses are included in our results of operations since we consolidate the results of our international operations, which are denominated in each country’s functional currency, with our U.S. results. The impact of translation gains or losses on net income from consolidating foreign subsidiaries was not material for the periods presented. We have historically had low exposure to changes in foreign currency exchange rates upon consolidating the results of our foreign subsidiaries with our U.S. results due to the size of our foreign operations in comparison to our consolidated operations. However, if the operating profits of our international operations increase as a percentage of our consolidated operations, our exposure to the appreciation or depreciation in the U.S. Dollar could have a more significant impact on our net income and cash flows. Thus, we evaluate our exposure to foreign currency fluctuation risk on an ongoing basis.
 
Since our foreign operations are conducted using foreign currencies, we bear additional risk of fluctuations in exchange rates because of instruments denominated in foreign currencies. We have historically had low exposure to changes in foreign currency exchange rates with regard to instruments denominated in foreign currencies, given the amount and short-term nature of the maturity of these instruments. The carrying values of financial instruments denominated in foreign currencies, including cash, cash equivalents, accounts receivable and accounts payable, approximate fair value because of the short-term nature of the maturity of these instruments.
 
We performed a sensitivity analysis at June 30, 2011. Holding all other variables constant, we have 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 condition, results of operations and cash flows.


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Item 8.   Financial Statements and Supplementary Data
 
Index to Consolidated Financial Statements
 
         
    39  
    40  
    41  
    42  
    43  
    44  
    81  
    85  
 
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and have therefore been omitted.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of Harris Interactive Inc.
 
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Harris Interactive Inc. and its subsidiaries at June 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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.
 
/s/  PricewaterhouseCoopers LLP
 
Rochester, New York
September 28, 2011


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HARRIS INTERACTIVE INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)
 
                 
    June 30,
    June 30,
 
    2011     2010  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 14,224     $ 14,158  
Accounts receivable, less allowances of $582 and $641, respectively
    26,480       23,735  
Unbilled receivables
    7,580       7,566  
Prepaid expenses and other current assets
    3,619       3,722  
Deferred tax assets
    306       375  
                 
Total current assets
    52,209       49,556  
Property, plant and equipment, net
    3,447       5,626  
Other intangibles, net
    14,582       16,382  
Other assets
    1,610       1,566  
                 
Total assets
  $ 71,848     $ 73,130  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 9,521     $ 8,952  
Accrued expenses
    21,249       16,768  
Current portion of outstanding debt
    4,794       4,794  
Deferred revenue
    13,872       11,612  
                 
Total current liabilities
    49,436       42,126  
Long-term debt
    5,993       10,787  
Deferred tax liabilities
    2,195       2,391  
Other long-term liabilities
    2,752       1,792  
Commitments and contingencies (Note 19)
               
Stockholders’ equity:
               
Preferred stock, $.001 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2011 and 2010
           
Common stock, $.001 par value, 100,000,000 shares authorized; 55,417,531 shares issued and outstanding at June 30, 2011 and 54,465,449 shares issued and outstanding at June 30, 2010
    55       54  
Additional paid-in capital
    186,648       185,726  
Accumulated other comprehensive income
    5,526       2,558  
Accumulated deficit
    (180,757 )     (172,304 )
                 
Total stockholders’ equity
    11,472       16,034  
                 
Total liabilities and stockholders’ equity
  $ 71,848     $ 73,130  
                 
 
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)
 
                         
    For the Years Ended June 30,  
    2011     2010     2009  
 
Revenue from services
  $ 165,264     $ 168,415     $ 184,334  
Operating expenses:
                       
Cost of services
    108,887       107,266       115,235  
Selling, general and administrative
    51,932       54,335       65,678  
Depreciation and amortization
    6,040       6,714       7,610  
Restructuring and other charges
    5,392       623       12,010  
Goodwill impairment charge
                40,250  
                         
Total operating expenses
    172,251       168,938       240,783  
                         
Operating loss
    (6,987 )     (523 )     (56,449 )
Interest and other income
    (47 )     (58 )     (400 )
Loss on extinguishment of debt
          724        
Interest expense
    1,359       2,029       3,433  
                         
Loss from operations before income taxes
    (8,299 )     (3,218 )     (59,482 )
Provision (benefit) for income taxes
    154       (1,052 )     15,849  
                         
Net loss
  $ (8,453 )   $ (2,166 )   $ (75,331 )
                         
Basic and diluted net loss per share
  $ (0.15 )   $ (0.04 )   $ (1.41 )
                         
Weighted-average shares outstanding — basic and diluted
    54,566,590       54,089,971       53,547,670  
                         
 
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)
 
                         
    For the Years Ended June 30,  
    2011     2010     2009  
 
Cash flows from operating activities:
                       
Net loss
  $ (8,453 )   $ (2,166 )   $ (75,331 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities —
                       
Depreciation and amortization
    7,451       8,145       9,125  
Deferred taxes
    (84 )     (276 )     16,831  
Stock-based compensation
    682       680       1,965  
Goodwill impairment charge
                40,250  
Non-cash portion of loss on extinguishment of debt
          550        
Bad debt expense
                532  
Amortization of deferred financing costs
    70       442       479  
Amortization of premium on marketable securities
          2       4  
(Increase) decrease in assets —
                       
Accounts receivable
    (1,331 )     (1,254 )     9,339  
Unbilled receivables
    633       (1,530 )     4,199  
Prepaid expenses and other current assets
    (1,227 )     2,051       (235 )
Other assets
    9       (153 )     (559 )
(Decrease) increase in liabilities —
                       
Accounts payable
    165       2,482       (2,307 )
Accrued expenses
    3,214       (636 )     (6,096 )
Deferred revenue
    1,896       (847 )     (3,326 )
Other liabilities
    958       (1,029 )     796  
                         
Net cash provided by (used in) operating activities
    3,983       6,461       (4,334 )
                         
Cash flows from investing activities:
                       
Purchase of marketable securities
                (3,703 )
Proceeds from maturities and sales of marketable securities
          998       2,688  
Capital expenditures
    (810 )     (1,629 )     (1,241 )
                         
Net cash used in investing activities
    (810 )     (631 )     (2,256 )
                         
Cash flows from financing activities:
                       
Credit agreement amendment financing costs
          (296 )     (1,274 )
Repayments of borrowings
    (4,794 )     (6,925 )     (6,925 )
Proceeds from exercise of employee stock options and employee stock purchases
    239       190       184  
                         
Net cash used in financing activities
    (4,555 )     (7,031 )     (8,015 )
                         
Effect of exchange rate changes on cash and cash equivalents
    1,448       (1,393 )     (1,517 )
                         
Net increase (decrease) in cash and cash equivalents
    66       (2,594 )     (16,122 )
Cash and cash equivalents at beginning of period
    14,158       16,752       32,874  
                         
Cash and cash equivalents at end of period
  $ 14,224     $ 14,158     $ 16,752  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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                      Accumulated
             
    Common Stock
    Additional
    Other
          Total
 
    Outstanding     Paid-in
    Comprehensive
    Accumulated
    Stockholders’
 
    Shares     Amount     Capital     Income     Deficit     Equity  
 
Balance at July 1, 2008
    53,784     $ 54     $ 182,709     $ 10,680     $ (94,807 )   $ 98,636  
Comprehensive income (loss):
                                               
Net loss
                                    (75,331 )     (75,331 )
Change in fair value of interest rate swap
                            244               244  
Actuarial loss on postretirement obligation
                            (61 )             (61 )
Unrealized gain on marketable securities
                            12               12  
Foreign currency translation
                            (7,528 )             (7,528 )
                                                 
Total comprehensive loss
                                            (82,664 )
                                                 
Issuance of stock for restricted stock grants and exercise of options
    (229 )             (4 )                     (4 )
Issuance of common stock under Employee Stock Purchase Plan and U.K. Limited Share Incentive Plan
    409               190                       190  
Stock-based compensation expense
                    1,965                       1,965  
                                                 
Balance at June 30, 2009
    53,964     $ 54     $ 184,860     $ 3,347     $ (170,138 )   $ 18,123  
Comprehensive income (loss):
                                               
Net loss
                                    (2,166 )     (2,166 )
Change in fair value of interest rate swap
                            (33 )             (33 )
Change in postretirement obligation, net of tax
                            242               242  
Unrealized loss on marketable securities
                            (10 )             (10 )
Foreign currency translation
                            (988 )             (988 )
                                                 
Total comprehensive loss
                                            (2,955 )
                                                 
Issuance of stock for restricted stock grants and exercise of options
    109                                          
Issuance of common stock under Employee Stock Purchase Plan and U.K. Limited Share Incentive Plan
    392               186                       186  
Stock-based compensation expense
                    680                       680  
                                                 
Balance at June 30, 2010
    54,465     $ 54     $ 185,726     $ 2,558     $ (172,304 )   $ 16,034  
Comprehensive income (loss):
                                               
Net loss
                                    (8,453 )     (8,453 )
Change in fair value of interest rate swap
                            304               304  
Change in postretirement obligation, net of tax
                            (196 )             (196 )
Unrealized loss on marketable securities
                            (1 )             (1 )
Foreign currency translation
                            2,861               2,861  
                                                 
Total comprehensive loss
                                            (5,485 )
                                                 
Issuance of stock for restricted stock grants and exercise of options
    699               28                       28  
Issuance of common stock under Employee Stock Purchase Plan and U.K. Limited Share Incentive Plan
    254       1       212                       213  
Stock-based compensation expense
                    682                       682  
                                                 
Balance at June 30, 2011
    55,418     $ 55     $ 186,648     $ 5,526     $ (180,757 )   $ 11,472  
                                                 


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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended June 30, 2011, 2010 and 2009

(In thousands, except share and per share amounts)
 
1.   Description of Business
 
Harris Interactive Inc. (the “Company”) is a leading global custom market research firm that uses online, telephone and other research methodologies to provide clients with information about the views, behaviors and attitudes of people worldwide.
 
