UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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FOR THE QUARTER ENDED MARCH 31, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER: 000-27577
HARRIS INTERACTIVE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE
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16-1538028
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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60 Corporate Woods, Rochester, New York 14623
(Address of principal executive offices)
(585) 272-8400
(Registrants telephone number, including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
þ
On May 5, 2008, 53,663,479 shares of the Registrants Common Stock, $.001 par value, were
outstanding.
HARRIS INTERACTIVE INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2008
INDEX
2
Part I: Financial Information
Item 1 Financial Statements
HARRIS INTERACTIVE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
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March 31,
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June 30,
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2008
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2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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31,234
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$
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28,911
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Marketable securities
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4,418
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Accounts receivable, net
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34,570
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34,794
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Unbilled receivables
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10,883
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9,938
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Prepaid expenses and other current assets
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9,341
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6,964
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Deferred tax assets
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3,633
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3,754
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Assets held for sale
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1,074
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Total current assets
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89,661
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89,853
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Property, plant and equipment, net
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12,001
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9,902
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Goodwill
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129,331
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115,466
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Other intangibles, net
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24,048
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11,788
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Deferred tax assets
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11,137
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13,628
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Other assets
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2,531
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1,401
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Total assets
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$
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268,709
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$
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242,038
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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6,972
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$
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8,079
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Accrued expenses
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22,143
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22,198
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Current portion of long-term debt
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6,925
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19,625
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Deferred revenue
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19,207
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17,575
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Liabilities held for sale
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330
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Total current liabilities
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55,247
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67,807
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Long-term debt
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24,238
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Deferred tax liabilities
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4,379
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859
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Other long-term liabilities
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3,074
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1,016
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Commitments and contingencies (Note 16)
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Stockholders equity:
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Preferred stock, $.001 par value, 5,000,000
shares authorized; 0 shares issued and
outstanding at March 31, 2008 and June 30, 2007
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Common stock, $.001 par value, 100,000,000
shares authorized; 53,670,829 shares issued and
outstanding at March 31, 2008 and 52,833,874
shares issued and outstanding at June 30, 2007
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53
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53
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Additional paid-in capital
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181,534
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177,169
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Accumulated other comprehensive income
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9,339
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5,392
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Accumulated deficit
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(9,155
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)
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(10,258
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)
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Total stockholders equity
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181,771
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172,356
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Total liabilities and stockholders equity
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$
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268,709
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$
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242,038
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
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Three Months Ended
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Nine Months Ended
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March 31,
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March 31,
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2008
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2007
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2008
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2007
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Revenue from services
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$
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57,322
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$
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51,748
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$
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175,224
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$
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154,696
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Operating expenses:
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Cost of services
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28,914
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26,511
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87,373
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76,324
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Sales and marketing
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5,806
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5,642
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17,643
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15,617
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General and administrative
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21,172
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16,945
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59,651
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51,197
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Depreciation and amortization
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2,161
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1,225
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6,304
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3,821
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Gain on sale of assets
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(410
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)
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Restructuring charges
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1,138
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1,138
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Total operating expenses
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59,191
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50,323
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172,109
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146,549
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Operating income (loss)
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(1,869
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)
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1,425
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3,115
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8,147
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Interest and other income
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230
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580
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909
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1,773
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Interest expense
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(514
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)
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(5
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(1,477
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(10
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Income (loss) from continuing
operations before income taxes
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(2,153
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)
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2,000
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2,547
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9,910
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Provision (benefit) for income taxes
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(20
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)
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879
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1,638
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4,271
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Income (loss) from continuing operations
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(2,133
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)
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1,121
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909
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5,639
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Income from discontinued operations
(including gain on disposal of $220 during
nine months ended March 31, 2008), net of
provision for income taxes
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35
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124
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73
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Net income (loss)
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$
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(2,133
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)
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$
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1,156
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$
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1,033
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$
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5,712
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Basic net income (loss) per share:
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Continuing operations
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$
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(0.04
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)
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$
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0.02
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$
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0.02
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$
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0.10
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Discontinued operations
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0.00
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0.00
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0.00
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Basic net income (loss) per share
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$
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(0.04
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)
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$
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0.02
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$
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0.02
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$
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0.10
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Diluted net income (loss) per share:
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Continuing operations
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$
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(0.04
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)
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$
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0.02
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$
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0.02
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$
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0.10
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Discontinued operations
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0.00
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0.00
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0.00
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Diluted net income (loss) per share
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$
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(0.04
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)
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$
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0.02
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$
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0.02
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$
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0.10
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Weighted-average shares outstanding basic
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52,923,113
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57,438,567
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52,776,473
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58,504,441
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Weighted-average shares outstanding diluted
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52,923,113
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57,707,097
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52,989,003
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58,760,154
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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For the Nine Months
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Ended March 31,
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2008
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2007
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Cash flows from operating activities:
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Net income
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$
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1,033
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$
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5,712
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Adjustments to reconcile net income to net cash provided by operating activities
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Depreciation and amortization
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7,447
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4,936
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Deferred taxes
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2,096
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1,861
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Stock-based compensation
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3,142
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2,849
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401(k) matching contribution
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951
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969
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Amortization of deferred financing costs
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80
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Amortization of discount on marketable securities
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(36
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)
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Gain on sale of discontinued operations and assets held for sale
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(220
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)
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(410
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)
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Non-cash restructuring charges
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927
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(Increase) decrease in assets, net of acquisitions
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Accounts receivable
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5,654
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3,586
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Unbilled receivables
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1,410
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1,993
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Prepaid expenses and other current assets
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(2,602
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)
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(2,053
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)
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Other assets
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(304
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)
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(39
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)
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(Decrease) increase in liabilities, net of acquisitions
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Accounts payable
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(4,073
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)
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(3,408
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)
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Accrued expenses
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(3,273
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)
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(3,284
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)
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Deferred revenue
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|
923
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2,138
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Other liabilities
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|
313
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|
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(1,855
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)
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Net cash (used in) provided by operating activities of discontinued operations
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|
(61
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)
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|
58
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Net cash provided by operating activities
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13,443
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|
|
|
13,017
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Cash flows from investing activities:
|
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Cash paid in connection with acquisitions, net of cash acquired
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(21,727
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)
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Proceeds from sale of discontinued operations and assets held for sale
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|
219
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|
1,273
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Purchases of marketable securities
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|
(15,000
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)
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(58,651
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)
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Proceeds from maturities and sales of marketable securities
|
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|
19,420
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|
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|
99,594
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Capital expenditures
|
|
|
(2,417
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)
|
|
|
(2,914
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)
|
Net cash used in investing activities of discontinued operations
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|
|
(21
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)
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|
|
|
|
|
|
|
|
|
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Net cash (used in) provided by investing activities
|
|
|
(19,526
|
)
|
|
|
39,302
|
|
|
|
|
|
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Cash flows from financing activities:
|
|
|
|
|
|
|
|
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Repurchases of common stock
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|
|
|
|
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(40,752
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)
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Increase in borrowings, net of financing costs
|
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|
14,525
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|
|
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Repayment of borrowings
|
|
|
(6,917
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)
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|
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Proceeds from exercise of employee stock options and employee stock purchases
|
|
|
296
|
|
|
|
1,229
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|
Excess tax benefits from share-based payment awards
|
|
|
33
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|
|
|
253
|
|
|
|
|
|
|
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Net cash provided by (used in) financing activities
|
|
|
7,937
|
|
|
|
(39,270
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)
|
|
|
|
|
|
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|
Effect of exchange rate changes on cash and cash equivalents
|
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|
469
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|
|
|
223
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|
|
|
|
|
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Net increase in cash and cash equivalents
|
|
|
2,323
|
|
|
|
13,272
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|
Cash and cash equivalents at beginning of period
|
|
|
28,911
|
|
|
|
11,465
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
31,234
|
|
|
$
|
24,737
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
HARRIS INTERACTIVE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(
In thousands, except share and per share amounts
)
1. Financial Statements
The unaudited consolidated financial statements included herein reflect, in the opinion of the
management of Harris Interactive Inc. and its subsidiaries (collectively, the Company), all
normal recurring adjustments necessary to fairly state the Companys unaudited consolidated
financial statements for the periods presented.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
These unaudited consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for
the fiscal year ended June 30, 2007, filed by the Company with the Securities and Exchange
Commission (SEC) on September 12, 2007.
The consolidated balance sheet as of June 30, 2007 has been derived from the audited
consolidated financial statements of the Company. However, during the three months ended December
31, 2007, the Company identified an error related to the impact of translating goodwill
attributable to its foreign acquisitions from its functional currency into U.S. dollars, in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
Foreign Currency
Translation.
The Company assessed the materiality of this item on its fiscal year ended June 30,
2007, and all prior and subsequent periods, in accordance with the SECs Staff Accounting Bulletin
(SAB) No. 99 and concluded that the error was not material to any such periods. The Company also
concluded that had the error been adjusted within its financial statements for the three months
ended December 31, 2007, the impact of such an adjustment would have been material to its financial
statements for the period then ended and it would expect the error to be material to its full year
fiscal 2008 results. Accordingly, in accordance with SAB No. 108,
Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, the June
30, 2007 balance sheet herein has been revised to correct the immaterial error and to reflect the
corrected balances of goodwill and accumulated other comprehensive income as of that date. This
correction resulted in an increase to goodwill and accumulated other comprehensive income of
$3,912. The Company will make corresponding adjustments as appropriate to its other affected
annual and quarterly financial statements the next time it files those statements.
Previously, cost of services did not include amortization of internally developed software, as
such amounts were included in depreciation and amortization. Such amounts are included in cost of
services in the accompanying unaudited consolidated statements of operations for the three and nine
months ended March 31, 2008, and previously reported amounts for the three and nine months ended
March 31, 2007 have been reclassified in the accompanying unaudited consolidated statements of
operations to conform to the current presentation with the following effect:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31, 2007
|
|
|
March 31, 2007
|
|
Cost of services:
|
|
|
|
|
|
|
|
|
Previously reported
|
|
$
|
26,132
|
|
|
$
|
75,225
|
|
Reclassification
|
|
|
379
|
|
|
|
1,099
|
|
|
|
|
|
|
|
|
As reclassified
|
|
$
|
26,511
|
|
|
$
|
76,324
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Previously reported
|
|
$
|
1,604
|
|
|
$
|
4,920
|
|
Reclassification
|
|
|
(379
|
)
|
|
|
(1,099
|
)
|
|
|
|
|
|
|
|
As reclassified
|
|
$
|
1,225
|
|
|
$
|
3,821
|
|
3. Summary of Significant Accounting Policies
During the nine months ended March 31, 2008, the Company had no changes to the significant
accounting policies disclosed in its Annual Report on Form 10-K for the fiscal year ended June 30,
2007, except as follows:
HIpoints Loyalty Program
In July 2001, the Company initiated HIpoints, a loyalty program 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. 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 Companys actual redemption rates since the inception of
the program.
Prior to December 2007, points under the HIpoints program expired after one year of account
inactivity. In December 2007, the Company modified the expiration parameters of the program such
that points now expire after nine months of account inactivity and tightened the rules around
expirations to more accurately account for panelists that are not truly engaged in the program.
These changes resulted in an approximately $800 reduction in the Companys reserve for obligations
with respect to future redemption of outstanding points during the three months ended December 31,
2007,
6
which was recorded in the Cost of services line item of the Companys unaudited
consolidated statement of operations.
All other aspects of the HIpoints program as described in the Companys Annual Report on Form
10-K for the fiscal year ended June 30, 2007 remain unchanged.
4. Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted
FIN No. 48
Effective July 1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN No. 48),
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109.
FIN No. 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements in accordance with FASB Statement
No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. Additionally, FIN No. 48 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. Adoption of FIN No. 48 did
not have a material impact on the Companys consolidated financial statements. For further
discussion regarding the impact of adoption of FIN No. 48 on the Companys consolidated financial
statements, see Note 13, Income Taxes.
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles (GAAP), and expands disclosures about fair value measurements. In February
2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157
(FSP 157-2), which provides a one year deferral of the effective date of SFAS No. 157 for
non-financial assets and non-financial liabilities, except those that are recognized or disclosed
in the financial statements at fair value at least annually. The Company will adopt SFAS No. 157
on July 1, 2008 for its financial assets and liabilities and on July 1, 2009 for its non-financial
assets and non-financial liabilities, and does not expect that it will have a material impact on
the Companys consolidated financial statements.
SFAS No. 159
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115.
SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS No. 159 does not affect
any existing accounting literature that requires certain assets and liabilities to be carried at
fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The
Company will adopt SFAS No. 159 on July 1, 2008, and does not expect that it will have a material
impact on the Companys consolidated financial statements.
SFAS No. 141(R)
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
, which
replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS
No. 141(R) also establishes disclosure requirements which will enable users to evaluate the nature
and financial effects of the business combination. SFAS No. 141(R) is effective as of the beginning
of an entitys fiscal year that begins after December 15, 2008. The Company will adopt SFAS No.
