10-K 1 d383536d10k.htm 10-K 10-K
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, 2012

or

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

 

COMMISSION FILE NUMBER: 000-27577

 

 

 

 

LOGO

HARRIS INTERACTIVE INC.

(Exact Name of Registrant as Specified in its Charter)

 

DELAWARE   16-1538028

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

60 Corporate Woods,

Rochester, New York

  14623
(Address of principal executive offices)   (zip code)

Registrant’s telephone number, including area code:

(585) 272-8400

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  ¨        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  ¨        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   ¨

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  þ        No  ¨

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    ¨

     Accelerated filer     ¨    Non-accelerated filer    ¨    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  ¨         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, 2011, was $28,435,481.

On September 17, 2012, 57,392,195 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 October 30, 2012, 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.

 

 

 


Table of Contents

HARRIS INTERACTIVE INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 2012

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      10   

Item 1B:

   Unresolved Staff Comments      16   

Item 2:

   Properties      16   

Item 3:

   Legal Proceedings      17   

Item 4:

   Mine Safety Disclosures      17   
Part II:   

Item 5:

   Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      18   

Item 6:

   Selected Financial Data      20   

Item 7:

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   

Item 7A:

   Quantitative and Qualitative Disclosures About Market Risk      38   

Item 8:

   Financial Statements and Supplementary Data      39   

Item 9:

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      79   

Item 9A:

   Controls and Procedures      79   

Item 9B:

   Other Information      80   
Part III:   

Item 10:

   Directors, Executive Officers and Corporate Governance      82   

Item 11:

   Executive Compensation      83   

Item 12:

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      83   

Item 13:

   Certain Relationships and Related Transactions, and Director Independence      83   

Item 14:

   Principal Accountant Fees and Services      83   
Part IV:   

Item 15:

   Exhibits and Financial Statement Schedules      83   

Signatures

     86   

 

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PART I

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995

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, restructuring and related charges, quarterly variations in financial results, the Company’s ability to maintain compliance with certain NASDAQ listing requirements, actions of competitors, the Company’s ability to develop and maintain products and services attractive to the market, and the Company’s ability to remain in compliance with the financial covenants in its credit agreement.

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 Rochester, New York. Our fiscal year ends June 30th.

Mergers, Acquisitions and Divestitures

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:

 

  Ÿ  

February 1996 — Louis Harris and Associates, Inc., headquartered in New York,

 

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  Ÿ  

February 2001 — the custom research division of Yankelovich Partners, Inc., headquartered in Norwalk, Connecticut,

 

  Ÿ  

August 2001 — Market Research Solutions Limited, a privately-owned U.K. company headquartered in Oxford, England,

 

  Ÿ  

September 2001 — M&A Create Limited, a privately-owned company headquartered in Tokyo, Japan; 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,

 

  Ÿ  

November 2001 — Total Research Corporation, a Delaware corporation headquartered in Princeton, New Jersey,

 

  Ÿ  

March 2004 — Novatris, S.A., a share corporation organized and existing under the laws of France,

 

  Ÿ  

September 2004 — Wirthlin Worldwide, Inc., a privately-held California corporation headquartered in Reston, Virginia,

 

  Ÿ  

April 2007 — MediaTransfer AG Netresearch & Consulting (“MediaTransfer”), a privately-held German stock corporation headquartered in Hamburg, Germany,

 

  Ÿ  

August 2007 — Decima Research Inc. (“Decima”), a corporation incorporated in Ontario, Canada, and

 

  Ÿ  

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”). Our operations in Asia ceased in September 2011.

Business Overview

Harris Interactive is a professional services firm that provides 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 2012, our telephone data collection was conducted through our telephone data collection centers in Canada and, prior to the sale of our U.K. telephone data collection center to a third-party in August 2011 and the closure of our telephone data collection centers in Hong Kong and Singapore in September 2011, the U.K., Hong Kong and Singapore. In fiscal 2012, we also used third party telephone data collection providers.

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:

 

  Ÿ  

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

 

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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.

 

  Ÿ  

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.

 

  Ÿ  

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:

 

  Ÿ  

Measure, sustain and improve customer loyalty,

 

  Ÿ  

Gather market and customer intelligence relative to the brand and category,

 

  Ÿ  

Detect emerging market trends and/or potential competitive threats,

 

  Ÿ  

Assess the impact of marketing on customer behaviors and attitudes, and

 

  Ÿ  

Identify opportunities for growth.

Service Bureau Research

Through our service bureau group, we provide our market research industry and other clients with mixed-mode data collection, panel development services, access to respondents through a sample-only offering, and syndicated and tracking research consultation.

Multi-Client Research

We offer a portfolio of multi-client offerings — specialized studies that are available immediately or, in some cases, within a very short time period. These studies span a variety of issues and industries, and the same studies are sold to multiple clients.

Omnibus Research

Our omnibus services cover a range of online, telephone and face-to-face solutions that are offered worldwide. These services allow our clients to obtain fast information at a lower cost than traditional custom market research studies.

 

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Research and Development

We have not incurred expenditures for the three fiscal years ended June 30, 2012 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.

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, 2012, 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, GfK AG, Ipsos SA, and companies within Kantar (owned by WPP Group plc), including TNS and Millward Brown.

We believe we have a number of competitive advantages, including:

 

  Ÿ  

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.

 

  Ÿ  

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.

 

  Ÿ  

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:

 

  Ÿ  

project results to large segments of the population, such as “all U.S. voters” or “all British adults”,

 

  Ÿ  

conduct a broad range of studies across a wide set of industries,

 

  Ÿ  

rapidly survey very large numbers of the general population, and

 

  Ÿ  

survey certain low-incidence, hard-to-find subjects.

 

  Ÿ  

Our Specialty Sub-Panels — we have developed numerous specialty sub-panels of hard-to-find respondents. 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.

 

  Ÿ  

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.

 

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Financial Information about Geographic Areas

We are comprised of operations in North America and Europe. Non-U.S. market research is comprised of operations in Canada, the United Kingdom, France and Germany. Our operations in Asia ceased as of September 30, 2011 and are classified as discontinued operations for all current and prior periods presented herein. There were no intercompany transactions that materially affected our financial statements, and all intercompany sales have been eliminated upon consolidation.

Our business model for offering 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 made by our chief operating decision-maker are made on a global basis. 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):

 

     2012     2011     2010  

Revenue from services

      

United States

   $ 87,190      $ 92,885      $ 96,942   

Canada

     22,551        23,160        20,653   

United Kingdom

     15,264        22,864        28,398   

France

     14,536        14,092        11,764   

Germany

     7,962        7,663        5,790   
  

 

 

   

 

 

   

 

 

 

Total revenue from services

   $ 147,503      $ 160,664      $ 163,547   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

      

United States

   $ (855   $ (2,298   $ 2,361   

Canada

     (333     (1,330     (2,277

United Kingdom

     (2,533     (4,371     (627

France

     264        1,475        765   

Germany

     651        490        154   
  

 

 

   

 

 

   

 

 

 

Total operating loss

   $ (2,806   $ (6,034   $ 376   
  

 

 

   

 

 

   

 

 

 

Long-lived assets

      

United States

   $ 909      $ 1,641      $ 2,964   

Canada

     276        431        1,093   

United Kingdom

     459        976        1,300   

France

     742        108        92   

Germany

     114        135        118   
  

 

 

   

 

 

   

 

 

 

Total long-lived assets

   $ 2,500      $ 3,291      $ 5,567   
  

 

 

   

 

 

   

 

 

 

Deferred tax assets (liabilities)

      

United States

   $      $      $   

Canada

     (1,458     (1,706     (1,709

United Kingdom

                     

France

     (51     (145     (196

Germany

     56        (38     (111
  

 

 

   

 

 

   

 

 

 

Total deferred tax assets (liabilities)

   $ (1,453   $ (1,889   $ (2,016
  

 

 

   

 

 

   

 

 

 

 

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During fiscal 2012, 2011 and 2010, 59.1%, 57.8% and 59.3%, respectively, of our total consolidated revenue was derived from our U.S. operations, and 40.9%, 42.2% and 40.7%, 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, 2012, we had a revenue backlog, also referred to as secured revenue, of approximately $42,502, as compared to a revenue backlog of approximately $44,711 at June 30, 2011. We estimate that substantially all of the backlog at June 30, 2012 will be recognized as revenue from services during the fiscal year ending June 30, 2013, based on our experience from prior years.

Employees

At June 30, 2012, we employed a total of 564 full-time individuals on a worldwide basis, 298 of whom were employed in the United States. In addition, we employed 120 part-time and hourly individuals on a worldwide basis for data gathering and processing activities, 8 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 24, 2012. 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

   63    President, Chief Executive Officer and Vice Chairman

Michael de Vere

   39    President and Chief Executive Officer, U.S. Business Groups

Marc H. Levin

   39    Chief Operating Officer, Chief Administrative Officer, General Counsel and Corporate Secretary

Todd Myers

   43    Chief Operating Officer, U.S. Business Groups

Eric W. Narowski

   43    Chief Financial Officer, Principal Accounting Officer and Global Controller

Al Angrisani is our President and Chief Executive Officer, and serves as Vice Chairman of our Board of Directors, positions he has held since February 2012. Mr. Angrisani served as our Interim Chief Executive Officer from June 2011 to February 2012. He 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 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.

 

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Michael de Vere is our President and Chief Executive Officer, U.S. Business Groups, positions he has held since June 2011 and March 2012, respectively. 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 Operating Officer, a position he has held since March 2012. He continues to serve as our Chief Administrative Officer, a position he has held since June 2011, and as our General Counsel and Corporate Secretary, positions he has held since April 2009. He held the additional title of Executive Vice President from May 2010 to February 2012, and the additional title of Senior Vice President 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, serving as Senior Vice President and General Counsel, North America from June 2007 to March 2009, Vice President and Senior Corporate Counsel, North America from May 2006 to May 2007, and Corporate Counsel, North America from April 2004 to April 2006. 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 Chief Operating Officer, U.S. Business Groups, a position he has held since March 2012. He served as our Interim Head of Technology, Operations and Panel, and Senior Vice President from June 2011 to March 2012. 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 Chief Financial Officer, a position he has held since March 2012. He continues to serve as our Principal Accounting Officer and Global Controller, positions he has held since February 2006 and October 2007, respectively. From November 2009 to October 2010 and again from June 2011 to March 2012, he also served as our interim Chief Financial Officer. He held the additional title of Senior Vice President from October 2007 to March 2012. 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.