2.   Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the assets, liabilities and results of operations of the Company and its wholly-owned subsidiaries. There are no unconsolidated entities or off-balance sheet arrangements. All intercompany accounts and transactions have been eliminated.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include all highly liquid instruments with a remaining maturity of three months or less at date of purchase.
 
Marketable Securities
 
The Company accounts for its investments in accordance with the FASB guidance for debt and equity securities. Investments for all periods presented have been classified as available-for-sale securities. Available-for-sale securities are stated at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income. Realized gains and losses, as well as interest and dividends on available-for-sale securities, are included in interest and other income. The cost of securities sold is based on the specific identification method.
 
Accounts Receivable and Allowance for Doubtful Accounts
 
Accounts receivable are recorded at the invoiced amount and do not bear interest. The collectibility of outstanding client invoices is continually assessed. The Company maintains an allowance for estimated losses resulting from the inability of clients to make required payments. In estimating the allowance, the Company considers factors such as historical collections, a client’s current creditworthiness, age of the receivable balance both individually and in the aggregate, and general economic conditions that may affect a client’s ability to pay.
 
Concentration of Credit Risk
 
Financial instruments which potentially expose the Company to concentrations of credit risk consist principally of accounts receivable and unbilled receivables. An allowance for doubtful accounts is provided for in the accompanying consolidated financial statements and is monitored by management to ensure that it is consistent with management’s expectations. Credit risk is limited with respect to accounts


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
2.   Summary of Significant Accounting Policies — (Continued)
 
receivable by the Company’s large client base. For fiscal years 2011, 2010, and 2009, no single client accounted for more than 10% of the Company’s consolidated revenue.
 
Property, Plant and Equipment
 
Property, plant and equipment, including improvements that significantly add to productive capacity or extend useful life, are recorded at cost. Maintenance and repairs are expensed as incurred. Upon sale or other disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to income.
 
Depreciation is calculated using the straight-line or accelerated methods over the estimated useful lives of the assets. Estimated useful lives are as follows:
 
         
Computer equipment
    3 years  
Non-computer equipment
    5 years  
Furniture and fixtures
    7 years  
 
In accordance with the FASB guidance for leases, leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful life of the assets or the term of the underlying lease arrangements.
 
Business Combinations
 
Acquisitions are accounted for under the purchase method of accounting pursuant to the FASB guidance for business combinations. Accordingly, the purchase price is allocated to the tangible assets and liabilities and intangible assets acquired, based on their estimated fair values. The excess purchase price over the fair value is recorded as goodwill and identifiable intangible assets are valued separately and amortized over their expected useful life.
 
Goodwill
 
The FASB guidance on goodwill requires the Company to test its goodwill for impairment on an annual basis and between annual tests in certain circumstances, and to write down goodwill and non-amortizable intangible assets when impaired. These assessments require the Company to estimate the fair market value of its single reporting unit. If the Company determines that the fair value of its reporting unit is less than its carrying amount, absent other facts to the contrary, an impairment charge must be recognized for the associated goodwill of the reporting unit against earnings in its consolidated financial statements. As the Company has one reportable segment, it utilizes the entity-wide approach for assessing goodwill.
 
Goodwill is evaluated for impairment using the two-step process as prescribed in the FASB guidance. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit. If the carrying amount exceeds the fair value, a second step must be followed to calculate impairment. Otherwise, if the fair value of the reporting unit exceeds the carrying amount, the goodwill is not considered to be impaired as of the measurement date. To determine fair value for its reporting unit, the Company uses the fair value of the cash flows that its reporting unit can be expected to generate in the future. This valuation method requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine the weighted average cost of capital to be used as a discount rate.


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
2.   Summary of Significant Accounting Policies — (Continued)
 
Intangible Assets
 
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to the estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
 
The Company’s intangible assets are stated at cost less accumulated amortization and are amortized over estimated useful lives that range as follows:
 
         
Contract-based intangibles
    2 to 4 years  
Internet respondent database
    2 to 9 years  
Customer relationships
    3 to 10 years  
Trade names
    0.5 to 20 years  
 
The Company has no indefinite-lived intangible assets.
 
Computer Software Developed or Obtained for Internal Use
 
The Company follows the provisions of the FASB guidance for internally developed software, which addresses the accounting for the costs of computer software developed or obtained for internal use and identifies the characteristics of internal use software. Costs that satisfy the capitalization criteria prescribed in the FASB guidance are included in other assets in the consolidated balance sheet and amounted to $1,596 and $2,146 at June 30, 2011 and 2010, respectively. Amortization expense related to these costs amounted to $1,411, $1,430 and $1,515 for the fiscal years ended June 30, 2011, 2010 and 2009, respectively.
 
Long-Lived Assets
 
In accordance with the FASB guidance for property, plant, and equipment, the Company evaluates the recoverability of the carrying value of its long-lived assets, excluding goodwill, based on undiscounted cash flows to be generated from each of such assets compared to the original estimates used in measuring the assets.
 
Events that trigger a test for recoverability include material adverse changes in the projected revenues and expenses, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. A test for recoverability also is performed when the Company has committed to a plan to sell or otherwise dispose of an asset group and the plan is expected to be completed within a year. Recoverability of an asset group is evaluated by comparing its carrying value to the future net undiscounted cash flows expected to be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, an impairment loss is recognized. The impairment loss is measured by the amount by which the carrying amount of the asset group exceeds the estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over its remaining useful life. Restoration of a previously-recognized long-lived asset impairment loss is not allowed.
 
The Company estimates the fair value of an asset group based on market prices (i.e., the amount for which the asset could be bought by or sold to a third party), when available. When market prices are not available, the Company estimates the fair value of the asset group using the income approach and/or the market approach. The income approach uses cash flow projections. Inherent in the Company’s development of cash flow projections are assumptions and estimates derived from a review of its


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
2.   Summary of Significant Accounting Policies — (Continued)
 
operating results, approved business plans, expected growth rates and cost of capital, among others. The Company also makes certain assumptions about future economic conditions, interest rates, and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods.
 
Changes in assumptions or estimates could materially affect the determination of fair value of an asset group, and therefore could affect the amount of potential impairment of the asset. The following assumptions are key to the Company’s income approach:
 
  •  Business Projections — The Company makes assumptions about the level of demand for its services in the marketplace. These assumptions drive the Company’s planning assumptions for revenue growth. The Company also makes assumptions about its cost levels. These assumptions are key inputs for developing the Company’s cash flow projections. These projections are derived using the Company’s internal business plans.
 
  •  Growth Rate — The growth rate is the expected rate at which an asset group’s earnings stream is projected to grow beyond the planning period.
 
  •  Economic Projections — Assumptions regarding general economic conditions are included in and affect the Company’s assumptions regarding revenue from services. These macroeconomic assumptions include inflation, interest rates, and foreign currency exchange rates.
 
During the three months ended December 31, 2008, as a result of the factors discussed in Note 8, “Goodwill”, to the accompanying consolidated financial statements, the Company tested its asset groups for recoverability. As the projected undiscounted cash flows for the individual asset groups exceeded the carrying value of the long-lived assets for each asset group, the Company did not record an impairment charge for any of its long-lived assets during the three months ended December 31, 2008. No additional facts and circumstances have since arisen to cause the Company to change this conclusion.
 
Fair Value of Financial Instruments
 
On July 1, 2008, the Company adopted the FASB guidance for fair value measurements, which defines fair value, establishes a fair value hierarchy and requires expanded disclosures about fair value measurements. On this same date, the Company adopted additional FASB guidance for fair value measurements which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. The Company did not elect the fair value option for any financial assets and liabilities existing at July 1, 2008 which had not previously been carried at fair value. Any future transacted financial assets or liabilities will be evaluated for the fair value election as prescribed by this guidance.
 
The fair value of the Company’s cash equivalents and available for sale marketable securities is derived from quoted market prices for similar instruments, with all significant inputs derived from or corroborated by observable market data. The fair value of the Company’s interest rate swap was based on quotes from the respective counterparty, which are corroborated by the Company using discounted cash flow calculations based upon forward interest-rate yield curves obtained from independent pricing services. The carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximate their fair value. The Company had $10,787 of outstanding debt at June 30, 2011 under its credit facilities, which is considered a financial instrument. The carrying amount of this debt approximates its fair value as the rate of interest on the Company’s term loans that are outstanding under its credit facilities reflect current market rates of interest for similar instruments with comparable maturities.