141(R) on July 1, 2009, and is currently evaluating the potential impact, if any, of the adoption
of SFAS No. 141(R) on the Companys consolidated financial statements.
SFAS No. 160
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated
Financial Statementamendments of ARB No. 51
. SFAS No. 160 states that accounting and reporting
for minority interests will be
7
recharacterized as noncontrolling interests and classified as a
component of equity. SFAS No. 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
that prepare consolidated financial statements, except not-for-profit organizations, but will
affect only those entities that have an outstanding noncontrolling interest in one or more
subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective as of the beginning of
an entitys first fiscal year beginning after December 15, 2008. The Company will adopt SFAS No.
160 on July 1, 2009, and does not expect that it will have a material impact on the Companys
consolidated financial statements.
SFAS No. 161
In March 2008, the FASB issued SFAS No. 161
, Disclosures about Derivative Instruments and
Hedging Activities
. SFAS No. 161 requires companies with derivative instruments to disclose
information that should enable financial-statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items are accounted for under
SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
, and how derivative
instruments and related hedged items affect a companys financial position, financial performance
and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company is currently evaluating the impact
that SFAS No. 161 will have on its consolidated financial statements.
SAB No. 110
In December 2007, the SEC issued SAB No. 110,
Share-Based Payment
. SAB No. 110 amends and
replaces Question 6 of Section D.2 of Topic 14,
Share-Based Payment
, of the Staff Accounting
Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the Staff regarding
the use of the simplified method in developing an estimate of expected term of plain vanilla
share options and allows usage of the simplified method for share option grants prior to December
31, 2007. SAB No. 110 allows public companies which do not have historically sufficient experience
to provide a reasonable estimate to continue use of the simplified method for estimating the
expected term of plain vanilla share option grants after December 31, 2007. The Company
currently uses the simplified method to estimate the expected term for share option grants, as it
does not have enough historical experience to provide a reasonable estimate. The Company will
continue to use the simplified method until it has enough historical experience to provide a
reasonable estimate of expected term in accordance with SAB No. 110. SAB No. 110 was effective for
the Company on January 1, 2008.
5. Business Combinations
Decima Research
On August 16, 2007, the Company, along with 2144798 Ontario Inc., a corporation incorporated
under the laws of the Province of Ontario, Canada (the Companys wholly-owned, indirect subsidiary,
Canco), and all of the stockholders of Decima Research Inc., a corporation amalgamated under the
laws of Province of Ontario, Canada (Decima) (such stockholders, collectively, the Decima
Sellers) entered into a Share Purchase Agreement dated August 16, 2007 (the Decima Purchase
Agreement) pursuant to which Canco purchased 100% of the outstanding shares (the Decima Shares)
of Decima.
This acquisition has allowed the Company to expand its presence in the global research market,
as according to
ESOMAR
, the Canadian market is the seventh largest in the world. Key sectors
served by Decima include financial services, telecommunications, public affairs and
tourism/recreation/gaming.
The Decima Purchase Agreement provided for an aggregate up-front purchase price for the Decima
Shares of CAD$22,400 (approximately US$21,300, based on the August 15, 2007 Canadian to U.S. Dollar
conversion rate), less the amount of Decima interest bearing debt at the time of closing (Closing
Debt), and subject to increase or decrease to the extent the working capital of Decima at closing
(Closing Working Capital) exceeded or fell below a target of CAD$2,700. The Closing Debt was
repaid following the closing. The up-front purchase price was payable in cash, and based upon
estimated Closing Debt and Closing Working Capital, resulted in a net adjusted cash up-front
payment at closing of CAD$18,039 (approximately US$16,935, based on the August 15, 2007 Canadian to
U.S. Dollar conversion rate). The up-front purchase price was subject to further adjustment as the
amounts of Closing Debt and Closing Working Capital are
8
finally determined post-closing. Final
determination of Closing Working Capital resulted in additional purchase price of US$272.
CAD$2,000 (approximately US$1,948, based on the March 31, 2008 Canadian to U.S. Dollar conversion
rate) was withheld from the up-front purchase price payment and placed in escrow to secure the
Decima Sellers representations, warranties, and covenants. 50% of the escrowed amount, less Canco
claims, will be released to the Decima Sellers on each of August 16, 2008 and November 16, 2008.
Total transaction costs amounted to $952.
In addition to the up-front purchase price, the Decima Purchase Agreement provided for
contingent consideration in the form of (i) a short-term earn-out payment of CAD$2,000
(approximately US$1,948, based on the March 31, 2008 Canadian to U.S. Dollar conversion rate), if
Decima EBITDA, subject to certain pre-closing and closing-related credits (the Credits), exceeds
CAD$7,540 (approximately US$7,344, based on the March 31, 2008 Canadian to U.S. Dollar conversion
rate), for the period between closing and February 16, 2009, and (ii) long-term earn-out payments
(Decima Long-Term Earn-Out), uncapped, and targeted at an aggregate of CAD$15,000 (approximately
US$14,610, based on the March 31, 2008 Canadian to U.S. Dollar conversion rate), based upon
achievement of Decima historical growth and profitability levels. The Decima Long-Term Earn-Out is
measured and paid based on performance during the periods ending on each of June 30, 2008, 2009,
2010, 2011, and 2012. Contingent payments under the earn-out arrangements described above will be
allocated to goodwill during the period in which it becomes probable that the contingent payments
will be made.
This acquisition was accounted for under the purchase method in accordance with SFAS No. 141,
Business Combinations
, and was included in the Companys consolidated financial statements
effective August 1, 2007. The Company recorded $8,361 in goodwill, $11,858 in intangible assets
and a deferred tax liability of $3,915 related to the acquisition, along with the other tangible
assets acquired and liabilities assumed. The goodwill is not deductible for tax purposes. The
intangible assets consisted of customer relationships, an Internet respondent database, and trade
names with assigned values of $11,617, $145, and $96, respectively, and useful lives (in years) of
10, 2 and 1, respectively.
The following table summarizes the fair values of the assets acquired and liabilities assumed
at the date of acquisition:
|
|
|
|
|
Current assets
|
|
$
|
6,441
|
|
Property, plant and equipment
|
|
|
3,011
|
|
Goodwill
|
|
|
8,361
|
|
Intangible assets
|
|
|
11,858
|
|
Deferred tax assets
|
|
|
198
|
|
|
|
|
|
Total assets acquired
|
|
$
|
29,869
|
|
|
|
|
|
Current liabilities
|
|
$
|
(7,842
|
)
|
Other liabilities
|
|
|
(47
|
)
|
Deferred tax liability
|
|
|
(3,915
|
)
|
|
|
|
|
Total liabilities assumed
|
|
$
|
(11,804
|
)
|
|
|
|
|
Net assets acquired
|
|
$
|
18,065
|
|
|
|
|
|
Unaudited pro forma results of operations of the Company for the three and nine months ended
March 31, 2008 are not presented to give effect to the Decima acquisition as if it had occurred on
July 1, 2007, as the acquisition was not significant.
Marketshare
On August 16, 2007, Harris Interactive International (HII), Harris Interactive Asia Limited,
(HIIs Hong Kong wholly-owned subsidiary, Harris Asia), and all the stockholders of (i)
Marketshare Limited, a company incorporated under the laws of Hong Kong (Marketshare), and (ii)
Marketshare Pte Ltd, a company incorporated under the laws of Singapore (Marketshare Pte) (such
stockholders, collectively, the Marketshare Sellers), entered into an Agreement Relating to the
Sale and Purchase of the Entire Issued Share Capitals of Marketshare Limited and Marketshare Pte
Ltd dated August 16, 2007 (the Marketshare Purchase Agreement), pursuant to which Harris Asia
purchased 100% of the issued share capital (the Marketshare Shares) of Marketshare and
Marketshare Pte.
This acquisition has provided access into the rapidly growing Asia/Pacific market and will
serve as a platform for continued acquisitive growth in the region. Key sectors served by
Marketshare include retail, financial services, technology and travel/tourism.
9
The Marketshare Purchase Agreement provided for an aggregate purchase price for the
Marketshare Shares of $2,800 of which $2,380 was paid to the Marketshare Sellers in cash at
closing, and the remaining $420 was held back in escrow to secure the Marketshare Sellers representations, warranties, and covenants. The
escrowed amount, less any Harris Asia claims, will be released to the Marketshare Sellers on August
16, 2008. Total transaction costs amounted to $206.
In addition to the up-front purchase price, the Marketshare Purchase Agreement provided for
contingent consideration in the form of long-term earn-out payments (Marketshare Long-Term
Earn-Out). Marketshare Long-Term Earn-Out payments will be due if Marketshare and Marketshare Pte
achieve growth and profitability expectations with respect to periods ending June 30 of each of
2008, 2009, 2010, 2011, and 2012. Such payments are targeted to total $1,800 but are contingent
and uncapped. Contingent payments under the earn-out arrangement described above will be allocated
to goodwill during the period in which it becomes probable that the contingent payments will be
made.
This acquisition was accounted for under the purchase method in accordance with SFAS No. 141
and was included in the Companys consolidated financial statements effective August 1, 2007. The
Company recorded $2,117 in goodwill, $766 in intangible assets and a deferred tax liability of $136
related to the acquisition, along with the other tangible assets acquired and liabilities assumed.
The goodwill is not deductible for tax purposes. The intangible assets consisted of customer
relationships and trade names with assigned values of $720 and $46, respectively, and useful lives
(in years) of 10 and 0.5, respectively.
The following table summarizes the fair values of the assets acquired and liabilities assumed
at the date of acquisition:
|
|
|
|
|
Current assets
|
|
$
|
355
|
|
Property, plant and equipment
|
|
|
140
|
|
Goodwill
|
|
|
2,117
|
|
Intangible assets
|
|
|
766
|
|
Other long-term assets
|
|
|
44
|
|
|
|
|
|
Total assets acquired
|
|
$
|
3,422
|
|
|
|
|
|
Current liabilities
|
|
$
|
(288
|
)
|
Deferred tax liability
|
|
|
(136
|
)
|
|
|
|
|
Total liabilities assumed
|
|
$
|
(424
|
)
|
|
|
|
|
Net assets acquired
|
|
$
|
2,998
|
|
|
|
|
|
Unaudited pro forma results of operations of the Company for the three and nine months ended
March 31, 2008 are not presented to give effect to the Marketshare acquisition as if it had
occurred on July 1, 2007, as the acquisition was not significant.
6. Restructuring Charges
During the third quarter of fiscal 2008, the Company recorded $1,138 in restructuring charges
directly related to its decisions made at various times during the quarter to close its telephone
center in Orem, Utah by March 2008, strategically reduce headcount, and reduce leased space at its
Grandville, Michigan and Norwalk, Connecticut offices. Each decision was designed to better align
the Companys cost structure with the evolving operational needs of the business.
In connection with the Orem closure, the Company reduced its headcount by 26 full-time
equivalents and incurred $166 in one-time termination benefits, all of which involved cash
payments. The reduction in staff was communicated to the affected employees in January 2008.
Additionally, the Company incurred $120 in contract termination charges related to the remaining
operating lease obligation, all of which involved cash payments. All actions were completed by
March 31, 2008. Cash payments in connection with the Orem closure will be completed in August
2008.
An additional headcount reduction of 15 full-time equivalents occurred in February 2008 and
resulted in $334 in one-time termination benefits, all of which involve cash payments. All actions
associated with this headcount reduction were completed in February 2008, and cash payments in
connection with the one-time termination benefits will be completed by September 2008.
10
In connection with the leased space reductions in Grandville and Norwalk, the Company incurred
$518 in contract termination charges related to the remaining operating lease obligations, all of
which involve cash payments. All actions associated with the space reductions were completed in March 2008. Cash payments in
connection with the remaining lease obligations will be completed by April 2015.
The following table summarizes activity with respect to the fiscal 2008 restructuring
activities for the nine months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
|
|
|
|
July 1,
|
|
|
Costs
|
|
|
Cash
|
|
|
Non-Cash
|
|
|
March 31,
|
|
|
|
2007
|
|
|
Incurred
|
|
|
Payments
|
|
|
Settlements
|
|
|
2008
|
|
Severance payments
|
|
$
|
|
|
|
$
|
500
|
|
|
$
|
(207
|
)
|
|
$
|
|
|
|
$
|
293
|
|
Lease obligations
|
|
|
|
|
|
|
638
|
|
|
|
(4
|
)
|
|
|
(42
|
)
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
1,138
|
|
|
$
|
(211
|
)
|
|
$
|
(42
|
)
|
|
$
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Discontinued Operations
Rent and Recruit
During the fourth quarter of fiscal 2007, the Company committed to a plan to sell its Rent and
Recruit business (Rent and Recruit). The Company classified Rent and Recruit as a discontinued
operation, consistent with the provisions of SFAS No. 144. At June 30, 2007, the Company was in
the process of identifying potential buyers or other interested parties and discussing a possible
transaction with them. On August 23, 2007, the sale of Rent and Recruit was completed and resulted
in a gain of $220.