 

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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.

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

 

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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 a significant portion 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 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.

Our outstanding debt obligations and ability to comply with related covenants could impact our financial condition or future operating results.

At June 30, 2012, we had $6.0 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.

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.

Privacy and data protection laws may restrict our activities and increase our costs.

Various statutes and rules regulate conduct in areas such as privacy and data protection which may affect our collection, use, storage, and transfer of personally identifiable information both abroad and in the United States. Compliance with these laws and regulations may require us to make certain investments or may dictate that we not offer certain types of products and services or only offer such services or products after making necessary modifications. Failure to comply with these laws and regulations may result in, among other things, civil and criminal liability, negative publicity, data being blocked from use, and liability under contractual warranties. In addition, there is an increasing public concern regarding data and consumer protection issues, and the number of jurisdictions with data protection laws has been increasing. There is also the possibility that the scope of existing privacy laws may be expanded. For example, several countries including the United States have regulations that restrict telemarketing to individuals who request to be included on a do-not-call list. Typically, these regulations target sales activity and do not apply to survey research. If the laws were extended to include survey research, our ability to recruit research participants could be adversely affected. These or future initiatives may adversely affect our ability to generate or assemble data or to develop or market current or future products or services, which could negatively impact our business.

 

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Our services involve the storage and transmission of proprietary information. If our security measures are breached and unauthorized access is obtained, our services may be perceived as not being secure and panelists and survey respondents may hold us liable for disclosure of personal data, and customers may hold us liable or reduce their use of our services.

We store and transmit large volumes of proprietary information and data that contains personally identifiable information about individuals. Security breaches could expose us to a risk of loss of this information, litigation and possible liability, and our reputation could be damaged. For example, hackers or individuals who attempt to breach our network security could, if successful, misappropriate proprietary information or cause interruptions in our services. If we experience any breaches of our network security or sabotage, we might be required to expend significant capital and resources to protect against or to alleviate problems. We may not be able to remedy any problems caused by hackers or saboteurs in a timely manner, or at all. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target and, as a result, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, the perception of the effectiveness of our security measures could be harmed and we could lose current and potential clients.

Any unauthorized disclosure or theft of private information we gather could harm our business.

Unauthorized disclosure of personally identifiable information regarding our panelists and survey respondents, whether through breach of our secure network by an unauthorized party, employee theft or misuse, or otherwise, could harm our business. If there were an inadvertent disclosure of personally identifiable information, or client confidential information, or if a third party were to gain unauthorized access to the personally identifiable or client confidential information we possess, our operations could be seriously disrupted and we could be subject to claims or litigation arising from damages suffered by panel members or pursuant to the agreements with our customers. In addition, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the unauthorized disclosure of personal information. Finally, any perceived or actual unauthorized disclosure of the information we collect could harm our reputation, substantially impair our ability to attract and retain panelists, and have an adverse impact on our business.

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 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.

 

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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, 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. There can be no assurance we can effectively limit these risks, which could materially adversely affect 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 to provide certain of our programming and data processing services, as well as telephone and online data collection. 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.

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.

 

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We may be subject to liability for publishing or distributing content over the Internet.

We may be subject to claims relating to content that is published on or downloaded from our websites. We also 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 investors’ perceptions of our longer term prospects, also may cause fluctuations in the price of our common stock.

To maintain our listing on The NASDAQ Global Select Market we must satisfy certain minimum financial and other continued listing standards. On June 13, 2011, we received a letter from the Listing Qualifications Department (the “Staff”) of The NASDAQ Stock Market LLC (“NASDAQ”) notifying us that we were not in compliance with the $1.00 per share minimum bid price requirement for continued inclusion on The NASDAQ Global Select Market set forth in NASDAQ Listing Rule 5450(a)(1) (the “Rule”), as a result of the bid price of our common stock having closed below $1.00 for the thirty consecutive business days prior to the date of the letter.

 

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The Staff’s letter advised us that, in accordance with NASDAQ Listing Rule 5810(c)(3)(A), we had 180 calendar days, or until December 12, 2011, to regain compliance. The letter further advised that such compliance could be achieved if, at any time before December 12, 2011, the bid price of our common stock closed at $1.00 or more per share for a minimum of ten consecutive business days.

We did not regain compliance with the Rule on or prior to December 12, 2011 and, accordingly, on December 13, 2011, we received a second letter from the Staff stating that our common stock would be subject to delisting from The NASDAQ Global Select Market as a result of the deficiency unless we requested a hearing before a NASDAQ Listing Qualifications Panel (the “Panel”) on or before December 20, 2011.

Accordingly, we requested and received a hearing before the Panel. On February 21, 2012, we were notified by the Panel that our request for an extension of time to satisfy the $1.00 bid price requirement for continued listing on The NASDAQ Global Select Market was granted. Pursuant to the terms of the Panel’s decision, we were required to evidence a closing bid price of at least $1.00 per share for a minimum of ten consecutive business days on or before June 11, 2012. On March 23, 2012, we received a notice from NASDAQ indicating that we had met the requirements of the Panel’s decision, and were in compliance with all other applicable requirements for listing on NASDAQ. Accordingly, the Panel determined to continue the listing of our securities on The NASDAQ Global Select Market, and closed the matter.

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. If our common stock were to trade on the over-the-counter market, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our common stock is de-listed, broker-dealers have certain regulatory burdens that may discourage them from affecting transactions in our common stock, further limiting the liquidity of 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.

Our stock price may be volatile, and investors may not be able to resell shares of our common stock at or above the price they 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

 

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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 60 Corporate Woods, Rochester, New York, under an operating lease that expires in July 2015. We also lease offices in the following locations:

 

  Ÿ  

New York, New York;

 

  Ÿ  

Princeton, New Jersey;

 

  Ÿ  

Norwalk, Connecticut;

 

  Ÿ  

Reston, Virginia;

 

  Ÿ  

Minneapolis, Minnesota;

 

  Ÿ  

Ann Arbor, Michigan;

 

  Ÿ  

Portland, Oregon;

 

  Ÿ  

Brentford and Hazel Grove, United Kingdom;

 

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  Ÿ  

Ottawa and Toronto, Ontario;

 

  Ÿ  

Montreal, Quebec;

 

  Ÿ  

Paris, France; and

 

  Ÿ  

Hamburg, Germany;

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 are actively working to sublease excess office space in Princeton, New Jersey and Norwalk, Connecticut and do not have active operations at either office location. 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):

 

Address

 

Location

 

Termination Date

  Remaining
Lease Obligation
June 30, 2012
39 Rue Crozatier   Paris, France   September 2014   $2,545
101 Merritt 7 Corporate Park   Norwalk, Connecticut   May 2015   1,051
60 Corporate Woods   Rochester, New York   July 2015   4,207
160 Elgin   Ottawa, Ontario   February 2016   1,912
1080 Beaver Hall Hill   Montreal, Quebec   April 2016      809
5 Independence Way   Princeton, New Jersey   December 2018   4,193
Great West Road   Brentford, United Kingdom   June 2020   1,123

 

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.

 

Item 4. Mine Safety Disclosures

None.

 

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PART II

 

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 NASDAQ Global Select Market under the symbol “HPOL”. The following table shows, the high and low sales prices per share of our common stock on The NASDAQ Global Select Market for fiscal 2012 and 2011.

 

     Fiscal 2012      Fiscal 2011  
     High      Low      High      Low  

Quarter Ended:

           

June 30

   $ 1.35       $ 0.97       $ 1.18       $ 0.70   

March 31

     1.35         0.54         1.44         0.82   

December 31

     0.84         0.27         1.31         0.80   

September 30

     0.86         0.48         1.10         0.70   

Holders

At September 10, 2012, our common stock was held by approximately 4,300 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

The following table shows the monthly activity for the three months ended June 30, 2012 under the share repurchase program (the “Repurchase Program”) authorized by the Board on March 6, 2012:

 

     Total Number
of Shares
Purchased
     Average Price
Paid

Per Share
     Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Program
     Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Program
 

April 1, 2012 through April 30, 2012

           $               $   

May 1, 2012 through May 31, 2012

     16,900         1.10         16,900         2,962   

June 1, 2012 through June 30, 2012

     29,907         1.08         29,907         2,930   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     46,807       $ 1.08         46,807       $ 2,930   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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, 2007 to June 30, 2012.

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

 

LOGO

 

      6/07    6/08    6/09    6/10    6/11    6/12

Harris Interactive Inc.

   100.00    37.57    7.66    19.81    15.89    21.12

NASDAQ Composite

   100.00    84.54    73.03    82.88    110.33    115.30

S&P Smallcap 600

   100.00    85.33    63.73    78.79    107.97    109.51

Peer Group

   100.00    66.63    47.64    68.23    94.48    94.26

* $100 invested on 6/30/07 in stock or index, including reinvestment of dividends. Fiscal year ending June 30. Copyright© 2012 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 we specifically request 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 we specifically incorporate 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) and Marketshare (August 2007). In addition, information reported below has been reclassified to reflect our Asian operations as discontinued operations for all periods presented.