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
2.   Summary of Significant Accounting Policies — (Continued)
 
Derivative Financial Instruments
 
The Company uses an interest rate swap to manage the economic effect of the variable interest obligation on the outstanding debt under its credit agreement so that the interest payable on the outstanding debt effectively becomes fixed at a certain rate, thereby reducing the impact of future interest rate changes on the Company’s future interest expense.
 
The Company accounts for its interest rate swap in accordance with the FASB guidance for derivatives and hedging. The Company records the interest rate swap’s fair value in other assets or liabilities in its consolidated balance sheet. The effective portion of the change in the interest rate swap’s fair value is recorded as a component of accumulated other comprehensive income and is recorded as interest expense when the hedged debt affects interest expense. The ineffective portion of the change in fair value is recognized in interest expense in the period of the change.
 
The Company determined its interest rate swap to be a highly effective cash flow hedge at inception and evaluates the swap’s continued effectiveness on a quarterly basis. If it is determined that the interest rate swap is no longer a highly effective cash flow hedge, the Company will discontinue hedge accounting and recognize all subsequent changes in fair value in its results of operations.
 
Post-employment Payments
 
The Company has entered into employment and letter agreements with certain of its executives which obligate the Company to make post-employment payments for varying periods of time and under terms and circumstances set forth in these agreements. In part, the payments are in consideration for obligations of the executives not to compete with the Company after termination of their employment, and in part, the payments relate to other relationships between the parties. The Company accounts for its obligations under these agreements in accordance with the FASB guidance for non-retirement post-employment benefits.
 
Revenue Recognition
 
The Company recognizes revenue from services on a proportional performance basis. In assessing contract performance, both input and output criteria are reviewed. Costs incurred are used as an objective input measure of performance. The primary input of all work performed under these arrangements is labor. As a result of the relationship between labor and cost, there is normally a direct relationship between the costs incurred and the proportion of the contract performed to date. Costs incurred as an initial proportion of expected total costs is used as an initial proportional performance measure. This indicative proportional performance measure is always subsequently validated against more subjective criteria (i.e. relevant output measures) such as the percentage of interviews completed, percentage of reports delivered to a client and the achievement of any project milestones stipulated in the contract. In the event of divergence between the objective and more subjective measures, the more subjective measures take precedence since these are output measures.
 
Clients are obligated to pay based upon services performed, and in the event that a client cancels the contract, the client generally is responsible for payment for services performed through the date of cancellation. Losses expected to be incurred, if any, on jobs in progress are charged to income as soon as it becomes probable that such losses will occur. Invoices to clients in the ordinary course are generated based upon the achievement of specific events, as defined by each contract, including deliverables, timetables, and incurrence of certain costs. Such events may not be directly related to the performance of


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
2.   Summary of Significant Accounting Policies — (Continued)
 
services. Revenues earned on contracts in progress in excess of billings are classified as unbilled receivables. Amounts billed in excess of revenues earned are classified as deferred revenue.
 
In accordance with the FASB guidance for revenue recognition, revenue includes amounts billed to clients for subcontractor costs incurred in the completion of surveys and reflects reductions offered to clients in the form of rebates and reimbursements of out-of-pocket expenses related to service contracts.
 
Cost of Services
 
The Company’s direct costs of providing services principally consist of project personnel, which relate to the labor costs directly associated with a project, panelist incentives, which represent cash and non-cash incentives awarded to individuals who complete surveys, data processing, which represents both the internal and outsourced processing of survey data, and other direct costs related to survey production, including the amortization of software developed for internal use.
 
Panelist Incentives
 
The Company’s HIpoints loyalty program is designed to reward respondents who register for its panel, complete online surveys, and refer others to join its online panel. The earned points are non-transferable and may be redeemed for gifts from a specific product portfolio at any time prior to expiration. Points awarded under the HIpoints program expire after nine months of account inactivity. The Company maintains a reserve for obligations with respect to future redemption of outstanding points based on the expected redemption rate of the points. This expected redemption rate is based on the Company’s actual redemption rates since the inception of the program.
 
In addition, certain of the Company’s panelists receive cash incentives for participating in surveys from the Company, which are earned by the panelist when the Company receives a timely survey response. The Company accrues these incentives in the period in which they are earned.
 
Advertising Expenses
 
Advertising costs are expensed as incurred and are included in selling, general and administrative expense in the accompanying consolidated statements of operations. Such expenses amounted to $732, $871 and $1,511 for the fiscal years ended June 30, 2011, 2010 and 2009, respectively.
 
Stock-Based Compensation
 
The FASB guidance for stock-based compensation requires that all share-based payments to employees after July 1, 2005, including employee stock options and shares issued to employees under the Company’s Employee Stock Purchase Plans, be recognized in the financial statements as stock-based compensation expense based on their fair value on the date of grant using an option-pricing model, such as the Black-Scholes model. The guidance also requires that the Company estimate forfeitures when recognizing stock-based compensation expense and that this estimate of forfeitures be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change, and also impact the amount of unamortized stock-based compensation expense to be recognized in future periods.
 
A deferred tax asset is recorded on the stock-based compensation expense required to be accrued under the FASB guidance. A current income tax deduction arises at the time of vesting (restricted stock) or


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
2.   Summary of Significant Accounting Policies — (Continued)
 
exercise (stock options). In the event the current income tax deduction is greater or less than the associated deferred tax asset, the difference is required to be charged first to the windfall tax benefit pool. In the event that there is not an adequate pool of windfall tax benefits, the shortfall is charged to expense. The Company elected to adopt the alternative method of calculating the historical pool of windfall benefits as permitted by the FASB guidance.
 
Debt Issuance Costs
 
Debt issuance costs are amortized and recognized as interest expense under the effective interest method over the expected term of the related debt. Unamortized debt issuance costs related to extinguished debt are expensed at the time the debt is extinguished and recorded as a component of the gain or loss recognized upon extinguishment. Unamortized debt issuance costs are recorded in other assets in the consolidated balance sheet.
 
Income Taxes
 
The Company follows the asset and liability approach to account for income taxes in accordance with the FASB guidance 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. Through December 31, 2010, the Company did not provide U.S. deferred income taxes applicable to the unremitted earnings of its foreign subsidiaries, as these amounts were considered to be indefinitely reinvested outside the U.S. During the three months ended March 31, 2011, the Company began to provide U.S. deferred income taxes applicable to the unremitted earnings of certain of its foreign subsidiaries, as more fully described in Note 16, “Income Taxes”, to the accompanying consolidated financial statements.
 
On July 1, 2007, the Company adopted the FASB guidance for uncertain tax positions, which contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return and which is now incorporated into the FASB guidance for income taxes. Applying the two-step approach, the Company first determines if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is that the Company measures the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes line of its consolidated statements of operations.
 
Net Income (Loss) Per Share
 
In accordance with the FASB guidance on earnings per share, basic net income (loss) per share amounts are computed by dividing net loss by the weighted-average number of common shares outstanding for the period. 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. The treasury stock method is used in calculating diluted shares outstanding whereby assumed proceeds from the exercise of stock options, net of average unrecognized stock-based compensation expense for stock options and restricted stock, and the related tax benefit are assumed to be used to repurchase common stock at the average market price during the period. When the impact of stock options or other stock-based compensation is anti-dilutive, they are excluded from the calculation.


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
2.   Summary of Significant Accounting Policies — (Continued)
 
Foreign Currency Translation
 
For the Company’s subsidiaries located outside of the United States, the local currency is the functional currency. In accordance with FASB guidance on foreign currency matters, the financial statements of those subsidiaries are translated into U.S. Dollars as follows. Consolidated assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Consolidated income, expenses and cash flows are translated at the average exchange rates for each period and stockholders’ equity is translated using historical exchange rates. The resulting translation adjustment is recorded as a component of accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets.
 
Comprehensive Income (Loss)
 
The Company accounts for comprehensive income (loss) in accordance with the FASB guidance on comprehensive income. Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that, under generally accepted accounting principles, are recorded as an element of stockholders’ equity but are excluded from net income. The Company’s other comprehensive income (loss) is comprised of changes in the fair value of the Company’s interest rate swap, any unrealized holding gain (loss) on available-for-sale marketable securities, and the foreign currency translation adjustments from those subsidiaries not using the U.S. Dollar as their functional currency.
 
Segment Reporting
 
The Company reports segment information in accordance with the FASB guidance on segment reporting. The Company operates a globally consistent business model, offering custom market research to its customers in the geographic regions in which it operates. Geographic management facilitates local execution of the Company’s global strategies. However, the Company maintains global leaders for the majority of its critical business processes, and the most significant performance evaluations and resource allocations made on a global basis by the Company’s chief operating decision-maker. Accordingly, the Company has concluded that it has one reportable segment.
 