The results of operations, net of taxes, and the carrying value of the assets and liabilities
of Rent and Recruit are reflected in the accompanying unaudited consolidated financial statements
as discontinued operations, assets held for sale and liabilities held for sale, respectively. All
prior periods presented were reclassified to conform to this presentation. These reclassifications
of the prior period consolidated financial statements did not impact total assets, liabilities,
stockholders equity, net income or cash flows.
The revenue and income attributable to the operations of Rent and Recruit and reported in
discontinued operations were as follows for the three and nine months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue from services
|
|
$
|
|
|
|
$
|
806
|
|
|
$
|
479
|
|
|
$
|
2,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes
|
|
$
|
|
|
|
$
|
53
|
|
|
$
|
(29
|
)
|
|
$
|
112
|
|
Gain on sale of discontinued operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
19
|
|
|
|
67
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of provision for income taxes
|
|
$
|
|
|
|
$
|
34
|
|
|
$
|
124
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following assets and liabilities of Rent and Recruit were reported as assets and
liabilities held for sale in the accompanying consolidated balance sheet for the fiscal year ended
June 30:
|
|
|
|
|
|
|
2007
|
|
Accounts receivable, net
|
|
$
|
535
|
|
Unbilled receivables, net
|
|
|
28
|
|
Prepaid expenses and other current assets
|
|
|
17
|
|
Property, plant and equipment
|
|
|
50
|
|
Goodwill
|
|
|
396
|
|
Deferred tax assets
|
|
|
48
|
|
|
|
|
|
Assets held for sale
|
|
$
|
1,074
|
|
|
|
|
|
Accounts payable
|
|
$
|
(212
|
)
|
11
|
|
|
|
|
|
|
2007
|
|
Accrued expenses
|
|
|
(57
|
)
|
Deferred revenue
|
|
|
(61
|
)
|
|
|
|
|
Liabilities held for sale
|
|
$
|
(330
|
)
|
|
|
|
|
8. Goodwill
The changes in the carrying amount of goodwill for the nine months ended March 31, 2008 were
as follows:
|
|
|
|
|
Balance at July 1, 2007
|
|
$
|
115,466
|
|
Acquisition of Decima Research, Inc. (Note 5)
|
|
|
8,034
|
|
Acquisition of Marketshare (Note 5)
|
|
|
2,109
|
|
Foreign currency translation adjustments
|
|
|
3,598
|
|
Purchase accounting adjustments related to April 2007 acquisition of MediaTransfer
|
|
|
(306
|
)
|
Purchase accounting adjustments related to August 2007 acquisition of Decima Research, Inc.
|
|
|
439
|
|
Purchase accounting adjustments related to August 2007 acquisition of Marketshare
|
|
|
8
|
|
Prior period purchase accounting adjustment of deferred taxes
|
|
|
(17
|
)
|
|
|
|
|
Balance at March 31, 2008
|
|
$
|
129,331
|
|
|
|
|
|
9. Acquired Intangible Assets Subject to Amortization
Acquired intangible assets subject to amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Book
|
|
|
Weighted-Average
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amortization Period
|
|
Contract-based intangibles
|
|
$
|
1,770
|
|
|
$
|
1,760
|
|
|
$
|
10
|
|
|
3.4 years
|
Internet respondent database
|
|
|
3,611
|
|
|
|
1,503
|
|
|
|
2,108
|
|
|
7.0 years
|
Customer relationships
|
|
|
22,127
|
|
|
|
4,007
|
|
|
|
18,120
|
|
|
9.5 years
|
Trade names
|
|
|
5,362
|
|
|
|
1,552
|
|
|
|
3,810
|
|
|
16.1 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,870
|
|
|
$
|
8,822
|
|
|
$
|
24,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Book
|
|
|
Weighted-Average
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amortization Period
|
|
Contract-based intangibles
|
|
$
|
1,761
|
|
|
$
|
1,751
|
|
|
$
|
10
|
|
|
3.4 years
|
Internet respondent database
|
|
|
2,341
|
|
|
|
783
|
|
|
|
1,558
|
|
|
8.0 years
|
Customer relationships
|
|
|
8,430
|
|
|
|
2,271
|
|
|
|
6,159
|
|
|
9.2 years
|
Trade names
|
|
|
5,033
|
|
|
|
972
|
|
|
|
4,061
|
|
|
17.1 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,565
|
|
|
$
|
5,777
|
|
|
$
|
11,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months Ended
|
|
|
|
Ended March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Aggregate amortization expense
|
|
$
|
868
|
|
|
$
|
315
|
|
|
$
|
2,828
|
|
|
$
|
1,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future amortization expense for the fiscal years ending June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
3,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
2,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
2,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
$
|
2,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
$
|
11,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
10. Borrowings
On September 21, 2007, the Company entered into a Credit Agreement (the Credit Agreement)
with JPMorgan Chase Bank, N.A. (JPMorgan), as Administrative Agent, and the Lenders party
thereto. Pursuant to the Credit Agreement, the Lenders made available $100,000 in credit
facilities (the Credit Facilities) in the form of a revolving line of credit (Revolving Line),
a term loan (Term Loan), and a multiple advance term loan commitment (Multiple Advance
Commitment).
The Revolving Line enables the Company to borrow, repay, and re-borrow up to $25,000 principal
outstanding at any one time, with a $10,000 sub-limit for issuance of letters of credit. The full
amount of the Term Loan (Term Loan A) was made in a single advance of $12,000 at the time of
closing of the Credit Facilities. The Multiple Advance Commitment enables the Company to borrow up
to an aggregate of $63,000 in one or more advances, and $19,825 (Term Loan B) and $2,800 (Term
Loan C) were advanced at closing. Existing letters of credit in the face amount of $196 also were
treated as if issued under the Revolving Line. In addition, the Credit Agreement permits the
Company to request increases in the Revolving Line up to an additional $25,000 of availability,
subject to discretionary commitments by the then Lenders and, if needed, additional lenders. The
Credit Facilities replaced existing credit arrangements with JPMorgan.
Outstanding amounts under the Credit Facilities accrue interest, as elected by the Company, at
either (a) the greater of the Administrative Agents Prime Rate or the Federal Funds Rate plus
0.5%, or (b) the Adjusted LIBOR interest rate plus a spread of between 0.625% and 1.00% depending
upon the Companys leverage ratio as measured quarterly. In addition, the Lenders receive a
commitment fee ranging from 0.10% to 0.175%, depending upon the Companys leverage ratio, quarterly
in arrears based on average unused portions of the full committed amount of the Credit Facilities.
Accrued interest is payable quarterly in arrears, or at the end of each applicable LIBOR interest
rate period, but at least every three months, with respect to borrowings for which the Adjusted
LIBOR interest rate applies.
All outstanding amounts under the Credit Facilities are due and payable in full on September
21, 2012 (the Maturity Date). On the last day of each quarter, principal payments of $600 each
are due and payable with respect to the Term Loan, and principal payments equal to 5% of each
borrowing made under the Multiple Advance Commitment also are due and payable. Borrowings are
freely prepayable, subject to break funding payments for prepayments during Adjusted LIBOR interest
periods. At March 31, 2008, the required principal repayments of Term Loans A, B and C for the
remaining three months of fiscal 2008 and for each of the five succeeding fiscal years were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan A
|
|
|
Term Loan B
|
|
|
Term Loan C
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
600
|
|
|
$
|
991
|
|
|
$
|
140
|
|
|
$
|
1,731
|
|
2009
|
|
|
2,400
|
|
|
|
3,965
|
|
|
|
560
|
|
|
|
6,925
|
|
2010
|
|
|
2,400
|
|
|
|
3,965
|
|
|
|
560
|
|
|
|
6,925
|
|
2011
|
|
|
2,400
|
|
|
|
3,965
|
|
|
|
560
|
|
|
|
6,925
|
|
2012
|
|
|
2,400
|
|
|
|
3,965
|
|
|
|
560
|
|
|
|
6,925
|
|
2013
|
|
|
600
|
|
|
|
992
|
|
|
|
140
|
|
|
|
1,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,800
|
|
|
$
|
17,843
|
|
|
$
|
2,520
|
|
|
$
|
31,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has elected the LIBOR interest rate on amounts outstanding under Term Loans A, B
and C. At March 31, 2008, the applicable LIBOR interest rate was 2.70%. Effective September 21,
2007, the Company entered into an interest rate swap agreement with JPMorgan, which effectively
fixed the floating LIBOR interest portion of the rates on the amounts outstanding under Term Loans
A, B and C at 5.08% through September 21, 2012. The additional spread applicable to the interest
rates based on the Companys leverage ratio at March 31, 2008 was 0.875%, resulting in an aggregate
interest rate at March 31, 2008 of 5.955%. The Company anticipates that the interest rate swap
will be settled upon maturity and it is being accounted for as a cash flow hedge. The interest
rate swap is recorded at fair value each reporting period with the changes in the fair value of the
hedge that take place through the date of maturity recorded in accumulated other comprehensive
income. At March 31, 2008, the Company recorded a liability of $1,673 in the Other liabilities
line item of its unaudited consolidated balance sheet. There was no ineffectiveness associated
with the interest rate swap for the nine months ended March 31, 2008.
13
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. The Credit Agreement requires the Company to maintain a
consolidated interest coverage ratio of at least 3.0 to 1.0, and a consolidated leverage ratio of
2.5 to 1.0 or less. At March 31, 2008, the Company was in compliance with all covenants under the
Credit Agreement.
The Company may freely transfer assets and incur obligations among its domestic subsidiaries
that are guarantors of its obligations related to the Credit Facilities, and its first tier foreign
subsidiaries with respect to which it has delivered pledges of 66% of the outstanding stock and
membership interests, as applicable, in favor of the Lenders. On the date of closing of the Credit
Facilities, the Companys domestic subsidiaries, Louis Harris & Associates, Inc., Wirthlin
Worldwide, LLC, Harris Interactive International Inc., Harris International Asia, LLC, and The
Wirthlin Group International, L.L.C., guaranteed the Companys obligations under the Credit
Facilities.
11. Stock-Based Compensation
The Company recognizes expense for its share-based payments in accordance with SFAS No. 123
(revised),
Share-Based Payment
. 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
stock-based compensation expense for the cost of stock options and restricted stock issued under
its Long-Term Incentive Plan (the Incentive Plan), stock options issued to new employees outside
the Incentive Plan and shares issued under the Companys Employee Stock Purchase Plan (ESPP)
included in the Companys unaudited consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Cost of services
|
|
$
|
25
|
|
|
$
|
23
|
|
|
$
|
82
|
|
|
$
|
74
|
|
Sales and marketing
|
|
|
49
|
|
|
|
45
|
|
|
|
160
|
|
|
|
145
|
|
General and administrative
|
|
|
880
|
|
|
|
822
|
|
|
|
2,900
|
|
|
|
2,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
954
|
|
|
$
|
890
|
|
|
$
|
3,142
|
|
|
$
|
2,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a summary of the status of the Companys employee and
non-employee director stock options (including options issued under the Incentive Plan and options
issued outside the Incentive Plan to new employees) for the nine months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
Options outstanding at July 1
|
|
|
5,576,373
|
|
|
$
|
5.34
|
|
Granted
|
|
|
775,314
|
|
|
|
4.17
|
|
Forfeited
|
|
|
(328,986
|
)
|
|
|
4.17
|
|
Exercised
|
|
|
(36,000
|
)
|
|
|
0.47
|
|
|
|
|
|
|
|
|
Options outstanding at March 31
|
|
|
5,986,701
|
|
|
$
|
5.28
|
|
|
|
|
|
|
|
|
The following table provides a summary of the status of the Companys employee and
non-employee director restricted stock awards for the nine months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
Shares
|
|
|
Date of Grant
|
|
Restricted shares outstanding at July 1
|
|
|
200,622
|
|
|
$
|
5.63
|
|
Granted
|
|
|
673,925
|
|
|
|
3.61
|
|
Forfeited
|
|
|
(143,570
|
)
|
|
|
4.18
|
|
Vested
|
|
|
(61,747
|
)
|
|
|
5.15
|
|
|
|
|
|
|
|
|
Restricted shares outstanding at March 31
|
|
|
669,230
|
|
|
$
|
3.95
|
|
|
|
|
|
|
|
|
14
At March 31, 2008, there was $7,166 of total unrecognized stock-based compensation expense
related to non-vested stock-based compensation arrangements granted under the Incentive Plan,
outside the Incentive Plan and under the ESPP. That expense is expected to be recognized over a
weighted-average period of 3.0 years.