 

    For the Years Ended June 30,  
    2012     2011     2010     2009     2008  
    (In thousands, except share and per share amounts)  

Statement of Operations Data:

         

Revenue from services

  $ 147,503      $ 160,664      $ 163,547      $ 179,750      $ 236,203   

Operating expenses:

         

Cost of services

    91,902        105,976        103,987        112,354        118,392   

Selling, general and administrative

    46,270        49,701        52,430        63,907        102,711   

Depreciation and amortization

    4,607        5,921        6,576        7,445        8,322   

Restructuring and other charges

    7,530        5,100        178        12,010        3,847   

Goodwill impairment charge

                         39,511        84,920   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    150,309        166,698        163,171        235,227        318,192   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (2,806     (6,034     376        (55,477     (81,989

Interest expense, net

    689        1,171        1,827        2,944        794   

Loss on extinguishment of debt

                  724                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

    (3,495     (7,205     (2,175     (58,421     (82,783
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes

    234        492        (1,052     15,841        (511
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (3,729     (7,697     (1,123     (74,262     (82,272

Loss from discontinued operations, net of tax

    (1,854     (756     (1,043     (1,069     (2,346
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to holders of common stock

  $ (5,583   $ (8,453   $ (2,166   $ (75,331   $ (84,618
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share:

         

Continuing operations

  $ (0.07   $ (0.14   $ (0.02   $ (1.39   $ (1.56

Discontinued operations

    (0.03     (0.01     (0.02     (0.02     (0.04
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share

  $ (0.10   $ (0.15   $ (0.04   $ (1.41   $ (1.60
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding — basic and diluted

    55,383,780        54,566,590        54,089,971        53,547,670        52,861,354   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    For the Years Ended June 30,  
    2012     2011     2010     2009     2008  
    (In thousands, except share and per share amounts)  

Balance Sheet Data:

         

Cash and cash equivalents

  $        11,456      $        14,084      $        13,842      $        16,635      $        32,756   

Marketable securities

  $      $      $      $ 1,010      $   

Working capital

  $ (1,323   $ 3,529      $ 8,128      $ 11,580      $ 33,514   

Total assets

  $ 57,386      $ 71,848      $ 73,130      $ 84,527      $ 187,049   

Outstanding debt

  $ 5,993      $ 10,787      $ 15,581      $ 22,506      $ 29,431   

Total stockholders’ equity

  $ 6,085      $ 11,472      $ 16,034      $ 18,123      $ 98,636   

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

For our fiscal year ended June 30, 2012:

 

  Ÿ  

Revenue from services was $147,503, down 8.2% from fiscal 2011. Excluding foreign exchange rate differences, revenue was down 8.1% from fiscal 2011. The decrease was driven by declines in the U.S., U.K. and Canada, as discussed further under “Results of Operations – Fiscal Year Ended June 30, 2012 Versus Fiscal Year Ended June 30, 2011”.

 

  Ÿ  

Bookings were down 8.1% compared with the same prior year period, excluding foreign exchange rate differences. The decrease was driven by decreased bookings in the U.S., U.K. and Canada, as discussed further under “Significant Factors Affecting Company Performance – Key Operating Metrics”.

 

  Ÿ  

Our operating loss was $2,806, compared with $6,034 for the same prior year period. Our operating loss for fiscal 2012 included $7,530 in restructuring and other charges, compared with $5,100 for fiscal 2011. These restructuring and other charges were deemed necessary to right-size our business.

 

  Ÿ  

We had $11,456 in cash at June 30, 2012, down from $14,084 at June 30, 2011. While cash decreased, it is important to note that our cash funded our debt principal payments and payments related to restructuring and other charges during fiscal 2012.

 

  Ÿ  

Our outstanding debt at June 30, 2012 was $5,993, down from $10,787 at June 30, 2011 as a result of quarterly principal payments made throughout fiscal 2012.

Significant Events

Amendment Agreement and Waiver

At June 30, 2011, we were not in compliance with the leverage and interest coverage ratio covenants contained in our credit agreement largely due to the magnitude of restructuring and other charges incurred during the fiscal year ended June 30, 2011. As a result, on September 27, 2011, we entered into an amendment agreement and waiver to our credit agreement. Pursuant to the amendment agreement and waiver, these covenant violations were permanently waived. The amendment agreement and waiver includes both the addition and modification of certain definitions, terms, and financial covenants in our credit agreement. Obligations under our credit agreement continue to be secured by our domestic assets and 66% of the equity interests in first tier foreign subsidiaries. In accordance with ASC Topic 470, we evaluated the change in cash flows, determined that there was not a greater than 10% change, and concluded that the amendment agreement and waiver did not result in an extinguishment of debt.

 

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The credit facilities under our credit agreement consist of our 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. Pursuant to the amendment agreement and waiver, until we achieved 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 amendment agreement and waiver did not change the principal amount outstanding under, or the payment terms of, the term loan. Pursuant to the amendment agreement and waiver, the manner in which outstanding amounts accrue interest remained unchanged, except that the Eurodollar Applicable Rate (Adjusted LIBO Applicable Rate) and ABR Applicable Rate were fixed at 5.50% and 4.50%, respectively, through March 31, 2012.

The amendment agreement and waiver impacted certain financial covenants, as follows:

 

  Ÿ  

The consolidated interest coverage ratio and consolidated total leverage ratio covenants contained in our credit agreement were suspended for the fiscal quarters ended September 30, 2011, December 31, 2011 and March 31, 2012. During each of those fiscal quarters, we were subject to trailing twelve month adjusted EBITDA covenants of $4,548, $3,817 and $4,424, respectively.

 

  Ÿ  

For fiscal quarters commencing on or after April 1, 2012, we are subject to the consolidated interest coverage ratio and consolidated total leverage ratio covenants contained in our credit agreement.

 

  Ÿ  

Cash paid to fund restructuring and other charges incurred on or before September 30, 2011 was limited to amounts agreed upon in the amendment agreement and waiver.

 

  Ÿ  

We were required to maintain minimum global cash of $7,000 and U.S. cash of $1,000 through June 30, 2012, and now are again subject to only a minimum global cash requirement of $5,000.

At June 30, 2012, we were in compliance with all of the covenants under our credit agreement, as amended by the amendment agreement and waiver agreement.

Restructuring and Other Charges

Restructuring

Fiscal 2012

During fiscal 2012, we continued to take actions designed to re-align the cost structure of our U.S. and U.K. operations.

 

  Ÿ  

We reduced headcount at our U.S. facilities throughout fiscal 2012, as follows:

 

  Ÿ  

During the first quarter of fiscal 2012, we reduced headcount by a total of 23 full-time employees and incurred $389 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in July and August 2011 and all actions were completed at those respective times. Related cash payments were completed by February 2012.

 

  Ÿ  

During the second quarter of fiscal 2012, we reduced headcount by a total of 10 full-time employees and incurred $260 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 2011 and all actions were completed at those respective times. Related cash payments were completed by March 2012.

 

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  Ÿ  

During the fourth quarter of fiscal 2012, we reduced headcount by a total of 20 full-time employees and incurred $644 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in June 2012 and all actions were completed at that time. Related cash payments will be completed by December 2012.

 

  Ÿ  

During the first quarter of fiscal 2012, we reduced headcount at our U.K. facilities by a total of 56 full-time employees and incurred $1,008 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in July 2011 and all actions were completed at that time. Related cash payments were completed by January 2012.

 

  Ÿ  

Throughout fiscal 2012, we reduced our occupancy of leased office space. Specifically, we reduced our occupancy of leased office space at our Rochester, New York, Princeton, New Jersey, Reston, Virginia, Brentford, United Kingdom, and Ottawa, Canada facilities. We incurred $5,705 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 by June 2012, and all cash payments will be completed by June 2015.

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.

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 2015.

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:

 

     2012      2011      2010  

Termination benefits

   $ 2,301       $ 1,165       $   

Lease commitments

     5,705         1,942           
  

 

 

    

 

 

    

 

 

 
   $ 8,006       $ 3,107       $   
  

 

 

    

 

 

    

 

 

 

 

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The following table summarizes activity during fiscal 2012 with respect to our remaining reserves for the restructuring activities described above and those undertaken in prior fiscal years:

 

     Balance,
July 1,
2011
     Costs
Incurred
     Changes in
Estimate
    Cash
Payments
    Non-Cash
Settlements
     Balance,
June 30,
2012
 

Termination benefits

   $ 422       $ 2,301       $ (7   $ (2,418   $       $ 298   

Lease commitments

     2,212         5,705         (41     (1,598             6,278   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Remaining reserve

   $ 2,634       $ 8,006       $ (48   $ (4,016   $       $ 6,576   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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, 2012, 2011 and 2010 included the following:

 

  Ÿ  

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, as modified, cash payments to Ms. Till are due to be completed in December 2012, while all cash payments to Messrs. Bhalla and Micali were completed during fiscal 2012.

 

  Ÿ  

Other — For fiscal 2011, “Other” included costs associated with reorganizing the operational structure of our Canadian operations. In October 2011, our obligation to fund those costs lapsed and accordingly, a credit of $331 was recognized at that time. For fiscal 2010, “Other” included costs incurred to close our telephone-based data collection center in Brentford, United Kingdom.

 

     2012     2011      2010  

Post-employment payments to former senior executives

   $ (97   $ 1,312       $   

Other

     (331     681         178   
  

 

 

   

 

 

    

 

 

 
   $ (428   $ 1,993       $ 178   
  

 

 

   

 

 

    

 

 

 

Discontinued Operations

In July 2011, our Board of Directors approved the closure of our operations in Hong Kong, Singapore and Shanghai (collectively, “Harris Asia”). This decision was based on the Board’s determination that Harris Asia’s operations did not adequately support our strategic objectives. While the operations of Harris Asia ceased as of September 30, 2011, significant future cash flows attributable to those operations as a result of collecting outstanding accounts receivable and settling accounts payable and accrued expenses at December 31, 2011 and September 30, 2011 had not yet been eliminated. As such, we determined that Harris Asia’s operations did not qualify for treatment as discontinued operations for the fiscal quarters ended September 30, 2011 and December 31, 2011.

In connection with our closure of Harris Asia, the following charges were initially recognized in the “Restructuring and other charges” line shown on our unaudited consolidated statements of operations for the fiscal quarters ended September 30, 2011 and December 31, 2011:

 

Writeoff of intangible assets

   $ 489   

Termination benefits to former employees

     390   

Payments to terminate office and equipment leases

     231   

Professional fees

     180   

Writeoff of fixed assets

     149   

Other

     (23
  

 

 

 
   $ 1,416   
  

 

 

 

 

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The foregoing charges were reclassified to discontinued operations for the fiscal quarter ended March 31, 2012, since all significant future cash flows attributable to Harris Asia had been eliminated at that time.