3.   Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted
 
Presentation of Comprehensive Income
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220) Presentation of Comprehensive Income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011 (July 1, 2012 for the Company). The guidance requires changes in presentation only and will have no material impact on the Company’s accompanying consolidated financial statements.


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
3.   Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted — (Continued)
 
Goodwill Impairment Testing
 
In December 2010, the FASB issued ASU No. 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, which amends Accounting Standards Codification (“ASC”) Topic 350, Intangibles — Goodwill and Other. ASU No. 2010-28 amends the ASC to require entities that have a reporting unit with a zero or negative carrying value to assess whether qualitative factors indicate that it is more likely than not that an impairment of goodwill exists, and if an entity concludes that it is more likely than not that an impairment exists, the entity must measure the goodwill impairment. The changes to the ASC as a result of this update were effective for annual and interim reporting periods beginning after December 15, 2010. The Company adopted this guidance on July 1, 2011 and adoption did not impact the Company’s accompanying consolidated financial statements.
 
Accounting for Transfers of Financial Assets
 
In June 2009, the FASB issued new guidance on the accounting for the transfers of financial assets. The new guidance, which was issued as Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140, is now part of ASC Topic 860. The new guidance requires additional disclosures for transfers of financial assets, including securitization transactions, and any continuing exposure to the risks related to transferred financial assets. There is no longer a concept of a qualifying special-purpose entity, and the requirements for derecognizing financial assets have changed. The new guidance was effective on a prospective basis for the annual period beginning after November 15, 2009 and interim and annual periods thereafter. The Company adopted the new guidance on July 1, 2010 and adoption did not have a material impact on the Company’s accompanying consolidated financial statements.
 
Amendments to Accounting for Variable Interest Entities
 
In June 2009, the FASB issued revised guidance on the accounting for variable interest entities. The revised guidance, which was issued as Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R), is now part of ASC Topic 810. The revised guidance significantly affects the overall consolidation analysis and was effective as of the beginning of the first fiscal year that commenced after November 15, 2009. The Company adopted the revised guidance on July 1, 2010 and adoption did not have a material impact on the Company’s accompanying consolidated financial statements.
 
Fair Value Disclosures
 
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 provides amendments to subtopic 820-10 that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements, in addition to the presentation of purchases, sales, issuances and settlements for Level 3 fair value measurements. ASU 2010-06 also provides amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques. The new disclosure requirements were effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements of Level 3 fair value measurements. Those disclosures were effective for interim and annual periods beginning after December 15, 2010. The Company adopted the disclosures involving Level 1 and Level 2 fair value measurements on January 1, 2010, and on January 1, 2011, adopted


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
3.   Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted — (Continued)
 
the disclosures involving Level 3 fair value measurements. Adoption did not have a material impact on the Company’s accompanying consolidated financial statements.
 
4.   Restructuring and Other Charges
 
Restructuring
 
Fiscal 2011
 
During the second and fourth quarters of fiscal 2011, the Company took actions designed to re-align the cost structure of its U.K. operations. Specifically, the Company reduced headcount at its U.K. facilities by a total of 27 full-time employees and incurred $834 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in December 2010 and April 2011 and all actions were completed at those respective times. Related cash payments were completed in June 2011.
 
During the third and fourth quarters of fiscal 2011, the Company took actions designed to re-align the cost structure of its U.S. operations. Specifically, the Company reduced headcount at its U.S. facilities by a total of 21 full-time employees and incurred $330 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in December 2010 and April 2011 and all actions were completed at those respective times. Related cash payments were completed in June 2011.
 
During the fourth quarter of fiscal 2011, the Company reduced its occupancy of leased office space at Norwalk, Connecticut, Brentford, United Kingdom, and Portland, Oregon facilities. The Company incurred $1,942 in lease exit costs associated with the remaining lease obligations, all of which involve cash payments. All actions associated with the leased office space reductions were completed in June 2011, and all cash payments will be completed in June 2020.
 
Fiscal 2009
 
During the third quarter of fiscal 2009, the Company took actions to re-align the cost structure of its U.S. and U.K. operations. Specifically, the Company reduced headcount at its U.S. facilities by 92 full-time employees and announced plans to reduce headcount at its U.K. facilities by 25 full-time employees. One-time termination benefits associated with the U.S. and U.K. actions were $2,656 and $389, respectively, all of which involved cash payments. The reductions in staff were communicated to the affected employees in March 2009. All actions were completed by March 2009 in the U.S. and May 2009 in the U.K. The related cash payments were completed by June 2009 in the U.K. and March 2010 in the U.S.
 
At March 31, 2009, the Company reviewed the estimate of anticipated sublease rental income for its Rochester, New York office located at 135 Corporate Woods. This review, prompted by adverse changes in real estate market conditions, resulted in a decrease to the Company’s estimate of the portion of the remaining lease obligation period over which it expects to derive sublease rental income. This change in estimate resulted in a charge of $35 in the third quarter of fiscal 2009.
 
Previously, during the second quarter of fiscal 2009, the Company took actions to re-align the cost structure of its U.S. operations. Specifically, the Company reduced headcount at its U.S. facilities by 78 full-time employees and incurred $2,261 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in October and December 2008. All actions were completed by December 2008 and the related cash payments were completed in December 2009.


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
4.   Restructuring and Other Charges — (Continued)
 
Additionally during the second quarter of fiscal 2009, the Company substantially vacated leased space at 135 Corporate Woods. The Company incurred $493 in charges related to the remaining operating lease obligation, all of which involved cash payments. All actions associated with this vacated space were completed by December 2008. The related cash payments were completed in June 2010.
 
At December 31, 2008, the Company reviewed the estimates of anticipated sublease rental income for its Grandville, Michigan and Norwalk, Connecticut offices, which were included in restructuring charges taken during the third quarter of fiscal 2008 in conjunction with its reduction of leased space at these facilities. This review, prompted by adverse changes in real estate market conditions within each of these locales, resulted in a decrease to the Company’s estimate of the portion of the remaining lease obligation period over which it expects to derive sublease rental income. This change in estimate resulted in a charge of $366 for the three months ended December 31, 2008.
 
Summary of Restructuring Charges and Reserves
 
The following table summarizes the restructuring charges recognized in the Company’s consolidated statements of operations for the fiscal years ended June 30:
 
                         
    2011     2010     2009  
 
Termination benefits
  $ 1,165     $     $ 5,306  
Lease commitments
    1,942             894  
Reversals of prior accruals
                (543 )
                         
    $ 3,107     $     $ 5,657  
                         
 
The following table summarizes activity during fiscal 2011 with respect to the Company’s remaining reserves for the restructuring activities described above and those undertaken in prior fiscal years:
 
                                                 
    Balance,
                            Balance,
 
    July 1,
    Costs
    Changes in
    Cash
    Non-Cash
    June 30,
 
    2010     Incurred     Estimate     Payments     Settlements     2011  
 
Termination benefits
  $     $ 1,165     $ 45     $ (788 )   $     $ 422  
Lease commitments
    408       1,942             (138 )           2,212  
                                                 
Remaining reserve
  $ 408     $ 3,107     $ 45     $ (926 )   $     $ 2,634  
                                                 
 
The changes in estimate noted above were the result of certain outplacement benefits that expired unused.
 
Other Charges
 
Other charges reflected in the “Restructuring and other charges” line shown on the Company’s consolidated statements of operations for the fiscal years ended June 30, 2011, 2010 and 2009 included the following:
 
  •  Post-employment payments to former senior executives — In connection with their departures from the Company during fiscal 2011, the Company reached negotiated settlements with Kimberly Till, Pavan Bhalla, and Enzo Micali. Under the separation agreements, cash payments to Ms. Till are due to be completed in August 2013, while cash payments to Messrs. Bhalla and Micali are due to be completed in December 2011 and January 2012, respectively. In connection with their departures from the Company during fiscal 2009, Gregory T. Novak, Ronald E. Salluzzo and


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
4.   Restructuring and Other Charges — (Continued)
 
David B. Vaden became entitled to certain contractually obligated cash payments. The cash payments to Messrs. Novak, Vaden, and Salluzzo were completed in December 2010, December 2009, and February 2010, respectively.
 
  •  Consultant fees — During fiscal 2009, the Company incurred fees for services rendered by a consulting firm related to, among others, performance improvement initiatives, bank negotiations, and an interim CFO arrangement, the details of which are described in Note 21, “Related-Party Transactions”, to the accompanying consolidated financial statements.
 
  •  Other — For fiscal 2011, “Other” included costs associated with reorganizing the operational structure of the Company’s Canadian and U.K. operations, as well as immaterial prior period adjustments related to the Company’s Asian operations. For fiscal 2010, “Other” included costs associated with reorganizing the operational structure of the Company’s Asia operations and costs incurred to close the Company’s telephone-based data collection center in Brentford, United Kingdom. For fiscal 2009, “Other” included bad debt expense for a note receivable for which collectability became doubtful, recruitment fees for senior executives, and legal fees associated with the waiver and amendments to the Company’s credit agreement due to certain financial covenant violations.
 