12. Comprehensive Income
The components of the Companys total comprehensive income for the three and nine months ended
March 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net income (loss), as reported
|
|
$
|
(2,133
|
)
|
|
$
|
1,156
|
|
|
$
|
1,033
|
|
|
$
|
5,712
|
|
Foreign currency translation adjustments
|
|
|
2,007
|
|
|
|
208
|
|
|
|
6,361
|
|
|
|
1,663
|
|
Change in fair value of interest rate swap
|
|
|
(785
|
)
|
|
|
|
|
|
|
(1,673
|
)
|
|
|
|
|
Unrealized gain (loss) on marketable securities
|
|
|
|
|
|
|
2
|
|
|
|
(4
|
)
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
(911)
|
|
|
$
|
1,366
|
|
|
$
|
5,717
|
|
|
$
|
7,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Income Taxes
As indicated in Note 4, effective July 1, 2007 the Company adopted FIN No. 48. The Company
recorded a $70 cumulative effect adjustment to retained earnings as a result of the adoption of FIN
No. 48. Upon adoption, the liability for income taxes associated with uncertain tax positions was
$437, of which $191 related to unrecognized tax benefits that would affect the Companys effective
tax rate if recognized. The Company reclassified $156 of income tax liabilities from current to
non-current liabilities because payment of cash is not anticipated within one year of the balance
sheet date. These non-current liabilities are recorded in the Other liabilities line in the
Companys unaudited consolidated balance sheet. There were no material changes to the Companys
FIN No. 48 liabilities during the nine months ended March 31, 2008.
It is reasonably possible that the liability associated with the Companys unrecognized tax
benefits will increase or decrease within the next twelve months. These changes may be the result
of ongoing audits or the expiration of statutes of limitations. At this time, an estimate of the
range of the reasonably possible outcomes cannot be made.
In accordance with the Companys accounting policy, the Company recognizes accrued interest
and penalties related to unrecognized tax benefits as a component of income tax expense. This
policy did not change as a result of the adoption of FIN No. 48. As of the date of adoption, $18,
net of tax benefit, was included in the liability for uncertain tax positions for the possible
payment of interest and penalties.
The Company files U.S. federal income tax returns and various state, local and foreign income
tax returns. With few exceptions, the Company is no longer subject to U.S. federal, state, local
or foreign income tax examinations for fiscal years prior to June 30, 2000.
During the quarter ended March 31, 2008, the Company recorded an additional valuation
allowance of $510 with respect to its deferred tax asset associated with its capital loss carryover
of $1,458. This capital loss carryover now has a full valuation
allowance against it as it is not
more likely than not that any portion of the carryover will be realized during the carryover
period. The change in judgment during this quarter is primarily due to a change in market
conditions which will limit the Companys ability to generate capital gain income. Adjustments to
this valuation allowance may be necessary in the future if estimates of capital gain income are
revised.
14. Net Income Per Share
The following table presents the share counts used in computing basic and diluted net income
per share for the three and nine months ended March 31:
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Weighted-average
outstanding common
shares for basic
net income per
share
|
|
|
52,923,113
|
|
|
|
57,438,567
|
|
|
|
52,776,473
|
|
|
|
58,504,441
|
|
Dilutive effect of
outstanding stock
options and
unvested restricted
stock
|
|
|
|
|
|
|
268,530
|
|
|
|
212,530
|
|
|
|
255,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding common
shares for diluted
net income per
share
|
|
|
52,923,113
|
|
|
|
57,707,097
|
|
|
|
52,989,003
|
|
|
|
58,760,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock and unexercised stock options to purchase 5,918,209 and 2,409,191
shares of the Companys common stock for the three months ended March 31, 2008 and 2007,
respectively, at weighted-average prices per share of $5.50 and $7.06, respectively, were not
included in the computations of diluted net income per share because their grant prices were
greater than the average market price of the Companys common stock during the respective periods.
Unvested restricted stock and unexercised stock options to purchase 5,599,677 and 2,356,691 shares
of the Companys common stock for the nine months ended March 31, 2008 and 2007, respectively, at
weighted-average prices per share of $5.60 and $7.10, respectively, were not included in the
computations of diluted net income per share because their grant prices were greater than the
average market price of the Companys common stock during the respective periods.
15. Enterprise-Wide Disclosures
The Company is comprised principally of operations in North America, Europe and Asia.
Non-U.S. market research is comprised of operations in United Kingdom, Canada, France, Germany,
Hong Kong and Singapore and to a more limited extent, China. The Company currently has one
reportable segment. There were no inter-company transactions that materially affected the
unaudited consolidated financial statements, and all inter-company sales have been eliminated upon
consolidation.
The Company has 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. The Company has allocated common expenses among these
geographic regions differently than it would for stand-alone information prepared in accordance
with GAAP. Thus, geographic operating income (loss) may not be consistent with measures used by
other companies.
Geographic information for the three and nine months ended March 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
36,066
|
|
|
$
|
40,237
|
|
|
$
|
114,154
|
|
|
$
|
118,412
|
|
United Kingdom
|
|
|
9,756
|
|
|
|
9,934
|
|
|
|
30,319
|
|
|
|
31,448
|
|
Canada
|
|
|
7,552
|
|
|
|
|
|
|
|
18,157
|
|
|
|
|
|
Other European countries
|
|
|
3,425
|
|
|
|
1,577
|
|
|
|
10,745
|
|
|
|
4,836
|
|
Asia
|
|
|
523
|
|
|
|
|
|
|
|
1,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from services
|
|
$
|
57,322
|
|
|
$
|
51,748
|
|
|
$
|
175,224
|
|
|
$
|
154,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(1,222
|
)
|
|
$
|
1,376
|
|
|
$
|
4,132
|
|
|
$
|
6,548
|
|
United Kingdom
|
|
|
(122
|
)
|
|
|
279
|
|
|
|
118
|
|
|
|
2,030
|
|
Canada
|
|
|
128
|
|
|
|
|
|
|
|
(569
|
)
|
|
|
|
|
Other European countries
|
|
|
(104
|
)
|
|
|
(162
|
)
|
|
|
234
|
|
|
|
(270
|
)
|
Asia
|
|
|
(549
|
)
|
|
|
(68
|
)
|
|
|
(800
|
)
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
(1,869
|
)
|
|
$
|
1,425
|
|
|
$
|
3,115
|
|
|
$
|
8,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,598
|
|
|
$
|
7,424
|
|
|
$
|
6,598
|
|
|
$
|
7,424
|
|
Canada
|
|
|
2,823
|
|
|
|
|
|
|
|
2,823
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
United Kingdom
|
|
|
1,963
|
|
|
|
2,272
|
|
|
|
1,963
|
|
|
|
2,272
|
|
Other European countries
|
|
|
383
|
|
|
|
147
|
|
|
|
383
|
|
|
|
147
|
|
Asia
|
|
|
234
|
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
12,001
|
|
|
$
|
9,843
|
|
|
$
|
12,001
|
|
|
$
|
9,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
14,292
|
|
|
$
|
18,021
|
|
|
$
|
14,292
|
|
|
$
|
18,021
|
|
Canada
|
|
|
(3,299
|
)
|
|
|
|
|
|
|
(3,299
|
)
|
|
|
|
|
United Kingdom
|
|
|
478
|
|
|
|
308
|
|
|
|
478
|
|
|
|
308
|
|
Other European countries
|
|
|
(949
|
)
|
|
|
(468
|
)
|
|
|
(949
|
)
|
|
|
(468
|
)
|
Asia
|
|
|
(131
|
)
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
10,391
|
|
|
$
|
17,861
|
|
|
$
|
10,391
|
|
|
$
|
17,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Commitments and Contingencies
The Company has several non-cancelable operating leases for office space, vehicles and
equipment, including certain leases with former related parties as discussed in Note 20, Related
Party Transactions, to the consolidated financial statements included in the Companys Annual
Report on Form 10-K for the fiscal year ended June 30, 2007. There have been no material changes
to the financial obligations for such leases during the nine months ended March 31, 2008 from those
disclosed in Note 18, Commitments and Contingencies, to the audited consolidated financial
statements included in the Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2007.
17. Legal Proceedings
In the normal course of business, the Company is at times subject to pending and threatened
legal actions and proceedings. After reviewing pending and threatened actions and proceedings with
counsel, management does not expect the outcome of such actions or proceedings to have a material
adverse effect on the Companys business, financial condition or results of operations.
Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations
The discussion in this
Form 10-Q
contains forward-looking statements that involve risks and
uncertainties. The statements contained in this
Form 10-Q
that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements
regarding expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on the information available to
Harris Interactive on the date hereof, and Harris Interactive assumes no obligation to update any
such forward-looking statement. Actual results could differ materially from the results discussed
herein. Factors that might cause or contribute to such differences include but are not limited to,
those discussed in the Risk Factors section set forth in reports or documents Harris Interactive
files from time to time with the SEC, such as our Annual Report on
Form 10-K
for the fiscal year
ended June 30, 2007, filed on September 12, 2007. In addition, general market factors and economic
trends, such as interest rates, the U.S. and world economy, the financial stability of world
markets and the financial condition and outlook of our customers and potential customers should
also be considered. The Risk Factors set forth in other reports or documents Harris Interactive
files from time to time with the SEC should also be reviewed.
Overview
Harris Interactive is a professional services firm that serves its clients in many industries
and many countries. We provide Internet-based and traditional market research services which
include ad-hoc or customized qualitative and quantitative research, service bureau research
(conducted for other market research firms), long-term tracking studies and syndicated research.
Year-to-Date
In August 2007, we took two significant steps to expand our global research capabilities by
acquiring Decima Research, a leading Canadian research firm, and Marketshare, a private Asian
research firm with co-located headquarters in Hong Kong and Singapore. Adding the strengths of
these firms improved our global service offering and
17
provided increased access into two fast-growing regions that, according to
ESOMAR
, represent
about a $4.0 billion market opportunity. By adding these firms, we now have a presence in six of
the top ten global research markets that among the ten represent two-thirds of the global market,
increasing our access to the global research market from approximately half nine months ago. In
line with our global expansion goals, we will continue to look for suitable partners in other
sizable and high-growth regions around the world.
From a financial perspective:
|
|
|
Total revenue increased 10.8% for the third fiscal quarter and 13.3% for the fiscal
year-to-date, when compared with the same prior year periods. Organic revenue (defined
as revenue from current operations owned at least one year) decreased 7.9% for the third
fiscal quarter and 3.1% for the fiscal year-to-date, when compared with the same prior
year periods.
|
|
|
|
|
Operating margin decreased to (3.3)% for the third fiscal quarter and 1.8% for the
fiscal year-to-date, when compared with 2.8% and 5.3% for the same respective prior year
periods.
|
|
|
|
|
The net loss for the third fiscal quarter was $(2.1) million and net income for the
fiscal year-to-date was $1.0 million, compared with net income of $1.2 million and $5.7
million for the same respective prior year periods.
|
|
|
|
|
Total North American revenue increased 8.4% for the third fiscal quarter and 11.7%
for the fiscal year-to-date, when compared with the same prior year periods. Organic
North American revenue decreased 10.4% for the third fiscal quarter and 3.6% for the
fiscal year-to-date, when compared with the same prior year periods.
|
|
|
|
|
Total European revenue increased 14.5% for the third fiscal quarter and 13.2% for the
fiscal year-to-date, when compared with the same prior year periods. Organic European
revenue was essentially flat for the third fiscal quarter and decreased 1.3% for the
fiscal year-to-date, when compared with the same prior year periods.
|
|
|
|
|
Total Internet-based revenue increased 15.8% for the third
fiscal quarter and 18.3%
for the fiscal year-to-date, when compared with the same prior year periods. Organic
Internet-based revenue increased 6.8% for the third fiscal quarter and 9.3% for the
fiscal year-to-date, when compared with the same prior year periods.
|
|
|
|
|
North American Internet-based revenue decreased 1.9% for the third fiscal quarter and
increased 7.3% for the fiscal year-to-date, when compared with the same prior year
periods. Organic North American Internet-based revenue decreased 6.8% for the third
fiscal quarter and increased 2.8% for the fiscal year-to-date, when compared with the
same prior year periods.
|
|
|
|
|
European Internet-based revenue increased 155.1% for the second fiscal quarter and
91.9% for the fiscal year-to-date, when compared with the same prior year periods.
Organic European Internet-based revenue increased 114.3% for the third fiscal quarter
and 52.6% for the fiscal year-to-date, when compared with the same prior year periods.
|
Through the first nine months of the fiscal year, our revenue has declined mainly due to
issues within the U.S. economy and our Healthcare business. In response to the economic issues, we
have rescaled our business to support sustainable revenue and deliver acceptable profitability.
Our Healthcare business has experienced both external market and internal management issues and as
a result, weve appointed new leadership within that business.