The revenues and losses attributable to Harris Asia and reported in discontinued operations were as follows for the fiscal years ended June 30:

 

     2012     2011     2010  

Revenues

   $ 493      $ 4,600      $ 4,868   

Loss from discontinued operations

     (1,854     (756     (1,043

The assets and liabilities of the discontinued operations were as follows:

 

     At
June 30,

2012
     At
June 30,
2011
 

Cash and cash equivalents

   $       $ 140   

Accounts receivable, net

             1,433   

Prepaid expenses and other current assets

             32   

Property, plant and equipment, net

             156   

Other intangibles, net

             541   

Other assets

             59   
  

 

 

    

 

 

 

Assets from discontinued operations

   $       $ 2,361   
  

 

 

    

 

 

 

Accounts payable

   $       $ 213   

Accrued expenses

     181         325   

Deferred revenue

             475   
  

 

 

    

 

 

 

Liabilities from discontinued operations

   $ 181       $ 1,013   
  

 

 

    

 

 

 

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 2012 include:

  Ÿ  

Revenue recognition;

 

  Ÿ  

Impairment of other intangible assets;

 

  Ÿ  

Impairment of long-lived assets;

 

  Ÿ  

Income taxes;

 

  Ÿ  

Stock-based compensation;

 

  Ÿ  

HIpoints loyalty program; and

 

  Ÿ  

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

 

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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:

 

  Ÿ  

Significant under-performance relative to historical or projected future operating results;

 

  Ÿ  

Significant changes in the manner of our use of acquired assets or the strategy for our overall business;

 

  Ÿ  

Significant negative industry or economic trends;

 

  Ÿ  

Significant decline in our stock price for a sustained period; and

 

  Ÿ  

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.

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.

 

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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:

 

  Ÿ  

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.

 

  Ÿ  

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.

 

  Ÿ  

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 temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases.

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 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

 

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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:

 

  Ÿ  

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.

 

  Ÿ  

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.

 

  Ÿ  

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.

 

  Ÿ  

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 options 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, 2012, 2011 and 2010, respectively, are set forth in Note 14, “Stock-Based Compensation”, to our consolidated financial statements included 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 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 twelve months of account inactivity, if a panelist cancels his or her registration or opts out of the program, or if the e-mail address used by a panelist for the program is no longer valid. 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.

 

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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:

 

  Ÿ  

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.

 

  Ÿ  

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.

 

  Ÿ  

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:

 

  Ÿ  

Project Personnel — Project personnel have four distinct roles: project management, survey design, data collection, and data analysis. We maintain project personnel in North America and Europe. 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.

 

  Ÿ  

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 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.

 

  Ÿ  

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.

 

  Ÿ  

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.

 

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Selling, General and Administrative

Selling, general and administrative expense includes the following:

 

  Ÿ  

payroll and related costs, including commissions, for sales and marketing professionals;

 

  Ÿ  

payroll and related costs for staff in the areas of finance, human resources, information technology, legal, and executive management; and

 

  Ÿ  

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 (benefit) 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.

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:

 

     2012     %     2011     %     2010     %  

Revenue from services

   $ 147,503        100.0   $ 160,664        100.0   $ 163,547        100.0

Operating expenses:

            

Cost of services

     91,902        62.3        105,976        66.0        103,987        63.6   

Selling, general and administrative

     46,270        31.4        49,701        30.9        52,430        32.1   

Depreciation and amortization

     4,607        3.1        5,921        3.7        6,576        4.0   

Restructuring and other charges

     7,530        5.1        5,100        3.2        178        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (2,806     (1.9     (6,034     (3.8     376        0.2   

Interest expense, net

     689        0.5        1,171        0.7        1,827        1.1   

Loss on extinguishment of debt

                                 724        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before taxes

     (3,495     (2.4     (7,205     (4.5     (2,175     (1.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes

     234        0.2        492        0.3        (1,052     (0.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (3,729     (2.5     (7,697     (4.8     (1,123     (0.7

Loss from discontinued operations, net of tax

     (1,854     (1.3     (756     (0.5     (1,043     (0.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,583     (3.8   $ (8,453     (5.3   $ (2,166     (1.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Fiscal Year Ended June 30, 2012 Versus Fiscal Year Ended June 30, 2011

Revenue from services.    Revenue from services decreased by $13,161, or 8.2%, to $147,503 for fiscal 2012 compared with fiscal 2011. As more fully described below, revenue from services was impacted by several factors. Excluding foreign currency exchange rate differences, revenue from services in fiscal 2012 was down 8.1% compared with fiscal 2011.

North American revenue decreased by $6,304 to $109,741 for fiscal 2012 compared with fiscal 2011, a decrease of 5.4%. By country, North American revenue for fiscal 2012 was comprised of:

 

  Ÿ  

Revenue from U.S. operations of $87,190, down 6.1% compared with $92,885 for fiscal 2011. The decrease was primarily due to the revenue impact from bookings declines in our U.S. operations during fiscal 2012.

 

  Ÿ  

Revenue from Canadian operations of $22,551, down 2.6% compared with $23,160 for fiscal 2011. In local currency (Canadian Dollar), Canadian revenue decreased by 2.6% compared with fiscal 2011. The decrease was due primarily to the loss of a large project in the second quarter of fiscal 2012 and declines in bookings for our Canadian service bureau business during fiscal 2012.

European revenue decreased by $6,857 to $37,762 for fiscal 2012 compared with fiscal 2011, a decrease of 15.4%. By country, European revenue for fiscal 2012 was comprised of:

 

  Ÿ  

Revenue from U.K. operations of $15,264, down 33.2% compared with $22,864 for fiscal 2011. In local currency (British Pound), U.K. revenue decreased by 33.5% compared with fiscal 2011. The decrease was primarily due to the expected impact of our U.K. restructuring actions discussed above under “Restructuring and Other Charges”, which were designed to scale back our U.K. business to focus on core markets and key solutions areas.

 

  Ÿ  

Revenue from French operations of $14,536, up 3.2% compared with $14,092 for fiscal 2011. In local currency (Euro), French revenue increased by 5.5% compared with fiscal 2011. The increase was primarily due to the French management team’s focus on and success in selling to new and existing clients across several industry sectors during the first half of fiscal 2012.

 

  Ÿ  

Revenue from German operations of $7,962, up 3.9% compared with $7,663 for fiscal 2011. In local currency (Euro), German revenue increased by 2.5% compared with fiscal 2011. The increase was primarily due to winning and delivering certain projects during the second half of fiscal 2012 that had been deferred as a result of delays in spending by certain of our German clients during the first half of the fiscal year.

Cost of services.    Cost of services was $91,902 or 62.3% of total revenue for fiscal 2012, compared with $105,976 or 66.0% of total revenue for fiscal 2011. Cost of services for fiscal 2012 was principally impacted by direct labor savings and operational efficiencies derived from the restructuring actions discussed above under “Restructuring and Other Charges”.

Selling, general and administrative.    Selling, general and administrative expense for fiscal 2012 was $46,270 or 31.4% of total revenue, compared with $49,701 or 30.9% of total revenue for fiscal 2011. Selling, general and administrative expense was principally impacted by the following:

 

  Ÿ  

$1,967 decrease in payroll-related expense as a result of the headcount reductions during fiscal 2012, as described above under “Restructuring and Other Charges”; and

 

  Ÿ  

$1,344 decrease in rent expense as a result of reducing our facilities footprint during fiscal 2011 and 2012, as described above under “Restructuring and Other Charges”.

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.

 

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Depreciation and amortization.    Depreciation and amortization was $4,607 or 3.1% of total revenue for fiscal 2012, compared with $5,921 or 3.7% of total revenue for fiscal 2011. The decrease in depreciation and amortization expense for fiscal 2012 when compared with fiscal 2011 was the result of fixed and intangible assets that became fully depreciated or amortized during fiscal 2012 combined with capital spending that was lower than historical levels 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 2012 and 2011.

Interest expense, net.    Net interest expense was $689 or less than 1% of total revenue for fiscal 2012, compared with $1,171 or less than 1% of total revenue for fiscal 2011. The decrease in net interest expense for fiscal 2012 as compared with fiscal 2011 reflects the impact of the decline in our outstanding debt as we continue to make required principal payments.

Income taxes.    We recorded an income tax provision of $234 for fiscal 2012, compared with an income tax provision of $492 for fiscal 2011. For both fiscal 2011 and fiscal 2012, our tax provisions were comprised mainly of tax expense related to income in certain of our foreign jurisdictions.

Fiscal Year Ended June 30, 2011 Versus Fiscal Year Ended June 30, 2010

Revenue from services.    Revenue from services decreased by $2,883, or 1.8%, to $160,664 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:

 

  Ÿ  

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:

 

  Ÿ  

9.8% in our Healthcare sector, driven by the revenue impact of bookings decreases experienced during the first nine months of fiscal 2011;

 

  Ÿ  

10.7% in our Financial Services sector, driven mainly by the loss of a large tracking study;

 

  Ÿ  

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

 

  Ÿ  

6.4% in our Technology, Media and Telecom sector, driven mainly by the loss of a large tracking study.

 

  Ÿ  

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.

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:

 

  Ÿ  

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.

 

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  Ÿ  

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.

 

  Ÿ  

Revenue from German operations of $7,663, up 32.4% compared with $5,790 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.

Cost of services.    Cost of services was $105,976 or 66.0% of total revenue for fiscal 2011, compared with $103,987 or 63.6% 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 $49,701 or 30.9% of total revenue, compared with $52,430 or 32.1% of total revenue for fiscal 2010. Selling, general and administrative expense was principally impacted by the following:

 

  Ÿ  

a $607 decrease in facilities-related expense, driven primarily by space reductions taken during fiscal 2010;

 

  Ÿ  

a $382 decrease in travel expense, driven primarily by our continued focus on controlling these costs;

 

  Ÿ  

a $255 decrease in payroll-related expenses, driven primarily by headcount reductions made throughout fiscal 2011; and

 

  Ÿ  

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 $5,921 or 3.7% of total revenue for fiscal 2011, compared with $6,576 or 4.0% of total revenue for fiscal 2010. The decrease in depreciation and amortization expense for fiscal 2011 when compared with fiscal 2010 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. We did not incur any restructuring and other charges during 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 credit agreement is included in Note 11, “Borrowings”, to our consolidated financial statements included in this Annual Report on Form 10-K.

Interest expense, net.    Net interest expense was $1,171 or less than 1% of total revenue for fiscal 2011, compared with $1,827 or 1.1% of total revenue for fiscal 2010. The decrease in net 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.

 

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Income taxes.    We recorded an income tax provision of $492 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 our U.K. operations due to the overall financial impact of revenue declines in that business.