                         
    2011     2010     2009  
 
Post-employment payments to former senior executives
  $ 1,312     $     $ 1,997  
Consultant fees
                3,095  
Other
    973       623       1,261  
                         
    $ 2,285     $ 623     $ 6,353  
                         
 
5.   Fair Value Measurements
 
The hierarchy for inputs used in measuring fair value for financial assets and liabilities maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels:
 
  •  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
 
  •  Level 2 inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset and liability, either directly or indirectly.
 
  •  Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
5.   Fair Value Measurements — (Continued)
 
 
The following table presents the fair value hierarchy for the Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30:
 
                                 
    Recurring Fair Value Measurements
    Quoted
  Significant
       
    Prices in
  Other
  Significant
   
    Active
  Observable
  Unobservable
   
    Markets
  Inputs
  Inputs
   
    (Level 1)   (Level 2)   (Level 3)   Total
 
At June 30, 2011
                               
Financial liabilities:
                               
Interest rate swap contract
  $     $ 513     $     $ 513  
At June 30, 2010
                               
Financial liabilities:
                               
Interest rate swap contract
  $     $ 889     $     $ 889  
 
The Company’s fair value hierarchy at June 30, 2011 is consistent with its fair value hierarchy at June 30, 2010.
 
The fair value of the Company’s interest rate swap was based on quotes from the respective counterparty, which are corroborated by the Company using discounted cash flow calculations based upon forward interest-rate yield curves obtained from independent pricing services.
 
6.   Marketable Securities
 
The Company had no marketable securities at June 30, 2011 or 2010.
 
7.   Property, Plant and Equipment
 
At June 30, property, plant and equipment consisted of the following:
 
                 
    2011     2010  
 
Furniture and fixtures
  $ 7,405     $ 7,168  
Equipment
    35,856       34,683  
Leasehold improvements
    11,987       11,738  
                 
      55,248       53,589  
Accumulated depreciation
    (51,801 )     (47,963 )
                 
    $ 3,447     $ 5,626  
                 
 
Depreciation expense on property, plant and equipment amounted to $3,173, $3,911 and $4,634 for the fiscal years ended June 30, 2011, 2010 and 2009, respectively.
 
8.   Goodwill
 
The Company had no goodwill at June 30, 2011 or 2010.


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
8.   Goodwill — (Continued)
 
Fiscal 2009
 
As part of its closing process for the three months ended December 31, 2008, the Company considered the following factors in determining whether an impairment review outside of its annual impairment evaluation date was necessary:
 
  •  operating losses in its single reporting unit for the fiscal quarters ended September 30, 2008 and December 31, 2008;
 
  •  potential declines in market research spending for calendar year 2009 based on industry forecasts from Inside Research;
 
  •  headcount reductions and related charges as announced in October and December 2008, the details of which are described in Note 4, “Restructuring and Other Charges,” to the accompanying consolidated financial statements; and
 
  •  a 62% decline in the Company’s per share stock price from $1.73 at September 30, 2008 to $0.65 at December 31, 2008, which resulted in a market capitalization that, based on the Company’s per share stock price as of market close on December 31, 2008, was below the carrying value of its reporting unit’s net assets at that date.
 
Based on its consideration of the above-noted factors, the Company concluded that an interim period goodwill impairment evaluation was necessary at December 31, 2008. Accordingly, the Company performed the initial step of its impairment evaluation and determined that the carrying value of its reporting unit’s net assets exceeded their fair value. The fair value of the reporting unit was determined using a discounted cash flow analysis, which used a discount rate based on the Company’s best estimate of the after-tax weighted average cost of capital, adjusted for the financial risk associated with its future operations.
 
In the second step of its impairment evaluation, the Company determined the implied fair value of goodwill and compared it to the carrying value of the goodwill. The fair value of its reporting unit was allocated to all of its assets and liabilities as if it had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. This allocation resulted in no implied fair value of goodwill. Therefore, the Company recognized an impairment charge of $40,250, the remaining amount of its previously reported goodwill.
 
The changes in the carrying amount of goodwill for the fiscal year ended June 30, 2009 were as follows:
 
         
Balance at July 1, 2008
  $ 42,805  
Foreign currency translation adjustments
    (2,404 )
Prior period purchase accounting adjustment of deferred taxes
    (151 )
Goodwill impairment charge
    (40,250 )
         
Balance at June 30, 2009
  $  
         


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
9.   Acquired Intangible Assets Subject to Amortization
 
At June 30, acquired intangible assets subject to amortization consisted of the following:
 
                                 
    2011  
    Weighted-Average
    Gross
          Net
 
    Amortization Period
    Carrying
    Accumulated
    Book
 
    (In Years)     Amount     Amortization     Value  
 
Contract-based intangibles
    3     $ 1,768     $ 1,768     $  
Internet respondent database
    7       3,457       2,878       579  
Customer relationships
    10       22,667       11,619       11,048  
Trade names
    16       5,352       2,397       2,955  
                                 
Total
          $ 33,244     $ 18,662     $ 14,582  
                                 
 
                                 
    2010  
    Weighted-Average
    Gross
          Net
 
    Amortization Period
    Carrying
    Accumulated
    Book
 
    (In Years)     Amount     Amortization     Value  
 
Contract-based intangibles
    3     $ 1,768     $ 1,768     $  
Internet respondent database
    7       3,000       2,187       813  
Customer relationships
    10       21,039       8,677       12,362  
Trade names
    16       5,283       2,076       3,207  
                                 
Total
          $ 31,090     $ 14,708     $ 16,382  
                                 
 
                         
    2011     2010     2009  
 
Aggregate amortization expense:
                       
For the fiscal year ended June 30:
  $ 2,866     $ 2,803     $ 2,976  
                         
Estimated amortization expense for the fiscal years ending June 30:
                       
2012
  $ 2,939                  
                         
2013
  $ 2,764                  
                         
2014
  $ 2,315                  
                         
2015
  $ 1,735                  
                         
2016
  $ 1,611                  
                         
Thereafter
  $ 3,218                  
                         
 
The gross carrying amount and accumulated amortization of the Company’s acquired intangible assets for the fiscal years ended June 30, 2011 and 2010, as well as the related amortization expense, reflect the impact of foreign currency exchange rate fluctuations during the period.


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
10.   Accrued Expenses
 
At June 30, accrued expenses consisted of the following:
 
                 
    2011     2010  
 
Panelist incentives
  $ 3,234     $ 3,282  
Project-related accruals
    1,838       2,194  
Payroll and withholding expenses
    2,626       1,996  
Accrued vacation
    1,990       1,616  
Bonuses
    1,351       1,193  
Other
    10,210       6,487  
                 
    $ 21,249     $ 16,768  
                 
 
“Other” consists of accrued expenses that are individually less than 5% of total current liabilities.
 
11.   Borrowings
 
As of June 30, 2011, largely due to the magnitude of restructuring and other charges incurred by the Company during fiscal 2011, the Company was not in compliance with the Consolidated Interest Coverage Ratio and Consolidated Total Leverage Ratio (each as defined below) covenants under the Amended and Restated Credit Agreement (as defined below). As a result of the violations, JP Morgan Chase Bank, N.A. (“JPMC”) had the right in their sole discretion to demand immediate payment, in full of the amount outstanding under the Amended and Restated Credit Agreement. However, on September 27, 2011, the Company entered into an amendment agreement and waiver with JPMC, as more fully described in Note 24, “Subsequent Events,” which permanently waived the covenant violations.
 
Fiscal 2010 Amended and Restated Credit Agreement
 
On June 30, 2010, the Company entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with JPMC as Administrative Agent (the “Administrative Agent”) and Issuing Bank (the “Issuing Bank”), and the Lenders party thereto (the “Lenders”). The Amended and Restated Credit Agreement supersedes and replaces the Credit Agreement, dated September 21, 2007, as amended on December 31, 2008, March 6, 2009 and May 6, 2009 (the “Original Credit Agreement”), by and among the Company, JPMC, as Administrative Agent, and the Lenders party thereto. Pursuant to the Amended and Restated Credit Agreement, the Lenders made available certain credit facilities (the “Credit Facilities”) as more fully described below. The Credit Facilities replace existing credit arrangements under the Original Credit Agreement. In accordance with ASC Topic 470, the Company evaluated the change in cash flows, determined that there was a greater than 10% change, and concluded that treatment of the amendment and restatement of its credit agreement as an extinguishment of debt was appropriate. Accordingly, a loss on extinguishment of $724, of which $550 represented unamortized debt issuance costs, was recorded in the Company’s consolidated statement of operations at June 30, 2010.