Our profitability has fallen short of expectations for the fiscal year due to our inability to
lower our fixed costs rapidly enough in response to decreased revenue and our resulting retention
of excess direct labor capacity. As a result, weve taken the actions more fully described under
Restructuring below.
18
Business Combinations
Decima Research
On August 16, 2007, we, along with 2144798 Ontario Inc., a corporation incorporated under the
laws of the Province of Ontario, Canada (our wholly-owned, indirect subsidiary, Canco), and all
of the stockholders of Decima Research Inc., a corporation amalgamated under the laws of Province
of Ontario, Canada (Decima) entered into a Share Purchase Agreement dated August 16, 2007
pursuant to which Canco purchased 100% of the outstanding shares of Decima.
This acquisition has allowed us to expand our presence in the global research market, as
according to
ESOMAR
, the Canadian market is the seventh largest in the world. Key sectors served
by Decima include financial services, telecommunications, public affairs and
tourism/recreation/gaming.
Marketshare
On August 16, 2007, Harris Interactive International (HII), Harris Interactive Asia Limited,
(HIIs Hong Kong wholly-owned subsidiary, Harris Asia), and all the stockholders of (i)
Marketshare Limited, a company incorporated under the laws of Hong Kong (Marketshare), and (ii)
Marketshare Pte Ltd, a company incorporated under the laws of Singapore (Marketshare Pte) entered
into an Agreement Relating to the Sale and Purchase of the Entire Issued Share Capitals of
Marketshare Limited and Marketshare Pte Ltd dated August 16, 2007, pursuant to which Harris Asia
purchased 100% of the issued share capital of Marketshare and Marketshare Pte.
This acquisition has provided access into the rapidly growing Asia/Pacific market and will
serve as a platform for continued acquisitive growth in the region. Key sectors served by
Marketshare include retail, financial services, technology and travel/tourism.
The acquisitions of Decima and Marketshare were accounted for under the purchase method in
accordance with SFAS No. 141 and were included in our consolidated financial statements effective
August 1, 2007. Further financial information about these business combinations is included in
Note 5, Business Combinations, to our unaudited consolidated financial statements contained in
this Form 10-Q.
Restructuring
During the third quarter of fiscal 2008, we recorded $1.1 million in restructuring charges
directly related to our decisions made at various times during the quarter to close our telephone
center in Orem, Utah by March 2008, strategically reduce headcount, and reduce leased space at our
Grandville, Michigan and Norwalk, Connecticut offices. Each decision was designed to better align
our cost structure with the evolving operational needs of the business.
In connection with the Orem closure, we reduced our headcount by 26 full-time equivalents and
incurred $0.2 million in one-time termination benefits, all of which involved cash payments. The
reduction in staff was communicated to the affected employees in January 2008. Additionally, we
incurred $0.1 million in contract termination charges related to the remaining operating lease
obligation, all of which involved cash payments. All actions were completed by March 31, 2008.
Cash payments in connection with the Orem closure will be completed in August 2008.
An additional headcount reduction of 15 full-time equivalents occurred in February 2008 and
resulted in $0.3 million in one-time termination benefits, all of which involve cash payments. All
actions associated with this headcount reduction were completed in February 2008, and cash payments
in connection with the one-time termination benefits will be completed by September 2008.
In connection with the leased space reductions in Grandville and Norwalk, we incurred $0.5
million in contract termination charges related to the remaining operating lease obligations, all
of which involve cash payments. All actions associated with the space reductions were completed in
March 2008. Cash payments in connection with the remaining lease obligations will be completed by
April 2015.
19
The following table summarizes activity with respect to the fiscal 2008 restructuring
activities for the nine months ended March 31, 2008 (amounts in 000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
|
|
|
|
July 1,
|
|
|
Costs
|
|
|
Cash
|
|
|
Non-Cash
|
|
|
March 31,
|
|
|
|
2007
|
|
|
Incurred
|
|
|
Payments
|
|
|
Settlements
|
|
|
2008
|
|
Severance payments
|
|
$
|
|
|
|
$
|
500
|
|
|
$
|
(207
|
)
|
|
$
|
|
|
|
$
|
293
|
|
Lease obligations
|
|
|
|
|
|
|
638
|
|
|
|
(4
|
)
|
|
|
(42
|
)
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
1,138
|
|
|
$
|
(211
|
)
|
|
$
|
(42
|
)
|
|
$
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
During the fourth quarter of fiscal 2007, we committed to a plan to sell our Rent and Recruit
business. We classified Rent and Recruit as a discontinued operation, consistent with the
provisions of SFAS No. 144. At June 30, 2007, we were in the process of identifying potential
buyers or other interested parties and discussing a possible transaction with them. The sale of
Rent and Recruit was completed on August 23, 2007 and resulted in a gain of $0.2 million.
The results of operations, net of taxes, and the carrying value of the assets and liabilities
of Rent and Recruit are reflected in the accompanying unaudited consolidated financial statements
as discontinued operations, assets held for sale and liabilities held for sale, respectively. All
prior periods presented were reclassified to conform to this presentation. These reclassifications
of the prior period consolidated financial statements did not impact total assets, liabilities,
stockholders equity, net income or cash flows.
Further financial information regarding discontinued operations is included in Note 7,
Discontinued Operations, to our unaudited consolidated financial statements contained in this
Form 10-Q.
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 consolidated financial
statements in fiscal 2008 include:
|
|
|
Revenue recognition,
|
|
|
|
|
Provision for uncollectible accounts,
|
|
|
|
|
Restructuring charges,
|
|
|
|
|
Discontinued operations,
|
|
|
|
|
Valuation of intangible assets and other long-lived assets,
|
|
|
|
|
Valuation of goodwill,
|
|
|
|
|
Realizability of deferred tax assets and tax contingencies,
|
|
|
|
|
HIpoints loyalty program,
|
|
|
|
|
Post-employment payments, and
|
|
|
|
|
Stock-based compensation.
|
In each situation, management is required to make estimates about the effects of matters or
future events that are inherently uncertain.
20
During the nine months ended March 31, 2008, there were no changes to the items that we
disclosed as our critical accounting policies and estimates in managements discussion and analysis
of financial condition and results of operations included in our
Annual Report on Form 10‑K for the
fiscal year ended June 30, 2007, filed by us with the SEC on September 12, 2007, except as follows:
HIpoints Loyalty Program
In July 2001, we initiated HIpoints, a loyalty program designed to reward respondents who
register for our 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 portfolio
at any time prior to expiration. We maintain 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 our actual redemption rates since the inception of the
program. An actual rate that differs from the expected redemption rate could have a material
impact on the results of our operations.
Prior to December 2007, points under the HIpoints program expired after one year of account
inactivity. In December 2007, we modified the expiration parameters of the program such that
points now expire after nine months of account inactivity and tightened the rules around
expirations to more accurately account for panelists that are not truly engaged in the program.
These changes resulted in a $0.8 million reduction in our reserve for obligations with respect to
future redemption of outstanding points during the three months ended December 31, 2007, which was
recorded in the Cost of services line item of our unaudited consolidated statement of operations.
All other aspects of the HIpoints program as described in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2007 remain unchanged.
Results of Operations
Three Months Ended March 31, 2008 Versus Three Months Ended March 31, 2007
The following table sets forth the results of our continuing operations, expressed both as a
dollar amount and as a percentage of revenue from services, for the three months ended March 31,
2008 and 2007, respectively (amounts in 000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
Revenue from services
|
|
$
|
57,322
|
|
|
|
100.0
|
%
|
|
$
|
51,748
|
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
28,914
|
|
|
|
50.4
|
|
|
|
26,511
|
|
|
|
51.2
|
|
Sales and marketing
|
|
|
5,806
|
|
|
|
10.1
|
|
|
|
5,642
|
|
|
|
10.9
|
|
General and administrative
|
|
|
21,172
|
|
|
|
36.9
|
|
|
|
16,945
|
|
|
|
32.7
|
|
Depreciation and amortization
|
|
|
2,161
|
|
|
|
3.8
|
|
|
|
1,225
|
|
|
|
2.4
|
|
Restructuring charges
|
|
|
1,138
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(1,869
|
)
|
|
|
(3.3
|
)
|
|
|
1,425
|
|
|
|
2.8
|
|
Interest and other income
|
|
|
230
|
|
|
|
0.4
|
|
|
|
580
|
|
|
|
1.1
|
|
Interest expense
|
|
|
(514
|
)
|
|
|
(0.9
|
)
|
|
|
(5
|
)
|
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
(2,153
|
)
|
|
|
(3.8
|
)
|
|
|
2,000
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes
|
|
|
(20
|
)
|
|
|
(0.0
|
)
|
|
|
879
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(2,133
|
)
|
|
|
(3.7
|
)
|
|
|
1,121
|
|
|
|
2.2
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(2,133
|
)
|
|
|
(3.7
|
)
|
|
$
|
1,156
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from services.
Revenue from services increased by $5.6 million to $57.3 million for
the three months ended March 31, 2008, an increase of 10.8% over the same prior year period.
Revenue from services was impacted by several factors, as more fully described below.
North American revenue increased by $3.4 million to $43.6 million for the three months ended
March 31, 2008, an increase of 8.4% over the same prior year period. For the three months ended
March 31, 2008, North American revenue was comprised of:
21
|
|
|
$36.1 million from U.S. operations, down 10.4% compared with $40.2 million for the
same prior year period. The decrease in U.S. revenue was impacted by revenue declines
in the following industry groups:
|
|
|
|
Healthcare, as a result of budget cuts in the pharmaceutical industry as
well as the internal management issues noted above,
|
|
|
|
|
Consumer Goods, as a result of losing a significant client, and
|
|
|
|
|
Emerging and General Markets, as a result of this group narrowing its sales focus.
|
|
|
|
$7.6 million from Canadian operations, all of which was attributable to our August 2007 acquisition of Decima.
|
European revenue increased by $1.7 million to $13.2 million for the three months ended March
31, 2008, an increase of 14.5% over the same prior year period. For the three months ended March
31, 2008, European revenue was comprised of:
|
|
|
$9.8 million from our U.K operations, essentially flat when compared with $9.9
million for the same prior year period, and
|
|
|
|
|
$3.4 million from our French and German operations, compared with $1.6 million from
our French operations for the same prior year period. The increase in revenue from
these operations was principally the result of our April 2007 acquisition of
MediaTransfer, which contributed $1.6 million in incremental revenue in the third fiscal
quarter.
|
European revenue for the three months ended March 31, 2008 included a favorable impact of $0.3
million as a result of foreign exchange rate differences and the depreciation of the U.S. Dollar
against the British Pound and the Euro.
Revenue from Internet-based services was $35.8 million or 62.5% of total revenue for the three
months ended March 31, 2008, compared with $30.9 million or 59.8% of total revenue for the same
prior year period. On a geographic basis:
|
|
|
North American Internet-based revenue was $26.9 million or 61.8% of total North
American revenue for the three months ended March 31, 2008, compared with $27.5 million
or 68.3% of total North American revenue for the same prior year period. North American
Internet-based revenue was comprised of the following:
|
|
|
|
U.S. Internet-based revenue of $25.6 million or 71.0% of total U.S.
revenue for the three months ended March 31, 2008, compared with $27.5 million or
68.3% of total U.S. revenue for the same prior year period. The increase in U.S.
Internet-based revenue as a percentage of total U.S. revenue from the same prior
year period is due to our focus on winning larger tracking studies which can be
performed online.
|
|
|
|
|
Canadian Internet-based revenue of $1.3 million or 17.8% of total
Canadian revenue for the three months ended March 31, 2008, all attributable to our
August 2007 acquisition of Decima. We will continue to focus on growing
Internet-based revenue in our Canadian operations throughout the remainder of fiscal
2008 and beyond.
|
|
|
|
European Internet-based revenue was $8.9 million or 67.4% of total European revenue
for the three months ended March 31, 2008, compared with $3.5 million or 30.3% of total
European revenue for the same prior year period. European Internet-based revenue was
comprised of the following:
|
|
|
|
U.K. Internet-based revenue of $5.8 million or 59.5% of total U.K.
revenue for the three months ended March 31, 2008, compared with $2.1 million or
20.8% of total U.K. revenue for the same prior year period. The increase in U.K.
Internet-based revenue was driven by our continued emphasis on marketing and selling
Internet-based research, as well as the ongoing transition to Internet-based
research throughout Europe.
|
|
|
|
|
French and German Internet-based revenue of $3.1 million or 90.2% of
total French and German revenue
|
22
|
|
|
for the three months ended March 31, 2008, compared
with $1.4 million or 90.0% of total French revenue for the same prior year period.
The increase in French and German Internet-based revenue was principally the result
of our April 2007 acquisition of MediaTransfer, which contributed $1.4 million in
incremental Internet-based revenue in the quarter.
|
Cost of services
.