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, 2011 and 2012, were as follows (U.S. Dollar amounts in millions):

 

     Q1
FY2011
     Q2
FY2011
     Q3
FY2011
     Q4
FY2011
     Total
FY2011
     Q1
FY2012
     Q2
FY2012
     Q3
FY2012
     Q4
FY2012
     Total
FY2012
 

Bookings

   $ 34.5       $ 54.4       $ 39.0       $ 34.0       $ 161.9       $ 32.1       $ 45.2       $ 39.5       $ 28.5       $ 145.3   

Secured revenue

   $ 41.9       $ 52.9       $ 54.9       $ 44.7         N/A       $ 39.0       $ 45.1       $ 50.5       $ 42.5         N/A   

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 fiscal year ended June 30, 2012 were $145.3 million, compared with $161.9 million for the fiscal year ended June 30, 2011. Excluding foreign exchange rate differences, bookings were down 8.1% over the same prior year period. Bookings in local currency for the fiscal year ended June 30, 2012 compared with the fiscal year ended June 30, 2011 were principally impacted by the following:

 

  Ÿ  

U.S. bookings decreased by 5.2%, impacted significantly by our decision not to sell work that is not expected to yield sufficient profit margins.

 

  Ÿ  

Canadian bookings decreased by 14.2%, due primarily to the loss of a large project in the second quarter of fiscal 2012 and declines in bookings for our Canadian service bureau business during fiscal 2012.

 

  Ÿ  

U.K bookings decreased by 24.7%, due primarily to the expected impact of our restructuring actions in the first quarter of fiscal 2012 to scale back the U.K. business to focus on core markets and key solution areas.

 

  Ÿ  

German bookings decreased by 14.7%, due primarily to the loss of a large research project earlier in fiscal 2012.

 

  Ÿ  

French bookings increased by 2.5%, a modest increase over fiscal 2011.

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

 

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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 also is 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 at June 30, 2012 was $42.5 million, compared with $44.7 million at June 30, 2011. Excluding foreign currency exchange rate differences, secured revenue was down 4.9% over the same prior year period. The decrease was due primarily to the impact of bookings declines throughout fiscal 2012 when compared with fiscal 2011.

Liquidity and Capital Resources

Cash and Cash Equivalents

The following table sets forth net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities, for the fiscal years ended June 30:

 

     2012     2011     2010  

Net cash provided by operating activities

   $ 3,924      $ 3,983      $ 6,461   

Net cash used in investing activities

     (1,416     (810     (631

Net cash used in financing activities

     (4,816     (4,555     (7,031

Net cash provided by operating activities.    Net cash provided by operating activities was $3,924 for fiscal 2012, essentially flat compared with $3,983 for fiscal 2011.

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 used in investing activities.    Net cash used in investing activities was $1,416 for fiscal 2012, compared with $810 for fiscal 2011. Investing activities during both fiscal 2011 and 2012 consisted solely of capital expenditures.

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 financing activities.    Net cash used in financing activities was $4,816 for fiscal 2012, compared with $4,555 for fiscal 2011. Cash used during both fiscal 2012 and 2011 was primarily for required principal payments on our outstanding debt and related amendment financing costs, along with repurchases of common stock through the Repurchase Program, offset by cash received from the purchase of shares by employees through our Employee Stock Purchase Plan and the exercise of employee stock options.

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 principal payments on our outstanding debt, partially offset by cash received from the purchase of shares by employees through

 

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our Employee Stock Purchase Plan and the exercise of employee 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.

Working Capital

At June 30, 2012, we had cash and cash equivalents of $11,456 compared with $14,084 at June 30, 2011. Available sources of cash to support known or reasonably likely cash requirements over the next 12 months include cash and cash equivalents 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 profitable 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 our 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 panels, 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 $1,000 and $1,500 during the fiscal year ending June 30, 2013.

Credit Facilities

The required principal repayments under our credit agreement for each of the two 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, 2012, we had no outstanding borrowings under our revolving line of credit and $345 of outstanding letters of credit. The outstanding letters of credit reduce the remaining undrawn portion of the revolving line of credit that is available for future borrowings.

At June 30, 2011, we were not in compliance with certain financial covenants under our 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 “Significant Events – Amendment Agreement and Waiver” and in Note 11, “Borrowings”, to our consolidated financial statements included in this Annual Report on Form 10-K.

At June 30, 2012, we were in compliance with all of the covenants under our credit agreement, as amended by the amendment agreement and waiver.

Interest Rate Swap

The principal terms of 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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Share Repurchase Program

Under the Repurchase Program, we repurchased 65,107 shares of our common stock at an average price per share of $1.08 for an aggregate purchase price of $70 during the fiscal year ended June 30, 2012. All shares repurchased were subsequently retired.

The Repurchase Program calls for up to $3,000 of share repurchases to be made at management’s discretion in the open market or through privately negotiated transactions from time to time through March 5, 2014 in compliance with applicable laws, rules, and regulations, subject to cash requirements for other purposes, and other relevant factors, such as trading price, trading volume, general market and business conditions, our performance, and our compliance with the covenants under our credit agreement.

At June 30, 2012, the Repurchase Program had $2,930 in remaining capacity.

Off-Balance Sheet Risk Disclosure

At June 30, 2012 and 2011, 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, 2012 are as follows:

 

     Payments Due by Period  
     Total      Less than
1 Year
     1-3
Years
     3-5
Years
     More than
5 Years
 

Long-term debt obligations

   $ 5,993       $ 4,794       $ 1,199       $       $   

Interest obligations on long-term debt(1)

     328         328                           

Operating lease obligations

     18,012         4,924         9,565         2,501         1,022   

Other long-term liabilities(2)

     107                 107                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,440       $ 10,046       $ 10,871       $ 2,501       $ 1,022   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1) Interest obligations shown above were derived using an interest rate of 7.82%. This rate is a combination of the 4.32% that is fixed by our interest rate swap, and the 3.50% 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 included 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 15, “Income Taxes”, to the consolidated financial statements included in this Annual Report on Form 10-K.

Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted

See Note 3, “Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted”, 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, 2012, for the fiscal year then ended, as well as the expected impact on our consolidated financial statements for future periods.

 

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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 held by us. We do not believe that our holdings have a material liquidity risk under current market conditions.

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 operations in North America and Europe. 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 (loss) 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, 2012. 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

 

Report of Independent Registered Public Accounting Firm

     40   

Consolidated Balance Sheets at June 30, 2012 and 2011

     41   

Consolidated Statements of Operations for the fiscal years ended June 30, 2012, 2011 and 2010

     42   

Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2012, 2011 and 2010

     43   

Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended June  30, 2012, 2011 and 2010

     44   

Notes to Consolidated Financial Statements (including unaudited quarterly results of operations)

     45   

Index to Financial Statement Schedule

     78   

Schedule II — Valuation and Qualifying Accounts

     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, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2012 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 25, 2012

 

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HARRIS INTERACTIVE INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

     June 30,
2012
    June 30,
2011
 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 11,456      $ 14,084   

Accounts receivable, less allowances of $419 and $582, respectively

     19,940        25,046   

Unbilled receivables

     7,513        7,580   

Prepaid expenses and other current assets

     3,859        3,588   

Deferred tax assets

     243        306   

Assets from discontinued operations

            2,361   
  

 

 

   

 

 

 

Total current assets

     43,011        52,965   

Property, plant and equipment, net

     2,500        3,291   

Other intangibles, net

     10,795        14,041   

Other assets

     1,080        1,551   
  

 

 

   

 

 

 

Total assets

   $ 57,386      $ 71,848   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable

   $ 7,628      $ 9,308   

Accrued expenses

     21,643        20,924   

Current portion of outstanding debt

     4,794        4,794   

Deferred revenue

     10,088        13,397   

Liabilities from discontinued operations

     181        1,013   
  

 

 

   

 

 

 

Total current liabilities

     44,334        49,436   

Long-term debt

     1,199        5,993   

Deferred tax liabilities

     1,696        2,195   

Other long-term liabilities

     4,072        2,752   

Commitments and contingencies (Note 18)

    

Stockholders’ equity:

    

Preferred stock, $.001 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2012 and 2011

              

Common stock, $.001 par value, 100,000,000 shares authorized; 57,399,291 shares issued and outstanding at June 30, 2012 and 55,417,531 shares issued and outstanding at June 30, 2011

     57        55   

Additional paid-in capital

     188,535        186,648   

Accumulated other comprehensive income

     3,833        5,526   

Accumulated deficit

     (186,340     (180,757
  

 

 

   

 

 

 

Total stockholders’ equity

     6,085        11,472   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 57,386      $ 71,848   
  

 

 

   

 

 

 

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,  
     2012     2011     2010  

Revenue from services

   $ 147,503      $ 160,664      $ 163,547   

Operating expenses:

      

Cost of services

     91,902        105,976        103,987   

Selling, general and administrative

     46,270        49,701        52,430   

Depreciation and amortization

     4,607        5,921        6,576   

Restructuring and other charges

     7,530        5,100        178   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     150,309        166,698        163,171   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (2,806     (6,034     376   

Interest expense, net

     689        1,171        1,827   

Loss on extinguishment of debt

                   724   
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (3,495     (7,205     (2,175

Provision (benefit) for income taxes

     234        492        (1,052
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (3,729     (7,697     (1,123

Loss from discontinued operations, net of tax

     (1,854     (756     (1,043
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,583   $ (8,453   $ (2,166
  

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share:

      

Continuing operations

   $ (0.07   $ (0.14   $ (0.02

Discontinued operations

     (0.03     (0.01     (0.02
  

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (0.10   $ (0.15   $ (0.04
  

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding — basic and diluted

     55,383,780        54,566,590        54,089,971   
  

 

 

   

 

 

   

 

 

 

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,  
     2012     2011     2010  

Cash flows from operating activities:

      

Net loss

   $ (5,583   $ (8,453   $ (2,166

Adjustments to reconcile net loss to net cash provided by operating activities —

      

Depreciation and amortization

     5,555        7,451        8,145   

Deferred taxes

     (450     (84     (276

Stock-based compensation

     1,827        682        680   

Writeoff of Asian intangible assets

     489                 

Loss on disposal of property, plant and equipment

     336                 

Non-cash portion of loss on extinguishment of debt

                   550   

Amortization of deferred financing costs

     102        70        442   

Amortization of premium on marketable securities

                   2   

(Increase) decrease in assets —

      