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
11.   Borrowings — (Continued)
 
The principal terms of the Original Credit Agreement and Amended and Restated Credit Agreement are described below:
 
       
Original Credit Agreement     Amended and Restated Credit Agreement
Availability:
     
$5,000 Revolving Line
   
$5,000 Revolving Line
• Until certain leverage ratios are achieved, advances require minimum cash balances and no outstanding balance may exist at least 5 consecutive days in every 30-day period
   
• The Revolving Line may be used to back Letters of Credit.
• The Revolving Line may be used to back Letters of Credit
   
• Requires the Company to maintain a minimum cash balance of the greater of $5,000 and 1.2 times the outstanding amount under the Revolving Line (including outstanding letters of credit)
Term Loan A – original principal, $12,000
   
New Term Loan – original principal, $15,581
Term Loan B, as consolidated with Term Loan C – original principal $22,625
     
       
Pricing Grid:      
Not applicable
   
See below
       
Interest:      
Company option:
   
Company option:
• Base Rate (greater of Federal Funds Rate plus 0.5%, LIBOR plus 1%, or Prime) plus 4%
   
• Base Rate (greater of Federal Funds Rate plus 0.5%, LIBOR plus 1%, or Prime) plus an Applicable Rate based on the pricing grid tied to the Company’s Consolidated Total Leverage Ratio, as described below (the “Pricing Grid”)
OR      
• LIBOR plus 5%
   
OR
     
• LIBOR plus an Applicable Rate based on the Pricing Grid
The Company elected LIBOR and the interest swap agreement, which fixed the LIBOR-based portion of the rate at 5.08%, remained unchanged. With the spread, the effective rate on the Term Loans was 10.08%.
   
The Company elected LIBOR and the interest swap agreement fixes the LIBOR-based portion of the rate at 4.32%. At June 30, 2011, with the spread at 4.50%, the effective rate on the New Term Loan was 8.82%.
Interest payments are due at end of LIBOR interest periods, but at least quarterly in arrears
   
Interest payments are due at end of LIBOR interest periods, but at least quarterly in arrears
Letter of credit participation fees equal to 5% of outstanding face amounts
   
Letter of credit fees equal to 5% of outstanding face amounts until the first quarterly adjustment pursuant to the Pricing Grid, and are set under the Pricing Grid thereafter
       


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
11.   Borrowings — (Continued)
 
       
Original Credit Agreement     Amended and Restated Credit Agreement
Interest Rate Swap:      
Fixes the floating LIBOR interest portion of the rates on the amounts outstanding under the Term Loans at 5.08% through September 21, 2012
   
Fixes the floating LIBOR interest portion of the rates on the amounts outstanding under the New Term Loan (reflecting the consolidation of Term Loans A and B into a single New Term Loan) at 4.32% through September 30, 2013
Three-month LIBOR rate received on the swap matches the LIBOR base rate paid on the Term Loans
   
Three-month LIBOR rate received on the swap matches the LIBOR base rate paid on the New Term Loan
Notional amount equal to outstanding amount of the Term Loans
   
Notional amount of $10,787 at June 30, 2011, equal to outstanding amount of the New Term Loan
       
Unused Facility Fees:      
Fee fixed at 1.0% of unused Revolving Line amount
   
Fee fixed at 0.75% of unused Revolving Line amount
       
Principal Payments:      
Term Loans – September 21, 2012
   
New Term Loan Maturity – September 30, 2013
Revolving Line Maturity – July 15, 2010
   
Revolving Line Maturity – September 30, 2013
Revolving Line – payable at maturity
   
Revolving Line – payable at maturity
Quarterly Term Loan Payments – $1,731
   
Quarterly New Term Loan Payments – $1,199
       
Financial Covenants:      
Minimum Consolidated Interest Coverage Ratio ranging over various quarters between 3.00:1.00 and 1.75:1.00
   
Minimum Consolidated Interest Coverage Ratio of at least 3.00:1.00
Maximum Consolidated Leverage Ratio ranging over various quarters between 6.40:1.00 and 2.00:1.00

Minimum Consolidated Revenue (trailing 3 months) ranging over various quarters between $33,200 and $45,400
   
Maximum Consolidated Leverage Ratio of 2.90:1.00 for quarterly periods ending through December 31, 2010, 2.70:1.00 for the quarterly period ending March 31, 2011, and 2.50:1.00 for quarterly periods ending thereafter.

Minimum cash balance of the greater of $5,000 and 1.2 times the outstanding amount under the Revolving Line (including outstanding letters of credit)
       
Collateral:      
Secured by all domestic assets and 66% of equity interests in first tier foreign subsidiaries
   
Secured by all domestic assets and 66% of equity interests in first tier foreign subsidiaries
       

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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
11.   Borrowings — (Continued)
 
 
The Pricing Grid provides for quarterly adjustment of rates and fees, and is as follows:
 
                                     
        ABR
          Commitment
    Consolidated Total
  Applicable
  Adjusted LIBO
  Letter of Credit
  Fee
Pricing Level   Leverage Ratio   Rate   Applicable Rate   Applicable Rate   Rate
 
1
  < 1.0     2.50 %     3.50 %     3.50 %     0.50 %
2
  ³ 1.0 but < 1.5     3.25 %     4.25 %     4.25 %     0.75 %
3
  ³ 1.5 but < 2.0     3.50 %     4.50 %     4.50 %     0.75 %
4
  ³ 2.0 but < 2.5     3.75 %     4.75 %     4.75 %     0.75 %
5
  ³ 2.5     4.00 %     5.00 %     5.00 %     1.00 %
 
The Amended and Restated Agreement contains customary representations, default provisions, and affirmative and negative covenants, including among others prohibitions of dividends, sales of certain assets and mergers, and restrictions related to acquisitions, indebtedness, liens, investments, share repurchases and capital expenditures. Among others, the Company may freely transfer assets and incur obligations among its domestic subsidiaries, but limitations apply to transfers of assets and loans to foreign subsidiaries.
 
At June 30, 2011, the Company was not in compliance with the Consolidated Interest Coverage Ratio and the Consolidated Total Leverage Ratio covenants under the Amended and Restated Credit Agreement, as noted above. At June 30, 2010, the Company was in compliance with certain financial covenants under the Amended and Restated Credit Agreement.
 
At June 30, 2011, the required principal repayments of the term loan under the Amended and Restated Credit Agreement (the “New Term Loan”) for the four succeeding fiscal years are as follows:
 
         
    Total  
 
2012
    4,794  
2013
    4,794  
2014
    1,199  
         
    $ 10,787  
         
 
At June 30, 2010, the Company had $15,581 outstanding under the Original Credit Agreement.
 
At June 30, 2011 and 2010, the Company had no outstanding borrowings under its revolving line of credit and $359 and $381, respectively, of outstanding letters of credit. The letters of credit reduce the remaining undrawn portion of the revolving line of credit that is available for future borrowings.
 
Interest Rate Swap
 
Effective September 21, 2007, the Company entered into an interest rate swap agreement with JPMC, which effectively fixed the floating LIBOR interest portion of the rates on the term loans outstanding under the Original Credit Agreement at 5.08% through September 21, 2012. The three-month LIBOR rate received on the swap matched the LIBOR base rate paid on the term loans since both used three-month LIBOR. The swap had an initial notional value of $34,625, which declined as payments were made on the term loans so that the amount outstanding under those term loans and the notional amount of the swap were always equal.
 
As a result of the Amended and Restated Credit Agreement, the Company modified the terms of its interest rate swap to ensure that the notional amount of the swap matches the outstanding amount of the


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
11.   Borrowings — (Continued)
 
New Term Loan and the three-month LIBOR rate received on the swap matches the LIBOR base rate on the New Term Loan. The term of the interest rate swap was extended through September 30, 2013 to be consistent with the maturity date of the New Term Loan. As a result of these modifications, the Company re-designated its interest rate swap as a cash flow hedge and determined it to be highly effective at that time.
 
The interest rate swap had a notional amount of $10,787 at June 30, 2011, which was the same as the outstanding amount of the New Term Loan. The applicable spread referenced in the pricing grid set forth above is added to the 4.32% rate fixed by the interest rate swap.
 
At June 30, 2011 and 2010, the Company had liabilities of $513 and $889, respectively, in the “Other liabilities” line item of its consolidated balance sheet to reflect the fair value of the interest rate swap. The interest rate swap was effective at June 30, 2010 and through the nine months ended March 31, 2011. During those periods, changes in the fair value of the interest rate swap were recorded through other comprehensive income, and any ineffectiveness was recorded through interest expense. As a result of the covenant violations noted above, the Company determined that the interest rate swap was not an effective cash flow hedge at June 30, 2011 and recorded a charge to interest expense of $68, the amount of the change in the swap’s fair value during the fourth quarter of fiscal 2011.
 
12.   Derivative Financial Instruments
 
As discussed in Note 11, “Borrowings”, to the accompanying consolidated financial statements, the Company uses an interest rate swap to manage the economic effect of the variable interest obligation on its outstanding debt under the Credit Facilities so that the interest payable on the outstanding debt effectively becomes fixed at a certain rate, thereby reducing the impact of future interest rate changes on the Company’s future interest expense. The critical terms of the interest rate swap match those of the outstanding debt, including the notional amounts, interest rate reset dates, maturity dates and underlying market indices. Accordingly, the Company has designated its interest rate swap as a qualifying instrument. The unrealized losses on the interest rate swap are included in other comprehensive loss and the corresponding fair value payables are included in other liabilities in the Company’s consolidated balance sheet. The periodic interest settlements, which occur at the same interval as the outstanding debt, are recorded as interest expense.
 