Cost of services was $28.9 million or 50.4% of total revenue
for the three
months ended March 31, 2008, compared with $26.5 million or 51.2% of total revenue for the same
prior year period. Cost of services was principally impacted by the mix of projects during the
quarter when compared with the same prior year period.
Sales and marketing.
Sales and marketing expense was $5.8 million or 10.1% of total revenue
for the three months ended March 31, 2008, compared with $5.6 million or 10.9% of total revenue for
the same prior year period. Sales and marketing expense was principally impacted by:
|
|
|
$0.8 million in incremental sales and marketing expenses attributable to our
MediaTransfer, Decima and Marketshare acquisitions, and
|
|
|
|
|
$0.6 million decline in selling expenses as a result of our decline in revenue in
both the U.S. and U.K., as discussed above.
|
Sales and marketing expense includes labor costs for project personnel during periods when
they are not working on specific revenue-generating projects but instead are participating in our
selling efforts.
General and administrative.
General and administrative expense increased to $21.2 million or
36.9% of total revenue for the three months ended March 31, 2008, compared with $16.9 million or
32.7% of total revenue for the same prior year period. General and administrative expense was
principally impacted by the following:
|
|
|
$3.4 million in incremental general and administrative expenses attributable to our
MediaTransfer, Decima and Marketshare acquisitions; and
|
|
|
|
|
$0.8 million in severance charges for Leonard R. Bayer, our former Executive Vice
President, Chief Scientist and Chief Technology Officer, in connection with his
retirement which was effective March 31, 2008.
|
General and administrative expense includes the labor costs for project personnel when they
are neither working on specific revenue-generating projects nor participating in our selling
efforts.
Depreciation and amortization
.
Depreciation and amortization was $2.2 million or 3.8% of
total revenue for the three months ended March 31, 2008, compared with $1.2 million or 2.4% of
total revenue for the same prior year period. The increase in depreciation and amortization was
principally the result of $0.8 million in incremental depreciation and amortization expense
attributable to our MediaTransfer, Decima and Marketshare acquisitions.
Restructuring charges.
See above under Restructuring for further discussion regarding
restructuring charges incurred during the three months ended March 31, 2008.
Interest and other income.
Interest and other income was $0.2 million or 0.4% of total
revenue for the three months ended March 31, 2008, compared with $0.6 million or 1.1% of total
revenue for the same prior year period. The decrease in interest and other income was due to a
decrease in the average balance of cash and marketable securities for fiscal 2007 when compared
with fiscal 2008.
Interest expense.
Interest expense was $0.5 million or 0.9% of total revenue for the three
months ended March 31, 2008, compared with essentially no interest expense for the same prior year
period. The increase in interest expense is the result of our outstanding debt during the three
months ended March 31, 2008 compared with the same prior year period, during which we did not have
any outstanding debt.
Income taxes.
Our income tax provision for the three months ended March 31, 2008 was nil,
compared with $0.9 million for the same prior year period. The tax provision for the quarter
reflects an adjustment to the annual effective tax
23
rate as a result of lower profitability within our U.S. operations and a $0.5 million
valuation allowance against a deferred tax asset whose future realizability no longer met the
more-likely-than-not criteria.
Our effective tax rate may be impacted in the future by several factors including, but not
limited to, changes in our legal entity structure, expansion of our global footprint and the nature
of future investment decisions.
Nine Months Ended March 31, 2008 Versus Nine Months Ended March 31, 2007
The following table sets forth the results of our continuing operations, expressed both as a
dollar amount and as a percentage of revenue from services, for the nine months ended March 31,
2008 and 2007, respectively (amounts in 000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
Revenue from services
|
|
$
|
175,224
|
|
|
|
100.0
|
%
|
|
$
|
154,696
|
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
87,373
|
|
|
|
49.9
|
|
|
|
76,324
|
|
|
|
49.3
|
|
Sales and marketing
|
|
|
17,643
|
|
|
|
10.1
|
|
|
|
15,617
|
|
|
|
10.1
|
|
General and administrative
|
|
|
59,651
|
|
|
|
34.0
|
|
|
|
51,197
|
|
|
|
33.1
|
|
Depreciation and amortization
|
|
|
6,304
|
|
|
|
3.6
|
|
|
|
3,821
|
|
|
|
2.5
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
(410
|
)
|
|
|
(0.3
|
)
|
Restructuring charges
|
|
|
1,138
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,115
|
|
|
|
1.8
|
|
|
|
8,147
|
|
|
|
5.3
|
|
Interest and other income
|
|
|
909
|
|
|
|
0.5
|
|
|
|
1,773
|
|
|
|
1.1
|
|
Interest expense
|
|
|
(1,477
|
)
|
|
|
(0.8
|
)
|
|
|
(10
|
)
|
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
2,547
|
|
|
|
1.5
|
|
|
|
9,910
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
1,638
|
|
|
|
0.9
|
|
|
|
4,271
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
909
|
|
|
|
0.5
|
|
|
|
5,639
|
|
|
|
3.6
|
|
Income from discontinued operations, net of tax
|
|
|
124
|
|
|
|
0.1
|
|
|
|
73
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,033
|
|
|
|
0.6
|
|
|
$
|
5,712
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from services.
Revenue from services increased by $20.5 million to $175.2 million for
the nine months ended March 31, 2008, an increase of 13.3% over the same prior year period.
Revenue from services was impacted by several factors, as more fully described below.
North American revenue increased by $13.9 million to $132.3 million for the nine months ended
March 31, 2008, an increase of 11.7% over the same prior year period. For the nine months ended
March 31, 2008, North American revenue was comprised of:
|
|
|
$114.2 million from U.S. operations, down 3.6% compared with $118.4 million for the
same prior year period. The decrease in U.S. revenue was impacted by revenue declines
in the following industry groups:
|
|
|
|
Healthcare, as a result of budget cuts in the pharmaceutical industry as
well as the internal management issues noted above, and
|
|
|
|
|
Emerging and General Markets, as a result of this group narrowing its sales focus.
|
|
|
|
$18.2 million from Canadian operations, all of which was attributable to our August 2007 acquisition of Decima.
|
European revenue increased by $4.8 million to $41.1 million for the nine months ended March
31, 2008, an increase of 13.2% over the same prior year period. For the nine months ended March
31, 2008, European revenue was comprised of:
|
|
|
$30.3 million from our U.K operations, compared with $31.4 million for the same prior
year period. The decrease in U.K. revenue was principally due to prior year projects
that were not renewed in the current year, and
|
24
|
|
|
$10.7 million from our French and German operations, compared with $4.8 million from
our French operations for the same prior year period. The increase in revenue from
these operations was principally the result of our April 2007 acquisition of
MediaTransfer, which contributed $5.3 million in incremental revenue in the third fiscal
quarter.
|
European revenue for the nine months ended March 31, 2008 included a favorable impact of $2.0
million as a result of foreign exchange rate differences and the depreciation of the U.S. Dollar
against the British Pound and the Euro.
Revenue
from Internet-based services was $109.1 million or 62.3% of total revenue for the nine
months ended March 31, 2008, compared with $92.3 million or 59.6% of total revenue for the same
prior year period. On a geographic basis:
|
|
|
North American Internet-based revenue was $86.1 million
or 65.1% of total North
American revenue for the nine months ended March 31, 2008, compared with $80.3 million
or 67.8% of total North American revenue for the same prior year period. North American
Internet-based revenue was comprised of the following:
|
|
|
|
U.S. Internet-based revenue of $82.5 million or 72.3% of total U.S.
revenue for the nine months ended March 31, 2008, compared with $80.3 million or
67.8% of total U.S. revenue for the same prior year period. The increases from the
same prior year period in U.S. Internet-based revenue, both as a dollar amount and
as a percentage of total U.S. revenue, are due to our focus on winning larger
tracking studies which can be performed online.
|
|
|
|
|
Canadian Internet-based revenue of $3.6 million or 19.7% of total
Canadian revenue for the nine months ended March 31, 2008, all attributable to our
August 2007 acquisition of Decima. We will continue to focus on growing
Internet-based revenue in our Canadian operations throughout the remainder of fiscal
2008 and beyond.
|
|
|
|
European Internet-based revenue was $23.0 million or 56.0% of total European revenue
for the nine months ended March 31, 2008, compared with $12.0 million or 33.0% of total
European revenue for the same prior year period. European Internet-based revenue was
comprised of the following:
|
|
|
|
U.K. Internet-based revenue of $13.3 million or 44.0% of total U.K.
revenue for the nine months ended March 31, 2008, compared with $7.6 million or
24.3% of total U.K. revenue for the same prior year period. The increase in U.K.
Internet-based revenue was driven by our continued emphasis on marketing and selling
Internet-based research, as well as the ongoing transition to Internet-based
research throughout Europe.
|
|
|
|
|
French and German Internet-based revenue of $9.7 million or 89.9% of
total French and German revenue for the nine months ended March 31, 2008, compared
with $4.4 million or 90.0% of total French revenue for the same prior year period.
The increase in French and German Internet-based revenue was principally the result
of our April 2007 acquisition of MediaTransfer, which contributed $4.7 million in
incremental Internet-based revenue in the quarter.
|
Cost of services
.
Cost of services was $87.4 million or 49.9% of total revenue for the nine
months ended March 31, 2008, compared with $76.3 million or 49.3% of total revenue for the same
prior year period. Cost of services was principally impacted by the mix of projects during the
quarter when compared with the same prior year period. Additionally, cost of services was
favorably impacted by the $0.8 million reduction in our reserve for obligations with respect to
future redemption of outstanding points under our HIpoints program discussed above. We expect that
the changes made to the program will provide additional ongoing savings.
Sales and marketing.
Sales and marketing expense was $17.6 million or 10.1% of total revenue
for the nine months ended March 31, 2008, compared with $15.6 million or 10.1% of total revenue for
the same prior year period. The increase in sales and marketing expense was principally due to:
|
|
|
$1.4 million in incremental sales and marketing expenses attributable to our
MediaTransfer, Decima and Marketshare acquisitions; and
|
25
|
|
|
$0.6 million in incremental expense as a result of an increase in the time spent by
our sales and professional staff on selling and proposal generation.
|
Sales and marketing expense includes labor costs for project personnel during periods when
they are not working on specific revenue-generating projects but instead are participating in our
selling efforts.
General and administrative.
General and administrative expense increased to $59.7 million or
34.0% of total revenue for the nine months ended March 31, 2008, compared with $51.2 million or
33.1% of total revenue for the same prior year period. General and administrative expense was
principally impacted by the following:
|
|
|
$9.4 million in incremental general and administrative expenses attributable to our
MediaTransfer, Decima and Marketshare acquisitions; and
|
|
|
|
|
$0.8 million in severance charges for Leonard R. Bayer, our former Executive Vice
President, Chief Scientist and Chief Technology Officer, in connection with his
retirement which was effective March 31, 2008.
|
General and administrative expense includes the labor costs for project personnel when they
are neither working on specific revenue-generating projects nor participating in our selling
efforts.
Depreciation and amortization
.
Depreciation and amortization was $6.3 million or 3.6% of
total revenue for the nine months ended March 31, 2008, compared with $3.8 million or 2.5% of total
revenue for the same prior year period. The increase in depreciation and amortization was
principally the result of $2.2 million in incremental depreciation and amortization expense
attributable to our MediaTransfer, Decima and Marketshare acquisitions.
Gain on sale of assets.
There were no gains on the sale of assets for the nine months ended
March 31, 2008. Gain on sale of assets held for sale for the same prior year period consisted
solely of a $0.4 million gain realized on the December 2006 sale of our Stockport facility.
Restructuring charges.
See above under Restructuring for further discussion regarding
restructuring charges incurred during the nine months ended March 31, 2008.
Interest and other income.
Interest and other income was $0.9 million or 0.5% of total
revenue for the nine months ended March 31, 2008, compared with $1.8 million or 1.1% of total
revenue for the same prior year period. The decrease in interest and other income was due to a
decrease in the average balance of cash and marketable securities for fiscal 2007 when compared
with fiscal 2008.
Interest expense.
Interest expense was $1.5 million or 0.8% of total revenue for the nine
months ended March 31, 2008, compared with essentially no interest expense for the same prior year
period. The increase in interest expense was the result of our outstanding debt during the nine
months ended March 31, 2008 compared with the same prior year period, during which we did not have
any outstanding debt.
Income taxes.
We recorded an income tax provision of $1.6 million for the nine months ended
March 31, 2008, compared with $4.3 million for the same prior year period. Our actual tax rate for
the nine months ended March 31, 2008 was 62.3%, compared with our projected global effective rate
of 57.8% for the year. Our actual tax rate differs from our effective tax rate as a result of
lower profitability within our U.S. operations and a $0.5 million valuation allowance against a
deferred tax asset whose future realizability no longer met the more-likely-than-not criteria.
Our effective tax rate may be impacted in the future by several factors including, but not
limited to, changes in our legal entity structure, expansion of our global footprint and the nature
of future investment decisions.