Accounts receivable

     5,448        (1,331     (1,254

Unbilled receivables

     (455     633        (1,530

Prepaid expenses and other current assets

     (1,237     (1,227     2,051   

Other assets

     335        9        (153

(Decrease) increase in liabilities —

      

Accounts payable

     (1,564     165        2,482   

Accrued expenses

     1,413        3,214        (636

Deferred revenue

     (3,619     1,896        (847

Other liabilities

     1,327        958        (1,029
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     3,924        3,983        6,461   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Proceeds from maturities and sales of marketable securities

                   998   

Capital expenditures

     (1,416     (810     (1,629
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,416     (810     (631
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Credit agreement amendment financing costs

     (86            (296

Repayments of borrowings

     (4,794     (4,794     (6,925

Proceeds from exercise of employee stock options and employee stock purchases

     134        239        190   

Repurchases of common stock

     (70              
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (4,816     (4,555     (7,031
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (460     1,448        (1,393
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (2,768     66        (2,594

Cash and cash equivalents at beginning of period, including cash from discontinued operations

     14,224        14,158        16,752   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 11,456      $ 14,224      $ 14,158   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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HARRIS INTERACTIVE INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

 

    Common Stock
Outstanding
    Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
    Accumulated
Deficit
    Total
Stockholders’
Equity
 
    Shares     Amount          

Balance at July 1, 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   

Comprehensive income (loss):

           

Net loss

            (5,583     (5,583

Change in fair value of interest rate swap

          108          108   

Change in postretirement obligation, net of tax

          (63       (63

Foreign currency translation

          (1,738       (1,738
           

 

 

 

Total comprehensive loss

              (7,276
           

 

 

 

Issuance of stock for restricted stock grants and exercise of options

    1,800        1        47            48   

Issuance of common stock under Employee Stock Purchase Plan and U.K. Limited Share Incentive Plan

    246        1        83            84   

Repurchases of common stock

    (65       (70         (70

Stock-based compensation expense

        1,827            1,827   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

    57,399      $ 57      $ 188,535      $ 3,833      $ (186,340   $ 6,085   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended June 30, 2012, 2011 and 2010

(In thousands, except share and per share amounts)

 

1. Description of Business

Harris Interactive Inc. (the “Company”) is a leading global 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 Financial Accounting Standards Board (“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

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

2. Summary of Significant Accounting Policies — (Continued)

 

management to ensure that it is consistent with management’s expectations. Credit risk is limited with respect to accounts receivable by the Company’s large client base. For fiscal 2012, 2011 and 2010, 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 method 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.

Since 2002, the Company has evaluated goodwill 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

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

2. Summary of Significant Accounting Policies — (Continued)

 

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.

In September 2011, the FASB issued updated guidance that now allows an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value as the basis for determining whether it is then necessary to apply the two-step goodwill impairment test as prescribed by current guidelines. The Company adopted the updated guidance on January 1, 2012, as more fully described below in Note 3, “Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted”.

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 Company’s consolidated balance sheet and amounted to $986 and $1,596 at June 30, 2012 and 2011, respectively. Amortization expense related to these costs amounted to $948, $1,411 and $1,430 for the fiscal years ended June 30, 2012, 2011 and 2010, 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 asset group 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

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

2. Summary of Significant Accounting Policies — (Continued)

 

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 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:

 

  Ÿ  

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.

 

  Ÿ  

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.

 

  Ÿ  

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.

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

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

2. Summary of Significant Accounting Policies — (Continued)

 

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 $5,993 of outstanding debt at June 30, 2012 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.

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 interest rate swap was not an effective cash flow hedge at June 30, 2011 as a result of the covenant violations as discussed below in Note 11, “Borrowings”, and the Company opted not to re-designate its interest rate swap as a cash flow hedge at September 30, 2011. As such, changes in the fair value of the interest rate swap were recorded through interest expense for the fiscal year ended June 30, 2012 and such treatment will continue for the foreseeable future.

Post-Employment Payments

The Company has entered into employment and letter agreements with certain of its executives and other employees that 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 individuals not to engage in certain competitive activities 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

 

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Table of Contents

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

2. Summary of Significant Accounting Policies — (Continued)

 

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 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 twelve months of account inactivity, if a panelist cancels his or her registration or opts out of the program, or if the e-mail address used by a panelist for the program is no longer valid. 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 $592, $732 and $871 for the fiscal years ended June 30, 2012, 2011 and 2010, respectively.

 

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Table of Contents

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

2. Summary of Significant Accounting Policies — (Continued)

 

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 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 third quarter of fiscal 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 below in Note 16, “Income Taxes”.

During the fiscal year ended June 30, 2011, the Company recorded $338 in French research and development credits and presented those credits within the provision for income taxes line of its consolidated statement of operations. During the fiscal year ended June 30, 2012, the Company recorded $124 in such credits and presented them in the selling, general and administrative line of its consolidated statement of operations based on the determined refundable nature of these credits. The prior year amount has been corrected to conform to current year presentation. Based on the Company’s assessment, this adjustment did not have a material impact on its fiscal 2011 results of operations. There were no such amounts recorded during the fiscal year ended June 30, 2010.

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

2. Summary of Significant Accounting Policies — (Continued)

 

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.

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.

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

2. Summary of Significant Accounting Policies — (Continued)

 

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.

Future Liquidity Considerations

At June 30, 2012, the Company had cash and cash equivalents of $11,456, compared with $14,084 at June 30, 2011. Available sources of cash to support known or reasonably likely cash requirements over the next 12 months include cash and cash equivalents on hand, additional cash that may be generated from the Company’s operations, and funds to the extent available through its credit facilities discussed in Note 11, “Borrowings”. While the Company believes that its available sources of cash, including funds available through its revolving line that are subject to certain requirements, including minimum cash balances, 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 the Company’s credit agreement, the Company’s ability to generate cash from its operations is dependent upon its ability to profitably generate revenue, which requires that it continually develops new business, both for growth and to replace completed projects. Although work for no one client constitutes more than 10% of revenue, the Company has 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. The Company’s ability to profitably generate revenue depends not only on execution of its business plans, but also on general market factors outside of its control. As many of the Company’s clients treat all or a portion of their market research expenditures as discretionary, the Company’s ability to profitably generate revenue is adversely impacted whenever there are adverse macroeconomic conditions in the markets the Company serves.

 

3. Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted

In May 2011, the FASB issued amended accounting guidance related to fair value measurements and disclosure requirements. The amended guidance clarifies the application of existing fair value measurement requirements and is effective on a prospective basis for fiscal years beginning after December 15, 2011. The Company adopted this amended guidance on July 1, 2012 and adoption of the amended guidance did not have a material impact on its consolidated financial statements.

In June 2011, the FASB issued new accounting guidance to update the presentation of comprehensive income in consolidated financial statements. Under this new guidance, an entity has the option 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 in its annual financial statements. This guidance is effective for fiscal years beginning after December 15, 2011. The Company adopted this guidance on July 1, 2012 and adoption did not have a material impact on its consolidated financial statements.

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

3. Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted — (Continued)

 

In September 2011, the FASB issued updated guidance that now allows an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value as the basis for determining whether it is then necessary to apply the two-step goodwill impairment test as proscribed by current guidelines. If the conclusion from the qualitative assessment is that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the entity would be required to conduct the two-step goodwill impairment process. If this conclusion is not reached from the qualitative assessment, the entity would not need to apply the two-step test. This updated guidance is effective for the Company for interim and annual periods beginning after December 15, 2011. The Company adopted this guidance on January 1, 2012 and adoption did not have a material impact on its consolidated financial statements.

 

4. Restructuring and Other Charges

Restructuring

Fiscal 2012

During fiscal 2012, the Company continued to take actions designed to re-align the cost structure of its U.S. and U.K. operations.

 

  Ÿ  

The Company reduced headcount at its U.S. facilities throughout fiscal 2012, as follows:

 

  Ÿ  

During the first quarter of fiscal 2012, the Company reduced headcount by a total of 23 full-time employees and incurred $389 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in July and August 2011 and all actions were completed at those respective times. Related cash payments were completed by February 2012.

 

  Ÿ  

During the second quarter of fiscal 2012, the Company reduced headcount by a total of 10 full-time employees and incurred $260 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 2011 and all actions were completed at those respective times. Related cash payments were completed by March 2012.

 

  Ÿ  

During the fourth quarter of fiscal 2012, the Company reduced headcount by a total of 20 full-time employees and incurred $644 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in June 2012 and all actions were completed at that time. Related cash payments will be completed by December 2012.

 

  Ÿ  

During the first quarter of fiscal 2012, the Company reduced headcount at its U.K. facilities by a total of 56 full-time employees and incurred $1,008 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in July 2011 and all actions were completed at that time. Related cash payments were completed by January 2012.

 

  Ÿ  

Throughout fiscal 2012, the Company reduced its occupancy of leased office space. Specifically, the Company reduced occupancy of leased office space at its Rochester, New York, Princeton, New Jersey, Reston, Virginia, Brentford, United Kingdom, and Ottawa, Canada facilities. The

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

4. Restructuring and Other Charges — (Continued)

 

 

Company incurred $5,705 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 by June 2012, and all cash payments will be completed by June 2015.

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 its 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 2015.

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:

 

     2012      2011      2010  

Termination benefits

   $ 2,301       $ 1,165       $   

Lease commitments

     5,705         1,942           
  

 

 

    

 

 

    

 

 

 
   $ 8,006       $ 3,107       $   
  

 

 

    

 

 

    

 

 

 

The following table summarizes activity during fiscal 2012 with respect to the Company’s remaining reserves for the restructuring activities described above and those undertaken in prior fiscal years:

 

     Balance,
July 1,
2011
     Costs
Incurred
     Changes in
Estimate
    Cash
Payments
    Non-Cash
Settlements
     Balance,
June 30,
2012
 

Termination benefits

   $ 422       $ 2,301       $ (7   $ (2,418   $       $ 298   

Lease commitments

     2,212         5,705         (41     (1,598             6,278   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Remaining reserve

   $ 2,634       $ 8,006       $ (48   $ (4,016   $       $ 6,576   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

4. Restructuring and Other Charges — (Continued)

 

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, 2012, 2011 and 2010 included the following:

 

  Ÿ  

Post-employment payments to former senior executives — In connection with their departures from the Company during fiscal 2011, negotiated settlements were reached with Kimberly Till, Pavan Bhalla and Enzo Micali. Under the separation agreements, as modified, cash payments to Ms. Till are due to be completed in December 2012, while all cash payments to Messrs. Bhalla and Micali were completed during fiscal 2012.