Fair Value of Derivative Instruments in Consolidated Balance Sheet
 
                 
    June 30, 2011  
    Balance Sheet Location     Fair Value  
 
Interest rate swap agreements designated as cash flow hedges
    Other liabilities     $ 513  
Total derivatives designated as hedging instruments
          $ 513  
                 
Total derivatives
          $ 513  
                 
 


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
12.   Derivative Financial Instruments — (Continued)
 
                 
    June 30, 2010  
    Balance Sheet Location     Fair Value  
 
Interest rate swap agreements designated as cash flow hedges
    Other liabilities     $ 889  
Total derivatives designated as hedging instruments
          $ 889  
                 
Total derivatives
          $ 889  
                 
 
Effects of Derivative Instruments on Income and Accumulated Other Comprehensive Income (OCI)
 
                                 
              Amount and Location
              of Gain (Loss)
          Amount and Location
  Recognized in Income
    Amount of Gain
    of Gain (Loss)
  on Derivative
    (Loss) Recognized in
    Reclassified from
  (Ineffective Portion
    Accumulated OCI
    Accumulated OCI
  and Amount
    on Derivative
    into Income
  Excluded from
    (Effective Portion)
    (Effective Portion)
  Effectiveness Testing)
    June 30, 2011     June 30, 2011   June 30, 2011
 
Cash flow hedges:
                               
Interest rate swap
  $ 62     $ 296     Interest expense   $ 68     Interest and other income
                                 
 
                                 
              Amount and Location
              of Gain (Loss)
          Amount and Location
  Recognized in Income
    Amount of Gain
    of Gain (Loss)
  on Derivative
    (Loss) Recognized in
    Reclassified from
  (Ineffective Portion
    Accumulated OCI
    Accumulated OCI
  and Amount
    on Derivative
    into Income
  Excluded from
    (Effective Portion)
    (Effective Portion)
  Effectiveness Testing)
    June 30, 2010     June 30, 2010   June 30, 2010
 
Cash flow hedges:
                               
Interest rate swap
  $ 358     $ 837     Interest expense   $     Interest and other income
                                 
 
13.   Stockholders’ Equity
 
Common Stock
 
100,000,000 shares of the Company’s Common Stock (“Common Stock”), par value $.001 per share, are authorized by the Company’s Certificate of Incorporation, as amended in fiscal 2000.
 
Restricted Stock Award Withholdings
 
The Company issues restricted stock awards as part of the Incentive Plans (defined below). For certain of the restricted stock awards granted, the number of shares released on the date the restricted stock awards vest is net of the statutory withholding requirements that the Company pays to the appropriate taxing authorities on behalf of its employees. The shares repurchased to satisfy the statutory withholding requirements are immediately retired.

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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
13.   Stockholders’ Equity — (Continued)
 
Stockholder Rights Plan
 
On March 11, 2005, the Board of Directors of the Company (the “Board”) adopted a stockholder rights plan, as set forth in the Rights Agreement, dated March 11, 2005 (the “Rights Agreement”). Under the Rights Agreement, the Board declared a dividend distribution of one preferred share purchase right (a “Right”) for each outstanding share of Common Stock to stockholders of record as of the close of business on March 29, 2005 (the “Record Date”). In addition, one Right automatically attaches to each share of Common Stock issued between the Record Date and the Distribution Date (defined below). Each Right entitles the holder to purchase from the Company a unit consisting of one one-thousandth of a share (a “Unit”) of the Company’s Series A Preferred Stock, par value $.01 per share (“Preferred Stock”), at a cash exercise price of $27.48 per Unit, subject to adjustment under certain conditions specified in the Rights Agreement. The Rights will separate from Common Stock and will become exercisable only when a public announcement has been made that a person or group acquires beneficial ownership of 15% or more of the outstanding shares of the Common Stock (an “Acquiring Person”), other than as a result of repurchases of stock by the Company or certain inadvertent actions by a stockholder, or ten days after a person commences, or publicly announces the intention to commence (which intention to commence remains in effect for five business days after such announcement), a tender offer or exchange offer that could result in the person or group becoming an Acquiring Person and that is not terminated within such ten-day period (the earlier of such dates being referred to as the “Distribution Date”). If a person or group becomes an Acquiring Person, each holder of a Right (other than the Acquiring Person and certain of its related parties, whose Rights become null and void) will be entitled to receive upon exercise of each Right that number of Units equal to $27.48 (as adjusted) multiplied by the number of Units for which the Right is then exercisable, divided by 50% of the then current per share market price of the Common Stock. If there are insufficient shares of Preferred Stock to permit full exercise of all of the Rights, holders of Rights may instead receive shares of the Common Stock, other securities, cash or property, or a combination thereof. If, at any time after a person or group becomes an Acquiring Person, the Company is acquired in a merger or other business combination transaction with an Acquiring Person or certain other types of transaction specified in the Rights Agreement, each holder of a Right (other than the Acquiring Person and certain of its related parties, whose Rights become null and void) will be entitled to receive upon exercise of each Right, in lieu of shares of Preferred Stock, that number of shares of Common Stock of the surviving entity equal to $27.48 (as adjusted) multiplied by the number of Units for which the Right is then exercisable, divided by 50% of the then current per share market price of the surviving entity’s common stock.
 
The Rights are not exercisable until a Distribution Date occurs and will expire on March 11, 2015, unless earlier terminated or redeemed by the Company in accordance with the Rights Agreement. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including without limitation, no right to vote or receive dividends. The Rights Agreement will be reviewed and evaluated at least once every three years by a “TIDES Committee” of independent directors. During fiscal 2010, the TIDES Committee reviewed the Rights Agreement and recommended no changes to it.
 
14.   Stock-Based Compensation
 
The Company adopted a Long Term Incentive Plan in 1999, amended in November 2004 (“1999 Incentive Plan”), and a 2007 Long Term Incentive Plan (“2007 Incentive Plan” and together with the 1999 Incentive Plan, the “Incentive Plans”). In addition, in 2001, as part of its acquisition of Total Research Corporation, the Company also assumed certain options previously issued by that company under its incentive plans (“Total Plans”). The Company also adopted an Employee Stock Purchase Plan in 1999, amended in November 2004 (“1999 ESPP”), and a 2007 Employee Stock Purchase Plan, amended in


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
14.   Stock-Based Compensation — (Continued)
 
November 2009 (“2007 ESPP” and together with the 1999 ESPP, the “ESPPs”). In January 2008, the Company adopted the Harris Interactive U.K. Limited Share Incentive Plan (“SIP”). The Company also has issued stock options to certain new employees outside the Incentive Plans.
 
The Company did not capitalize stock-based compensation expense as part of the cost of an asset for any periods presented. The following table illustrates the stock-based compensation expense included in the Company’s consolidated statements of operations for the cost of stock options and restricted stock issued under the Incentive Plans, stock options issued to new employees outside the Incentive Plans, and shares issued under the ESPPs for the fiscal years ended June 30:
 
                         
    2011     2010     2009  
 
Cost of services
  $ 12     $ 18     $ 54  
Selling, general and administrative
    670       662       1,911  
                         
    $ 682     $ 680     $ 1,965  
                         
 
Any potential tax benefits associated with incentive stock options are recognized if and when the Company receives a tax deduction associated with the options. Accordingly, due to the timing of the recognition of the tax benefit versus the related stock-based compensation expense, the Company’s effective tax rate was increased for the fiscal years ended June 30, 2011, 2010 and 2009.
 
The Company determines the fair value of each option award on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on historical volatilities from daily share price observations for the Company’s stock covering a period commensurate with the expected term of the options granted. The Company continues to use the “simplified” method as permitted by ASC 718-10 for purposes of determining the expected life of options when granted, but has corroborated the expected option life derived using this method to the expected option lives used by other companies within the market research industry to ensure reasonableness. The risk-free interest rate is based on the implied yield available at the time the options were granted on U.S. Treasury zero coupon issues with a remaining term equal to the expected life of the options when granted. The expected dividend yield is based on the Company’s historical practice of electing not to pay dividends to its stockholders.
 
Long Term Incentive Plans
 
The Company maintains the Incentive Plans, under which it may grant nonqualified and incentive stock options, as well as restricted stock awards to employees and directors of the Company. The Company grants options to purchase Common Stock at an exercise price equal to the fair market value as of the date of grant. Options generally vest over a period of up to four years for employees, and expire after ten years from the date of grant or earlier, if in connection with termination of employment or service as a director. Certain options vest upon the achievement of performance targets. Vesting of options is accelerated in certain circumstances upon a change in control. Restricted stock awards generally vest over a period of up to four years for employees and one year for directors, and any unvested portion forfeits upon termination of employment or service as a director. Certain restricted stock awards vest upon achievement of performance targets.
 
The Company has registered a total of 10,250,000 shares of Common Stock for issuance under the Incentive Plans. At June 30, 2011, 2,327,521 shares were unissued and available for grant under the Incentive Plans.


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
14.   Stock-Based Compensation — (Continued)
 
Investor Stock Options
 
At June 30, 2011 and 2010, the Company had outstanding non-qualified investor options to acquire 88,887 shares of Common Stock that were issued in connection with the Company’s acquisition of Novatris, S.A. in March 2004. Investor options are not included as options under the Incentive Plans.
 