Significant Factors Affecting Our Performance
Our Revenue Mix and Profitability
We treat all of the revenue from a project as Internet-based whenever more than 50% of the
data collection for that
26
project was completed online. Regardless of data collection mode, most full-service market
research projects contain three specific phases: survey design, data collection and data analysis.
Generally, the costs of a project are spread evenly across those three phases.
Internet-based data collection has certain fixed costs relating to data collection, panel
incentives and database development and maintenance. When the volume of Internet-based work reaches
the point where fixed costs are absorbed, increases in Internet-based revenue tend to increase
profitability, assuming that project professional service components and cost of services are
comparable and operating expenses are properly controlled.
Projects designated as Internet-based may have traditional data collection components,
particularly in multi-country studies where Internet databases are not fully developed. That
traditional data collection component tends to decrease the profitability of the project.
Profitability is also decreased by direct costs of outsourcing (programming, telephone data
collection and sample sourcing) and incentive pass-through costs.
For further information regarding Internet-based revenue, please see the tables in Our
Ability to Measure Our Performance below.
Seasonality
Being project-based, our business has historically exhibited moderate seasonality. Revenue
generally tends to ramp upward during the fiscal year, with fiscal Q1 (ending September 30),
particularly the vacation-heavy months of July and August, generating the lowest revenue. Fiscal
Q2 (ending December 31) generally yields a sequential increase in revenue. Fiscal Q3 (ending March
31) is approximately flat with or slightly below Q2 revenue. Fiscal Q4 (ending June 30) typically
yields the highest revenue of the year. Although trends in any particular year may vary from the
norm, given our historic seasonality, we manage our business based on an annual business cycle.
Consistent with this thinking, trailing twelve-month data for certain of our key operating metrics
is presented in the table below in Our Ability to Measure Our Performance. These data are
derived from the quarterly key operating metrics data presented in the current and prior periods.
Our Ability to Measure Our Performance
We closely track certain key operating metrics, specifically bookings, ending sales backlog,
average billable full-time equivalents, days of sales outstanding, utilization and bookings to
revenue ratio. Each of these key operating metrics enables us to measure the current and
forecasted performance of our business relative to historical trends and promote a management
culture that focuses on accountability. We believe that this ultimately leads to increased
productivity and more effective and efficient use of our human and capital resources.
For the three months ended March 31, 2008 and the last four fiscal quarters, key operating
metrics for continuing operations were as follows (U.S. Dollar amounts in millions):
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Q3
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|
Q4
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Q1
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Q2
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Q3
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FY2007
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FY2007
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FY2008
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FY2008
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FY2008
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Internet Revenue (% of total revenue)
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60
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%
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63
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%
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|
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62
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%
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|
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62
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%
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|
|
63
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%
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North American Internet Revenue (% of North American revenue)
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68
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%
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73
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%
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66
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%
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67
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%
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|
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62
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%
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European Internet Revenue (% of European revenue)
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30
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%
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35
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%
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|
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50
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%
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|
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51
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%
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67
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%
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Cash & Marketable Securities
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$
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29.1
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$
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33.3
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$
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24.1
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$
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33.3
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$
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31.2
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Bookings
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$
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57.6
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$
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50.9
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$
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50.8
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$
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68.2
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$
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61.3
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Ending Sales Backlog
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$
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70.4
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$
|
64.9
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$
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67.4
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|
$
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72.8
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$
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76.9
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Average Billable Full Time Equivalents (FTEs)
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728
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712
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766
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821
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818
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Days of Sales Outstanding (DSO)
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35 days
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43 days
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49 days
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43 days
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40 days
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Utilization
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64
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%
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|
68
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%
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62
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%
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62
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%
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|
|
62
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%
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Bookings to Revenue Ratio
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1.11
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0.89
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|
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0.92
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1.09
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|
|
|
1.07
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Since our business has moderate seasonality, we encourage investors to measure our progress
over longer time frames. To help that process, we provide trailing twelve-month key operating
metrics. Trailing twelve-month data for certain of our key operating metrics for continuing
operations at March 31, 2008, and at the last four fiscal quarter end dates, were as follows (U.S.
Dollar amounts in millions):
27
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Mar 07
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Jun 07
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Sep 07
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Dec 07
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Mar 08
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Consolidated Revenue
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$
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213.5
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$
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211.8
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$
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219.8
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$
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226.8
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$
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232.3
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Internet Revenue (% of total revenue)
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59
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%
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|
|
60
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%
|
|
|
61
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%
|
|
|
62
|
%
|
|
|
62
|
%
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North American Internet Revenue (% of North American revenue)
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|
|
67
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%
|
|
|
69
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%
|
|
|
69
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%
|
|
|
69
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%
|
|
|
67
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%
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European Internet Revenue (% of European revenue)
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|
32
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%
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|
|
34
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%
|
|
|
36
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%
|
|
|
42
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%
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|
|
50
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%
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Total Bookings
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|
$
|
213.0
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|
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$
|
217.1
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|
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$
|
225.0
|
|
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$
|
227.4
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$
|
231.2
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Average Billable Full Time Equivalents (FTEs)
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|
|
720
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|
|
|
720
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|
|
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731
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|
|
|
757
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|
|
|
779
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Utilization
|
|
|
63
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%
|
|
|
63
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%
|
|
|
64
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%
|
|
|
64
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%
|
|
|
63
|
%
|
Bookings to Revenue Ratio
|
|
|
1.00
|
|
|
|
1.03
|
|
|
|
1.02
|
|
|
|
1.00
|
|
|
|
1.00
|
|
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 expected to take
place during the next four fiscal quarters for which a firm client commitment was received during
the current period, less any adjustments to prior period bookings due to contract value adjustments
or project cancellations during the current period.
Bookings for the three months ended March 31, 2008 were $61.3 million, compared with $57.6
million for the same prior year period. The increase in bookings is principally the result of $9.9
million in bookings from Decima, MediaTransfer and Marketshare, offset by the declines in bookings
for Healthcare and Emerging and General Markets as a result of the reasons discussed above.
Monitoring bookings enhances our ability to forecast long-term revenue and to measure the
effectiveness of our marketing and sales initiatives. However, we also are mindful that bookings
often vary significantly from quarter to quarter. Information concerning our new bookings is not
comparable to, nor should it be substituted for, an analysis of our revenue over time. There are
no third-party standards or requirements governing the calculation of bookings. New bookings
involve estimates and judgments regarding new contracts as well as renewals, extensions and
additions to existing contracts. Subsequent cancellations, extensions and other matters may affect
the amount of bookings previously reported.
Ending Sales Backlog
is defined as prior period ending sales backlog plus current period
bookings, less revenue recognized on outstanding projects as of the end of the period.
Ending sales backlog helps us to manage our future staffing levels more accurately and is also
an indicator of the effectiveness of our marketing and sales initiatives. Generally, projects
included in ending sales backlog at the end of a fiscal period convert to revenue from services
during the following twelve months, based on our experience from prior years.
Ending sales backlog of $76.9 million at March 31, 2008 represented a 7.3% increase compared
with the ending sales backlog for the same prior year period. The increase in sales backlog is
principally the result of $8.5 million in sales backlog contributed by our Decima, MediaTransfer
and Marketshare operations.
Average Billable Full-Time Equivalents (FTEs)
are defined as the hours of available billable
capacity in a given period divided by total standard hours for a full-time employee and represent
an average for the periods reported.
Measuring FTEs enables us to determine proper staffing levels, minimize unbillable time, and
improve utilization and profitability.
Billable FTEs for the three months ended March 31, 2008 were 818, compared with 728 billable
FTEs reported for the same prior year period. The 12.4% increase in billable FTEs when compared
with the same prior year period is principally the result of the 10.8% increase over the same prior
year period in revenue from services.
Days of Sales Outstanding (DSO)
is calculated as accounts receivable as of the end of the
applicable period (including unbilled receivables less deferred revenue) divided by our daily
revenue (total revenue for the period divided by the number of calendar days in the period).
Measuring DSO allows us to minimize our investment in working capital, measure the
effectiveness of our collection efforts and helps forecast cash flow. Generally, a lower DSO
measure equates to more efficient use of working capital.
28
DSO for the three months ended March 31, 2008 was 40 days, up 14.3% when compared with the
same prior year period. The increase in DSO is the result of higher DSOs in our international
locations when compared with the same prior year periods.
Utilization
is defined as hours billed by project personnel in connection with specific
revenue-generating projects divided by total hours of available capacity. Hours billed do not
include marketing, selling or proposal generation time.
Tracking utilization enables efficient management of overall staffing levels and promotes
greater accountability for the management of resources on individual projects. Utilization for the
three months ended March 31, 2008 was 62%, compared with 64% for the same prior year period. The
slight decrease in utilization is principally the result of the declines in U.S. revenue from
services discussed above.
Financial Condition, Liquidity and Capital Resources
Financial Condition
Material changes in financial condition from June 30, 2007 to March 31, 2008 included changes in:
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current assets, property, plant and equipment, goodwill, intangibles, and current
liabilities and deferred tax liabilities primarily attributable to acquired businesses
as more fully described in Note 5, Business Combinations, to our unaudited
consolidated financial statements contained in this Form 10-Q, and
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current portion of long-term debt attributable to credit facilities described below
in the Credit Facilities section of Financial Condition, Liquidity and Capital
Resources.
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Cash and Cash Equivalents
The following table sets forth net cash provided by operating activities, net cash (used in)
provided by investing activities and net cash provided by (used in) financing activities, for the
nine months ended March 31 (amounts in 000s):
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|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Net cash provided by operating activities
|
|
$
|
13,443
|
|
|
$
|
13,017
|
|
Net cash (used in) provided by investing activities
|
|
|
(19,526
|
)
|
|
|
39,302
|
|
Net cash provided by (used in) financing activities
|
|
|
7,937
|
|
|
|
(39,270
|
)
|
Net cash provided by operating activities.
Net cash provided by operating activities
increased by $0.4 million to $13.4 million for the nine months ended March 31, 2008, essentially
flat when compared with $13.0 million for the same prior year period.
Net cash (used in) provided by investing activities.
Net cash used in investing activities
was $19.5 million for the nine months ended March 31, 2008, compared with $39.3 million provided by
investing activities for the same prior year period. This change is the principally result of
$21.0 million in net cash paid in connection with our Decima and Marketshare acquisitions, offset
by $4.4 million in net cash generated from maturities and sales of marketable securities.
Net cash provided by (used in) financing activities.
Net cash provided by financing
activities was $7.9 million for the nine months ended March 31, 2008, compared with $39.3 million
used in financing activities for the same prior year period. This change is the result of $14.5
million in net proceeds from borrowings, which were used to fund a portion of the consideration for
our acquisitions of Decima and Marketshare, offset by $6.9 million in payments on outstanding
borrowings. Comparatively, $40.8 million was used during the same prior year period to fund
repurchases of our common stock under our Share Repurchase Program discussed below.
Working Capital
At March 31, 2008, we had cash and cash equivalents of $31.2 million, down 6.3% compared with
$33.3 million in cash, cash equivalents and marketable securities at June 30, 2007 as a result of
the reasons described above. Based on
29
current plans and business conditions, we believe that our existing cash, cash equivalents and
cash flows from operations will be sufficient to satisfy the cash requirements that we anticipate
will be necessary to support our investments and operations for the foreseeable future. However,
we cannot be certain that our underlying assumed levels of revenue and expenses will be accurate.
In addition, if we acquire additional businesses, we likely will be required to seek additional
funding through public or private financing or other arrangements. Based upon our current credit
facilities, relationships with financial institutions and financial condition, we believe that
adequate funds will be available to support all of our investments and activities, including
acquisitions, on reasonable terms, but if sufficient funds are not available when needed or on
favorable terms, it could have a material adverse effect on our business and results of operations.
Our capital requirements depend on numerous factors, including but not limited to, market
acceptance of our services, the resources we allocate to the continuing development of our Internet
infrastructure and Internet panel, the marketing and selling of our services and our acquisition
activities. For the fiscal year ending June 30, 2008, our capital expenditures are expected to be
between $3.5 million and $4.0 million. We believe that cash generated from our operations and the
cash and cash equivalents we held at March 31, 2008 will be sufficient to provide adequate funding
for any foreseeable capital requirements that may arise.
In order to continue to generate revenue, we must continually develop new business, both for
growth and to replace non-renewed 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 generate revenue is dependent not only on execution of our
business plan, but also on general market factors outside of our control. Many of our clients
treat all or a portion of their market research expenditures as discretionary. As a result, if
economic conditions decline in any of our markets, our ability to generate revenue may be adversely
impacted.