 

  Ÿ  

Other — For fiscal 2011, “Other” included costs associated with reorganizing the operational structure of the Company’s Canadian operations. In October 2011, the Company’s obligation to fund those costs lapsed and accordingly, a credit of $331 was recognized at that time. For fiscal 2010, “Other” included costs incurred to close the Company’s telephone-based data collection center in Brentford, United Kingdom.

 

     2012     2011      2010  

Post-employment payments to former senior executives

   $ (97   $ 1,312       $   

Other

     (331     681         178   
  

 

 

   

 

 

    

 

 

 
   $ (428   $ 1,993       $ 178   
  

 

 

   

 

 

    

 

 

 

 

5. Discontinued Operations

In July 2011, the Company’s Board of Directors (the “Board”) approved the closure of its operations in Hong Kong, Singapore and Shanghai (collectively, “Harris Asia”). This decision was based on the Board’s determination that Harris Asia’s operations did not adequately support the Company’s strategic objectives. While the operations of Harris Asia ceased as of September 30, 2011, significant future cash flows attributable to those operations as a result of collecting outstanding accounts receivable and settling accounts payable and accrued expenses at December 31, 2011 and September 30, 2011 had not yet been eliminated. As such, the Company determined that Harris Asia’s operations did not qualify for treatment as discontinued operations for the fiscal quarters ended September 30, 2011 and December 31, 2011.

In connection with the Company’s closure of Harris Asia, the following charges were initially recognized in the “Restructuring and other charges” line shown on the Company’s unaudited consolidated statements of operations for the fiscal quarters ended September 30, 2011 and December 31, 2011:

 

Writeoff of intangible assets

   $ 489   

Termination benefits to former employees

     390   

Payments to terminate office and equipment leases

     231   

Professional fees

     180   

Writeoff of fixed assets

     149   

Other

     (23
  

 

 

 
   $ 1,416   
  

 

 

 

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

5. Discontinued Operations — (Continued)

 

The foregoing charges were reclassified to discontinued operations for the fiscal quarter ended March 31, 2012, since all significant future cash flows attributable to Harris Asia had been eliminated at that time.

The revenues and losses attributable to Harris Asia and reported in discontinued operations were as follows for the fiscal years ended June 30:

 

     2012     2011     2010  

Revenues

   $ 493      $ 4,600      $ 4,868   

Loss from discontinued operations

     (1,854     (756     (1,043

The assets and liabilities of the discontinued operations were as follows:

 

     At
June 30,

2012
     At
June 30,

2011
 

Cash and cash equivalents

   $       $ 140   

Accounts receivable, net

             1,433   

Prepaid expenses and other current assets

             32   

Property, plant and equipment, net

             156   

Other intangibles, net

             541   

Other assets

             59   
  

 

 

    

 

 

 

Assets from discontinued operations

   $       $ 2,361   
  

 

 

    

 

 

 

Accounts payable

   $       $ 213   

Accrued expenses

     181         325   

Deferred revenue

             475   
  

 

 

    

 

 

 

Liabilities from discontinued operations

   $ 181       $ 1,013   
  

 

 

    

 

 

 

 

6. 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:

 

  Ÿ  

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

  Ÿ  

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.

 

  Ÿ  

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, 2012, 2011 and 2010

 

6. 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
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  

At June 30, 2012

           

Financial liabilities:

           

Interest rate swap contract

   $       $ 174       $       $ 174   

At June 30, 2011

           

Financial liabilities:

           

Interest rate swap contract

   $       $ 513       $       $ 513   

The Company’s fair value hierarchy at June 30, 2012 is consistent with its fair value hierarchy at June 30, 2011.

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.

 

7. Property, Plant and Equipment

At June 30, property, plant and equipment consisted of the following:

 

     2012     2011  

Furniture and fixtures

   $ 5,911      $ 7,309   

Equipment

     35,346        35,495   

Leasehold improvements

     6,638        11,963   
  

 

 

   

 

 

 
     47,895        54,767   

Accumulated depreciation

     (45,395     (51,476
  

 

 

   

 

 

 
   $ 2,500      $ 3,291   
  

 

 

   

 

 

 

Depreciation expense on property, plant and equipment amounted to $1,836, $3,138 and $3,851 for the fiscal years ended June 30, 2012, 2011 and 2010, respectively.

 

8. Goodwill

The Company had no goodwill at June 30, 2012 or 2011.

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

9. Acquired Intangible Assets Subject to Amortization

At June 30, acquired intangible assets subject to amortization consisted of the following:

 

     2012  
     Weighted-Average
Amortization
Period

(In Years)
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Book
Value
 

Contract-based intangibles

     3       $ 1,768       $ 1,768       $   

Internet respondent database

     7         3,080         2,861         219   

Customer relationships

     10         20,849         12,974         7,875   

Trade names

     16         5,250         2,549         2,701   
     

 

 

    

 

 

    

 

 

 

Total

      $ 30,947       $ 20,152       $ 10,795   
     

 

 

    

 

 

    

 

 

 
     2011  
     Weighted-Average
Amortization
Period

(In Years)
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Book
Value
 

Contract-based intangibles

     3       $ 1,768       $ 1,768       $   

Internet respondent database

     7         3,457         2,878         579   

Customer relationships

     10         21,779         11,271         10,508   

Trade names

     16         5,296         2,342         2,954   
     

 

 

    

 

 

    

 

 

 

Total

      $ 32,300       $ 18,259       $ 14,041   
     

 

 

    

 

 

    

 

 

 

 

    2012     2011     2010  

Aggregate amortization expense:

     

For the fiscal year ended June 30:

  $ 2,771      $ 2,782      $ 2,725   
 

 

 

   

 

 

   

 

 

 

Estimated amortization expense for the fiscal years ending June 30:

     

2013

  $ 2,547       
 

 

 

     

2014

  $ 2,150       
 

 

 

     

2015

  $ 1,572       
 

 

 

     

2016

  $ 1,449       
 

 

 

     

2017

  $ 1,405       
 

 

 

     

Thereafter

  $ 1,672       
 

 

 

     

The gross carrying amount and accumulated amortization of the Company’s acquired intangible assets for the fiscal years ended June 30, 2012 and 2011, 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, 2012, 2011 and 2010

 

10.     Accrued Expenses

At June 30, accrued expenses consisted of the following:

 

     2012      2011  

Panelist incentives

   $ 2,702       $ 3,234   

Project-related accruals

     2,910         1,838   

Payroll and withholding expenses

     1,890         2,626   

Accrued vacation

     1,772         1,990   

Bonuses and commissions

     3,715         1,304   

Other

     8,654         9,932   
  

 

 

    

 

 

 
   $ 21,643       $ 20,924   
  

 

 

    

 

 

 

“Other” consists of accrued expenses that are individually less than 5% of total current liabilities.

 

11.     Borrowings

On June 30, 2010, the Company entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. (“JPMC”), as Administrative Agent and Issuing Bank, and the Lenders party thereto, as further amended on August 27, 2010 (the “Credit Agreement”).

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

11.     Borrowings — (Continued)

 

The principal terms of the Credit Agreement are described below:

 

Credit Agreement

Availability:

$5,000 Revolving Line

Ÿ     The Revolving Line may be used to back letters of credit.

Ÿ     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 – original principal, $15,581

Interest:

Company option:

Ÿ     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

Ÿ     LIBOR plus an Applicable Rate based on the Pricing Grid

The Company elected LIBOR and the interest swap agreement fixes the LIBOR-based portion of the rate at 4.32%

Interest payments are due at end of LIBOR interest periods, but at least quarterly in arrears

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

Interest Rate Swap:

Fixes the floating LIBOR interest portion of the rates on the amounts outstanding under the 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 Loan

Unused Facility Fees:

Fee fixed at 0.75% of unused Revolving Line amount

 

Principal Payments:

Term Loan Maturity – September 30, 2013

Revolving Line Maturity – September 30, 2013

Revolving Line – payable at maturity

Quarterly Term Loan Payments – $1,199

 

Financial Covenants:

Minimum Consolidated Interest Coverage Ratio of at least 3.00:1.00

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

 

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

11.     Borrowings — (Continued)

 

The Pricing Grid provides for quarterly adjustment of rates and fees, and is as follows:

 

Pricing Level

 

Consolidated

Total

Leverage Ratio

 

ABR

Applicable

      Rate      

 

Adjusted

LIBO

Applicable

      Rate      

 

Letter of

Credit

Applicable

       Rate      

 

Commitment

Fee

       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 Credit 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.

Amendment Agreement and Waiver

At June 30, 2011, the Company was not in compliance with the Consolidated Total Leverage and Consolidated Interest Coverage Ratio covenants contained in the Credit Agreement largely due to the magnitude of restructuring and other charges incurred during the fiscal year ended June 30, 2011. As a result, on September 27, 2011, the Company entered into Amendment Agreement No. 2 and Waiver (“Amendment No. 2”) to the Credit Agreement (as amended, the “Amended Credit Agreement”). Pursuant to Amendment No. 2, these covenant violations were permanently waived. Amendment No. 2 includes both the addition and modification of certain definitions, terms, and financial covenants in the Credit Agreement. Obligations under the Amended Credit Agreement continue to be secured by the Company’s domestic assets and 66% of the equity interests in first tier foreign subsidiaries. In accordance with ASC Topic 470, the Company evaluated the change in cash flows, determined that there was not a greater than 10% change, and concluded that Amendment No. 2 did not result in an extinguishment of debt.