Summary of Options and Restricted Stock Award Status
 
The following table provides a summary of the status of the Company’s employee stock options (including options issued under the Incentive Plans and Total Plans, as well as options issued outside the Incentive Plans to new employees) for the fiscal years ended June 30:
 
                                                 
    2011     2010     2009  
          Weighted-
          Weighted-
          Weighted-
 
          Average
          Average
          Average
 
          Exercise
          Exercise
          Exercise
 
    Shares     Price     Shares     Price     Shares     Price  
 
Options outstanding at July 1
    3,873,452     $ 2.38       3,857,209     $ 3.09       5,804,172     $ 5.32  
Granted
    4,750,500       0.75       1,248,812       0.97       1,910,000       0.93  
Forfeited
    (2,160,913 )     1.36       (1,232,569 )     3.20       (3,856,963 )     5.37  
Exercised
    (66,666 )     0.42                          
                                                 
Options outstanding at June 30
    6,396,373     $ 1.53       3,873,452     $ 2.38       3,857,209     $ 3.09  
                                                 
 
The total intrinsic value of options exercised during the fiscal years ended June 30, 2011, 2010 and 2009 was $34, $0 and $0, respectively.
 
The following weighted-average assumptions were used to value options granted by the Company during the fiscal years ended June 30:
 
                         
    2011   2010   2009
 
Risk-free interest rate
    2.8 %     2.7 %     2.7 %
Weighted-average expected life (in years)
    6.7       6.3       6.3  
Volatility factor
    66 %     68 %     56 %
Dividend yield
                 
Weighted-average fair value
  $ 0.46     $ 0.62     $ 0.51  
 
Cash received from the exercise of employee stock options was $28, $0 and $0, respectively, for the fiscal years ended June 30, 2011, 2010 and 2009, respectively.


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
14.   Stock-Based Compensation — (Continued)
 
The following table summarizes the Company’s granted and outstanding employee stock options (including options issued under the Incentive Plans and Total Plans, as well as options issued outside the Incentive Plans to new employees) at June 30, 2011:
 
                                                                 
    Options Outstanding     Options Exercisable  
          Weighted-
                      Weighted-
             
          Average
    Weighted-
                Average
    Weighted
       
          Remaining
    Average
    Aggregate
          Remaining
    Average
    Aggregate
 
Range of
  Number of
    Contractual
    Exercise
    Intrinsic
    Number of
    Contractual
    Exercise
    Intrinsic
 
Exercise Prices   Options     Life (In Years)     Price     Value     Options     Life (In Years)     Price     Value  
 
$ 0.38 – 1.18
    5,402,860       9.4     $ 0.80       276       874,781       7.6     $ 1.01       (141 )
  2.10 – 3.97
    116,374       1.2       2.35       (175 )     115,957       1.2       2.35       (174 )
  4.05 – 5.81
    450,339       4.9       4.81       (1,786 )     444,054       4.8       4.82       (1,765 )
  6.27 – 8.57
    426,800       2.9       7.11       (2,671 )     426,800       2.9       7.11       (2,671 )
                                                                 
      6,396,373       8.5     $ 1.53     $ (4,356 )     1,861,592       5.5     $ 3.40     $ (4,751 )
                                                                 
 
At June 30, 2011, 3,381,000 of the granted and outstanding employee stock option awards consist of awards that vest with the achievement of certain performance targets.
 
The following table provides a summary of the status of the Company’s granted and outstanding employee and director restricted stock awards for the fiscal years ended June 30:
 
                                                 
    2011     2010     2009  
          Weighted-
          Weighted-
          Weighted-
 
          Average
          Average
          Average
 
          Grant Date
          Grant Date
          Grant Date
 
    Shares     Fair Value     Shares     Fair Value     Shares     Fair Value  
 
Restricted shares outstanding at July 1
    73,751     $ 2.09       110,718     $ 2.86       555,574     $ 3.79  
Granted
    627,482       0.74       119,000       1.09       128,833       1.04  
Forfeited
    (3,351 )     2.63       (24,331 )     4.59       (412,785 )     3.47  
Vested
    (168,861 )     1.13       (131,636 )     1.37       (160,904 )     3.04  
                                                 
Restricted shares outstanding at June 30
    529,021     $ 0.79       73,751     $ 2.09       110,718     $ 2.86  
                                                 


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
14.   Stock-Based Compensation — (Continued)
 
Unamortized stock-based compensation expense for stock options and restricted stock awards issued and outstanding at June 30, 2011 will be recognized during the fiscal years ending June 30 as follows:
 
                         
          Restricted
       
    Stock
    Stock
       
    Options     Awards     Total  
 
2012
  $ 465     $ 385     $ 850  
2013
    450             450  
2014
    365             365  
2015
    149             149  
2016
    12             12  
                         
Total
  $ 1,441     $ 385     $ 1,826  
                         
Weighted-average vesting period (in years)
    3.4       1.0       3.3  
 
Employee Stock Purchase Plans
 
The ESPPs provide employees with an opportunity to purchase Common Stock through payroll deductions through semi-annual offerings in July and January of each fiscal year. Under the ESPPs, the Company’s employees may purchase, subject to certain restrictions, shares of Common Stock at the lesser of 85% of the fair value at either the beginning or the end of each six month offering period. During fiscal years 2011, 2010 and 2009, employees purchased 206,270, 293,179 and 337,876 shares of Common Stock, respectively, through the ESPPs. Of the 1,500,000 shares available for issuance under the ESPPs, 354,096 shares remained available for issuance as of June 30, 2011.
 
The ESPPs are considered compensatory under the FASB guidance and thus, a portion of the cost related to the July and January offerings under the ESPPs are included in the Company’s stock-based compensation expense for the fiscal years ended June 30, 2011, 2010 and 2009.
 
The fair value of the July and January offerings under the ESPPs were determined on the date of grant using the Black-Scholes option-pricing model. Expected volatility was determined based on the historical volatility from daily share price observations for the Company’s stock covering a period commensurate with the expected life of the rights under the ESPPs. The risk-free interest rate is based on the implied yield currently available at the time the rights under the ESPPs were granted on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the rights under the ESPPs when granted. The expected dividend yield is based on the Company’s historical practice of electing not to pay dividends to its stockholders.
 
The following weighted-average assumptions were used to value rights under the ESPPs for the July and January offerings for the fiscal years ended June 30:
 
                         
    2011   2010   2009
 
Risk-free interest rate
    0.2 %     0.3 %     1.6 %
Weighted-average expected life (in years)
    0.5       0.5       0.5  
Volatility factor
    63 %     108 %     80 %
Dividend yield
                 
Weighted-average fair value
  $ 0.33     $ 0.25     $ 0.50  


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009
 
14.   Stock-Based Compensation — (Continued)
 
U.K. employees may purchase the Company’s common stock pursuant to the SIP through a payroll deduction with no discount to the market price. Employees are entitled to receive three matching shares for every seventeen shares purchased under the SIP. The SIP has been deemed non-compensatory and, therefore, no stock-based compensation costs were recognized for fiscal 2011, 2010 or 2009.
 
15.   401(k) Plan
 
The Company established a 401(k) Plan effective January 1, 1995. Eligible employees may begin to participate in the 401(k) Plan the first of the month following their date of hire, but are not eligible to receive employer matching contributions, if any, until the first day of the calendar quarter following the one anniversary year of service during which they have worked at least 1,000 hours.
 
Participants may contribute from 1% to 60% of compensation up to federally established limitations. Employer matching contributions are discretionary, and were made in the form of Company stock through March 31, 2008. The Company suspended its matching contributions on January 1, 2009 and had not resumed them as of June 30, 2011.
 
Matching contribution expense incurred by the Company during the fiscal years ended June 30, 2011, 2010 and 2009 was $0, $0 and $563, respectively.
 
16.   Income Taxes
 
For the fiscal years ended June 30, the U.S. and foreign components of loss from operations before income taxes were as follows:
 
                         
    2011     2010     2009  
 
U.S. 
  $ (3,527 )   $ (153 )   $ (44,457 )
Foreign
    (4,772 )     (3,065 )     (15,025 )
                         
    $ (8,299 )   $ (3,218 )   $ (59,482 )
                         
 
For the fiscal years ended June 30, the provision (benefit) for income taxes from operations consisted of the following:
 
                         
    2011     2010     2009  
 
Current:
                       
Federal
  $ 1     $ (1,053 )   $ (1,375 )
State
    104       56       192  
Foreign
    451       439       42  
                         
    $ 556     $ (558 )   $ (1,141 )
Deferred:
                       
Federal
  $ (52 )   $ (73 )   $ 15,010  
State
    (12 )     (17 )     3,028  
Foreign
    (338 )     (404 )     (1,048 )
                         
    $ (402 )   $ (494 )   $ 16,990  
                         
    $ 154     $ (1,052 )   $ 15,849  
                         


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HARRIS INTERACTIVE INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fiscal Years Ended June 30, 2011, 2010 and 2009