Share Repurchase Program
Pursuant to the Repurchase Program authorized by our Board on May 3, 2006, as amended on
January 31 and May 2, 2007, we repurchased 10.3 million shares of our common stock at an average
price per share of $5.52 for an aggregate purchase price of $57.0 million. All repurchased shares
were subsequently retired. The Repurchase Program expired on December 31, 2007. We did not
repurchase any shares of our common stock under the Repurchase Program through the nine months
ended March 31, 2008.
Credit Facilities
On September 21, 2007, we entered into a Credit Agreement (the Credit Agreement) with
JPMorgan Chase Bank, N.A. (JPMorgan), as Administrative Agent, and the Lenders party thereto.
Pursuant to the Credit Agreement, the Lenders made available $100.0 million in credit facilities
(the Credit Facilities) in the form of a revolving line of credit (Revolving Line), a term loan
(Term Loan), and a multiple advance term loan commitment (Multiple Advance Commitment).
The Revolving Line enables us to borrow, repay, and re-borrow up to $25.0 million principal
outstanding at any one time, with a $10.0 million sub-limit for issuance of letters of credit. The
full amount of the Term Loan (Term Loan A) was made in a single advance of $12.0 million at the
time of closing of the Credit Facilities. The Multiple Advance Commitment enables us to borrow up
to an aggregate of $63.0 million in one or more advances, and $19.8 million (Term Loan B) and
$2.8 million (Term Loan C) were advanced at closing. Existing letters of credit in the face
amount of $0.2 million also were treated as if issued under the Revolving Line. In addition, the
Credit Agreement permits us to request increases in the Revolving Line up to an additional $25.0
million of availability, subject to discretionary commitments by the then Lenders and, if needed,
additional lenders. The Credit Facilities replaced existing credit arrangements with JPMorgan.
Outstanding amounts under the Credit Facilities accrue interest, as elected by us, at either
(a) the greater of the Administrative Agents Prime Rate or the Federal Funds Rate plus 0.5%, or
(b) the Adjusted LIBOR interest rate plus a spread of between 0.625% and 1.00% depending upon our
leverage ratio as measured quarterly. In addition, the Lenders receive a commitment fee ranging
from 0.10% to 0.175%, depending upon our leverage ratio, quarterly in arrears based on average
unused portions of the full committed amount of the Credit Facilities. Accrued interest is payable
quarterly in arrears, or at the end of each applicable LIBOR interest rate period, but at least
every three months, with respect to borrowings for which the Adjusted LIBOR interest rate applies.
30
All outstanding amounts under the Credit Facilities are due and payable in full on September
21, 2012 (the Maturity Date). On the last day of each quarter, principal payments of $0.6
million each are due and payable with respect to the Term Loan, and principal payments equal to 5%
of each borrowing made under the Multiple Advance Commitment also are due and payable. Borrowings
are freely prepayable, subject to break funding payments for prepayments during Adjusted LIBOR
interest periods. The required principal repayments of Term Loans A, B and C for the remaining
nine months of fiscal 2008 and for each of the five succeeding fiscal years are set forth in Note
10, Borrowings, to our unaudited consolidated financial statements contained in this Form 10-Q.
We have elected the LIBOR interest rate on amounts outstanding under Term Loans A, B and C.
At March 31, 2008, the applicable LIBOR interest rate was 2.70%. Effective September 21, 2007, we
entered into an interest rate swap agreement with JPMorgan, which effectively fixed the floating
LIBOR interest rates on the amounts outstanding under Term Loans A, B and C at 5.08% through
September 21, 2012. The additional spread applicable to the interest rates based on the our
leverage ratio at March 31, 2008 was 0.875%, resulting in an aggregate interest rate at March 31,
2008 of 5.955%. We anticipate that the interest rate swap will be settled upon maturity and it is
being accounted for as a cash flow hedge. The interest rate swap is recorded at fair value each
reporting period with the changes in the fair value of the hedge that take place through the date
of maturity recorded in accumulated other comprehensive income. At March 31, 2008, we recorded a
liability of $1.7 million in the Other liabilities
line item of our unaudited consolidated
balance sheet. There was no ineffectiveness associated with the interest rate swap for the nine
months ended March 31, 2008.
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. The Credit Agreement requires us to maintain a consolidated
interest coverage ratio of at least 3.0 to 1.0, and a consolidated leverage ratio of 2.5 to 1.0 or
less. At March 31, 2008, we were in compliance with all covenants under the Credit Agreement.
We
may freely transfer assets and incur obligations among our domestic subsidiaries that are
guarantors of our obligations related to the Credit Facilities, and our first tier foreign
subsidiaries with respect to which we have delivered pledges of 66% of the outstanding stock and
membership interests, as applicable, in favor of the Lenders. Our domestic subsidiaries, Louis
Harris & Associates, Inc., Wirthlin Worldwide, LLC, Harris Interactive International Inc., Harris
International Asia, LLC, and The Wirthlin Group International, L.L.C., have guaranteed our
obligations under the Credit Facilities.
Off-Balance Sheet Arrangements and Contractual Obligations
At March 31, 2008, 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.
On July 1, 2007, we adopted FIN No. 48. It is reasonably possible that the liability
associated with our unrecognized tax benefits will increase or decrease within the next twelve
months. These changes may be the result of ongoing audits or the expiration of statutes of
limitations. At this time, an estimate of the range of the reasonably possible outcomes cannot be
made. Further financial information regarding our unrecognized tax benefits is included in Note
13, Income Taxes, to our unaudited consolidated financial statements contained in this Form 10-Q.
There have been no material changes outside the ordinary course of business during the three
months ended March 31, 2008 to our contractual obligations as disclosed in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2007, filed by us with the SEC on September 12, 2007,
other than those described in Credit Facilities above.
Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted
See Note 4, Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet
Adopted, to our unaudited consolidated financial statements contained in this Form 10-Q for a
discussion of the impact of recently adopted and recently issued but not yet adopted accounting
pronouncements on our unaudited consolidated financial statements at March 31, 2008, and for the
nine months then ended, as well as the expected impact on our consolidated financial statements for
future periods.
31
Item 3
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.
As we continue to increase our debt and expand globally, the risk of interest rate and foreign
currency exchange rate fluctuation may increase. We will continue to assess the need to, and will
as appropriate, utilize interest rate swaps and financial instruments to hedge interest rate and
foreign currency exposures on an ongoing basis to mitigate such risks.
Interest Rate Exposure
At March 31, 2008, we had outstanding debt under our Credit Facilities of $31.2 million. The
debt matures September 21, 2012 and bears interest at the floating adjusted LIBOR plus an
applicable margin. On September 21, 2007, we entered into an interest rate swap agreement, which
fixed the floating adjusted LIBOR portion of the interest rate at 5.08% through September 21, 2012.
The additional applicable margin is adjusted quarterly based upon our leverage ratio.
Using a sensitivity analysis based on a hypothetical 1% increase in prevailing interest rates
over a 12-month period, each 1% increase from prevailing interest rates at March 31, 2008 would
have increased the fair value of the interest rate swap by $0.7 million and each 1% decrease from
prevailing interest rates at March 31, 2008 would have decreased the fair value of the interest
rate swap by $0.7 million.
Foreign Currency Exposure
As a result of operating in foreign markets, our financial results could be affected by
factors such as changes in foreign currency exchange rates. We have international sales and
operations in Europe, North America, and Asia. 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 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
currency of their home country, and the second being the extent to which we have instruments
denominated in a foreign currency.
Foreign exchange transaction gains and losses are included in our results of operations as a
result of consolidating the results of our international operations, which are denominated in each
countrys functional currency, with our U.S. results. The impact of transaction 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 and profitability of
our foreign operations in comparison to our consolidated operations. However, if the size and
operating profits of our international operations increase and we continue to expand globally, our
exposure to the appreciation or depreciation in the U.S. Dollar could have a more significant
impact on our net income and cash flows. Thus, we evaluate our exposure to foreign currency
fluctuation risk on an ongoing basis.
Since our foreign operations are conducted using a foreign currency, we bear additional risk
of fluctuations in exchange rates because of instruments denominated in a foreign currency. We
have historically had low exposure to changes in foreign currency exchange rates with regard to
instruments denominated in a foreign currency, given the amount and short-term nature of the
maturity of these instruments. The carrying values of financial instruments denominated in a
foreign currency, 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 March 31, 2008. 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.
32
Item 4
Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal
Financial Officer, evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as
amended (the Exchange Act)). Based on that evaluation, our Principal Executive Officer and
Principal Financial Officer concluded that our disclosure controls and procedures as of March 31,
2008 (the end of the period covered by this Quarterly Report on Form 10-Q) have been designed and
are functioning effectively. Further, there have been no changes in our internal control over
financial reporting identified in connection with managements evaluation thereof during the
quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II: Other Information
Item 1
Legal Proceedings
In the normal course of business, we are at times subject to pending and threatened legal
actions and proceedings. After reviewing pending and threatened actions and proceedings with
counsel, management does not expect the outcome of such actions or proceedings will have a material
adverse effect on our business, financial condition or results of operations.
Item 1A
Risk Factors
There have been no material changes to the risk factors that we disclosed in our Annual Report
on Form 10-K for the fiscal year ended June 30, 2007, filed by us with the SEC on September 12,
2007.
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3
Defaults Upon Senior Securities
None.
Item 4
Submission of Matters to a Vote of Security Holders
None.
Item 5
Other Information
Restructuring
During the third quarter of fiscal 2008, we recorded $1.1 million in restructuring charges
directly related to our decisions made at various times during the quarter to close our telephone
center in Orem, Utah by March 2008, strategically reduce headcount, and reduce leased space at our
Grandville, Michigan and Norwalk, Connecticut offices. Each decision was designed to better align
our cost structure with the evolving operational needs of the business.
In connection with the decisions discussed above, which are more fully described in Note 4,
Restructuring to our unaudited consolidated financial statements in this Form 10-Q, we concluded
that each of the individual actions resulting in the cumulative charge were not material at the
time the individual decisions were made and as such, did not report these decisions on Form 8-K
under Item 2.05 at the time they were made.
33
Item 6
Exhibits
|
|
|
10.1*
|
|
Form of Non-Qualified Stock Option Agreement.
|
|
|
|
10.2*
|
|
Form of Restricted Stock Agreement for Employees.
|
|
|
|
10.3*
|
|
Form of Restricted Stock Agreement for Non-Employee Directors.
|
|
|
|
10.4*
|
|
Employment Agreement Amendment 1 between the Company and Leonard R. Bayer, dated February
26, 2008 (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed on February
27, 2008 and incorporated herein by reference).
|
|
|
|
10.5*
|
|
Change in Control Agreement between the Company and Dr. David G. Bakken.
|
|
|
|
10.6*
|
|
Salary Arrangements for Executive Officers between the Company and each of Dr. David G.
Bakken and Stephan B. Sigaud.
|
|
|
|
10.7*
|
|
Employment Agreement Amendment 1
between the Company and David B. Vaden effective April 30, 2008.
|
|
|
|
10.8*
|
|
Employment Agreement Amendment 1 between the Company and Dr. George H. Terhanian effective April 30, 2008.
|
|
|
|
31.1
|
|
Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 906 of the
Sarbanes-Oxley Act of 2002).
|
|
|
|
32.2
|
|
Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 906 of the
Sarbanes-Oxley Act of 2002).
|
|
|
|
*
|
|
Denotes management contract or arrangement
|
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
May 9, 2008
|
Harris Interactive Inc.
|
|
|
By:
|
/s/ RONALD E. SALLUZZO
|
|
|
|
Ronald E. Salluzzo
|
|
|
|
Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
(On Behalf of the Registrant and as
Principal Financial Officer)
|
|
35
Exhibit Index
|
|
|
10.1*
|
|
Form of Non-Qualified Stock Option Agreement.
|
|
|
|
10.2*
|
|
Form of Restricted Stock Agreement for Employees.
|
|
|
|
10.3*
|
|
Form of Restricted Stock Agreement for Non-Employee Directors.
|
|
|
|
10.4*
|
|
Employment Agreement Amendment 1 between the Company and Leonard R. Bayer, dated February
26, 2008 (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed on February
27, 2008 and incorporated herein by reference).
|
|
|
|
10.5*
|
|
Change in Control Agreement between the Company and Dr. David G. Bakken.
|
|
|
|
10.6*
|
|
Salary Arrangements for Executive Officers between the Company and each of Dr. David G.
Bakken and Stephan B. Sigaud.
|
|
|
|
10.7*
|
|
Employment Agreement Amendment 1 between the Company and David B. Vaden effective April 30, 2008.
|
|
|
|
10.8*
|
|
Employment Agreement Amendment 1 between the Company and Dr. George H. Terhanian effective April 30, 2008.
|
|
|
|
31.1
|
|
Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 906 of the
Sarbanes-Oxley Act of 2002).
|
|
|
|
32.2
|
|
Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 906 of the
Sarbanes-Oxley Act of 2002).
|
|
|
|
*
|
|
Denotes management contract or arrangement
|
36
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