The Company’s credit facilities under the Amended Credit Agreement consist of its 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 the Company’s satisfaction of certain conditions. Pursuant to Amendment No. 2, until the Company achieved trailing twelve month adjusted EBITDA of $5,000, borrowings under the revolving line of credit are limited to the lesser of $2,000 or the Company’s net U.S. accounts receivable, defined as its U.S. accounts receivable plus its U.S. unbilled accounts receivable, less its deferred revenue. The principal amount outstanding under the term loan, $10,787 at June 30, 2011, and the payment terms of the term loan remained unchanged under the Amended Credit Agreement. Pursuant to Amendment No. 2, the manner in which outstanding amounts accrue interest remains unchanged, except that the Eurodollar Applicable Rate (Adjusted LIBO Applicable Rate) and ABR Applicable Rate were fixed at 5.50% and 4.50%, respectively, through March 31, 2012.

Amendment No. 2 also impacted certain financial covenants, as follows:

 

  Ÿ  

The Consolidated Interest Coverage Ratio and Consolidated Total Leverage Ratio covenants were suspended for the fiscal quarters ended September 30, 2011, December 31, 2011 and

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

11.     Borrowings — (Continued)

 

 

March 31, 2012. During each of those fiscal quarters, the Company was subject to trailing twelve month adjusted EBITDA covenants of $4,548, $3,817 and $4,424, respectively.

 

  Ÿ  

For fiscal quarters commencing on or after April 1, 2012, the Company is subject to the Consolidated Interest Coverage Ratio and Consolidated Total Leverage Ratio covenants contained in the Credit Agreement.

 

  Ÿ  

Cash paid to fund restructuring and other charges incurred on or before September 30, 2011 was limited to amounts agreed upon in Amendment No. 2.

 

  Ÿ  

The Company was required to maintain minimum global cash of $7,000 and U.S. cash of $1,000 through June 30, 2012, and is now again subject to only a minimum global cash requirement of $5,000.

At June 30, 2012, the Company was in compliance with all of the covenants under the Amended Credit Agreement.

At June 30, 2012, the required principal repayments of the term loan under the Amended Credit Agreement for the two succeeding fiscal years are as follows:

 

     Total  

2013

   $ 4,794   

2014

     1,199   
  

 

 

 
   $ 5,993   
  

 

 

 

At June 30, 2012 and June 30, 2011, the Company had no outstanding borrowings under the revolving line of credit and $345 and $359, respectively, in outstanding letters of credit. The outstanding 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 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 Credit Agreement, the Company modified the terms of its interest rate swap to ensure that the notional amount of the swap matched the outstanding amount of the term loan and the three-month LIBOR rate received on the swap matched the LIBOR base rate on the term loan. The term of the interest rate swap was extended through September 30, 2013 to be consistent with the maturity date of the term loan and the applicable spread referenced in the pricing grid set forth above is added to the 4.32% rate fixed by the interest rate swap. 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.

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

11.     Borrowings — (Continued)

 

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 there was no ineffectiveness that was recorded through interest expense. The interest rate swap was not an effective cash flow hedge at June 30, 2011 as a result of the covenant violations discussed above, 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. At September 30, 2011, the Company opted not to re-designate its interest rate swap as a cash flow hedge. As such, the change in the fair value of the interest rate swap, $339, was recorded through interest expense for the fiscal year ended June 30, 2012, and such treatment will continue for the foreseeable future.

At June 30, 2012 and 2011, the Company had liabilities of $174 and $513, respectively, in the “Other liabilities” line item of its consolidated balance sheet to reflect the fair value of the interest rate swap.

 

12.     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, as defined in Note 13, “Stock-Based Compensation”. 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.

Share Repurchase Program

Under the share repurchase program (the “Repurchase Program”) authorized by the Board on March 6, 2012, the Company repurchased 65,107 shares of its common stock at an average price per share of $1.08 for an aggregate purchase price of $70 during the fiscal year ended June 30, 2012. All shares repurchased were subsequently retired.

The Repurchase Program calls for up to $3,000 of share repurchases to be made at management’s discretion in the open market or through privately negotiated transactions from time to time through March 5, 2014 in compliance with applicable laws, rules, and regulations, subject to cash requirements for other purposes, and other relevant factors, such as trading price, trading volume, general market and business conditions, Company performance, and the Company’s compliance with the covenants under its credit agreement.

At June 30, 2012, the Repurchase Program had $2,930 in remaining capacity.

Stockholder Rights Plan

On March 11, 2005, 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

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

12.     Stockholders’ Equity — (Continued)

 

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 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 is 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.

 

13.     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 November 2009 and 2011 (“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.

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

13.     Stock-Based Compensation — (Continued)

 

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:

 

     2012      2011      2010  

Cost of services

   $ 31       $ 12       $ 18   

Selling, general and administrative

     1,796         670         662   
  

 

 

    

 

 

    

 

 

 
   $ 1,827       $ 682       $ 680   
  

 

 

    

 

 

    

 

 

 

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, 2012, 2011 and 2010.

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. Time-based 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, generally, any unvested portion is forfeited 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, 2012, 1,738,717 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, 2012, 2011 and 2010

 

13.     Stock-Based Compensation — (Continued)

 

Investor Stock Options

At June 30, 2012 and 2011, 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:

 

    2012     2011     2010  
    Shares     Weighted-
Average
Exercise
Price
    Shares     Weighted-
Average
Exercise
Price
    Shares     Weighted-
Average
Exercise
Price
 

Options outstanding at July 1

    6,396,373      $ 1.53        3,873,452      $ 2.38        3,857,209      $ 3.09   

Granted

    290,500        0.65        4,750,500        0.75        1,248,812        0.97   

Forfeited

    (1,343,779     1.33        (2,160,913     1.36        (1,232,569     3.20   

Exercised

    (124,167     0.38        (66,666     0.42                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Options outstanding at June 30

    5,218,927      $ 1.54        6,396,373      $ 1.53        3,873,452      $ 2.38   
 

 

 

     

 

 

     

 

 

   

During fiscal 2012 and 2011, 160,000 and 3,381,000, respectively, of the options granted represent awards that vest in ten equal tranches upon the achievement of certain performance targets. In February and March 2012, the Company modified such performance based targets. 966,000 of such performance-based options vested during fiscal 2012 due to the achievement of certain of the modified performance targets. As a result of such modifications, the Company recorded an additional $202 of stock-based compensation expense for the fiscal year ended June 30, 2012.

The total intrinsic value of options exercised during the fiscal years ended June 30, 2012, 2011 and 2010 was $29, $34 and $0, respectively.

The following weighted-average assumptions were used to value options granted by the Company during the fiscal years ended June 30:

 

     2012     2011     2010  

Risk-free interest rate

     2.3     2.8     2.7

Weighted-average expected life (in years)

     6.5        6.7        6.3   

Volatility factor

     71     66     68

Dividend yield

                     

Weighted-average fair value

   $ 0.47      $ 0.46      $ 0.62   

Cash received from the exercise of employee stock options was $47, $28 and $0 for the fiscal years ended June 30, 2012, 2011 and 2010, respectively.

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

13.     Stock-Based Compensation — (Continued)

 

The following table provides further detail regarding the Company’s granted and outstanding employee stock options (including options issued under the Incentive Plans, as well as options issued outside the Incentive Plans to new employees) at June 30, 2012:

 

    Options Outstanding     Options Exercisable  

Range of

Exercise Prices

  Number of
Options
    Weighted-
Average
Remaining
Contractual
Life (In
Years)
    Weighted-
Average
Exercise
Price
    Aggregate
Intrinsic
Value
    Number of
Options
    Weighted-
Average
Remaining
Contractual
Life (In
Years)
    Weighted
Average
Exercise
Price
    Aggregate
Intrinsic
Value
 

$ 0.38 – 1.18

    4,382,499        8.8      $ 0.75        1,684        1,473,555        8.6      $ 0.75        548   

   2.30 – 3.97

    61,874        0.4        2.50        (85     61,874        0.4        2.50        (85

   4.12 – 5.81

    397,764        3.9        4.80        (1,460     397,764        3.9        4.80        (1,460

   6.27 – 8.57

    376,790        1.9        7.14        (2,265     376,790        1.9        7.14        (2,265
 

 

 

     

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 
    5,218,927        7.8      $ 1.54      $ (2,126     2,309,983        6.5      $ 2.54      $ (3,262
 

 

 

       

 

 

   

 

 

       

 

 

 

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:

 

    2012     2011     2010  
    Shares     Weighted-
Average
Grant Date
Fair Value
    Shares     Weighted-
Average
Grant Date
Fair Value
    Shares     Weighted-
Average
Grant Date
Fair Value
 

Restricted shares outstanding at July 1

    529,021      $ 0.79        73,751      $ 2.09        110,718      $ 2.86   

Granted

    1,705,500        1.08        627,482        0.74        119,000        1.09   

Forfeited

    (33,417     0.73        (3,351     2.63        (24,331     4.59   

Vested

    (735,072     0.79        (168,861     1.13        (131,636     1.37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted shares outstanding at June 30

    1,466,032      $ 1.09        529,021      $ 0.79        73,751      $ 2.09   
 

 

 

     

 

 

     

 

 

   

During fiscal 2012, 2011 and 2010, the Company granted 300,500, 127,482 and 119,000 restricted shares, respectively, to non-employee directors.

At June 30, 2012, there was $2,426 of total unrecognized stock-based compensation expense related to non-vested stock-based compensation arrangements granted under the Incentive Plans and the ESPPs. That expense is expected to be recognized over a weighted-average period of 1.9 years.

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 2012, 2011 and 2010, employees purchased 227,000, 206,270 and 293,179 shares of Common Stock, respectively, through the ESPPs. Of the 3,000,000 shares available for issuance under the ESPPs, 608,018 shares remained available for issuance as of June 30, 2012.

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

13.     Stock-Based Compensation — (Continued)

 

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, 2012, 2011 and 2010.

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:

 

     2012     2011     2010  

Risk-free interest rate

     0.4     0.2     0.3

Weighted-average expected life (in years)

     0.5        0.5        0.5   

Volatility factor

     105     63     108

Dividend yield

                     

Weighted-average fair value

   $ 0.27      $ 0.33      $ 0.25   

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 2012, 2011 or 2010.

 

14.     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, 2012. As such, the Company incurred no matching contribution expense during the fiscal years ended June 30, 2012, 2011 and 2010.

 

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HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Years Ended June 30, 2012, 2011 and 2010

 

15.     Income Taxes

For the fiscal years ended June 30, the U.S. and foreign components of loss from continuing operations before income taxes were as follows:

 

     2012     2011