HPOL Harris Interactive, Inc. (MM)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

COMMISSION FILE NUMBER: 000-27577

 

 

 

 

HARRIS INTERACTIVE INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Registrant’s telephone number, including area code:

(585) 272-8400

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

INDICATE BY CHECK MARK IF THE REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, as defined in Rule 405 of the Securities Act.  Yes  o      No  þ

 

INDICATE BY CHECK MARK IF THE REGISTRANT IS NOT REQUIRED TO FILE REPORTS pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT:  (1) HAS FILED ALL REPORTS required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS SUBMITTED ELECTRONICALLY AND POSTED ON ITS CORPORATE WEB SITE, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o      No  o

 

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED FILER, OR A SMALLER REPORTING COMPANY. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

INDICATE BY CHECK MARK WHETHER REGISTRANT IS A SHELL COMPANY (as defined in Rule 12b-2 of the Act).  Yes  o      No  þ

 

The aggregate market value of voting and non-voting common equity securities held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, December 31, 2008, was $34,366,401.

 

On August 31, 2009, 53,950,118 shares of the Registrant’s Common Stock, $.001 par value, were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The information required by Part III of this Report, to the extent not set forth herein, is incorporated by reference from the Registrant’s definitive proxy statement relating to the annual meeting of stockholders to be held on October 27, 2009, which definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.

 

 

HARRIS INTERACTIVE INC.

 

FORM 10-K

 

FOR THE FISCAL YEAR ENDED JUNE 30, 2009

 

INDEX

 

 

The discussion in this Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding expectations, beliefs, plans, objectives, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as, “may”, “should”, “expects”, “plans”, “anticipates”, “feel”, “believes”, “estimates”, “predicts”, “potential”, “continue”, “consider”, “possibility”, or the negative of these terms or other comparable terminology. All forward-looking statements included in this document are based on the information available to Harris Interactive (the “Company”) on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. Actual results could differ materially from the results discussed herein. Factors that might cause or contribute to such differences include but are not limited to, those discussed in the Risk Factors section of this Form 10-K and as set forth in other reports or documents the Company files from time to time with the Securities and Exchange Commission (the “SEC”). Risks and uncertainties also include the continued volatility of the global macroeconomic environment and its impact on the Company and its clients, the Company’s ability to sustain and grow its revenue base, the Company’s ability to maintain and improve cost efficient operations, the impact of reorganization and restructuring and related charges, quarterly variations in financial results, actions of competitors, and our ability to develop and maintain products and services attractive to the market.

 

 

References herein to “we,” “our”, “us”, “its”, the “Company” or “Harris Interactive” refer to Harris Interactive Inc. and its subsidiaries, unless the context specifically requires otherwise. Harris Interactive ^® and The Harris Poll ^® are U.S. registered trademarks of Harris Interactive Inc. This Form 10-K may also include other trademarks, trade names and service marks of Harris Interactive and of other parties.

 

Corporate Overview

 

Harris Interactive was founded in 1975 in upstate New York as the Gordon S. Black Corporation, however, its roots date back to the founding of Louis Harris and Associates in New York City in 1956. Today, Harris Interactive is an international, full-service, consultative market research firm widely known for The Harris Poll (one of the world’s longest-running, independent opinion polls) and for pioneering online market research methods. Harris Interactive serves clients worldwide through its offices in North America, Europe and Asia and through a global network of independent market research firms.

 

Our corporate headquarters are located in Rochester, New York. We plan to move our corporate headquarters to 161 Sixth Avenue, New York, New York, effective September 15, 2009, where we have an office under an operating lease that expires in April 2012. Our fiscal year ends June 30th.

 

Mergers, Acquisitions and Sale of Business

 

The Gordon S. Black Corporation was founded in 1975 as a New York corporation. It formed and became part of the Delaware corporation now known as Harris Interactive in 1997. Since that time, our acquisitions have included:

 

 

 

In May 2005, we completed the sale of our Japanese subsidiaries, M&A Create Limited, Adams Communications Limited and Harris Interactive Japan, K.K., in a management buy-out. In August 2007, we sold our “Rent and Recruit” business, which was engaged primarily in providing facilities for and conducting focus group interviews.

 

Business Overview

 

Harris Interactive is a professional services firm that serves clients in many industries and many countries. We provide full service market research and polling services which include ad-hoc or customized qualitative and quantitative research, service bureau research (conducted for other market research firms) and long-term tracking studies.

 

We serve clients in numerous industries through the following research groups:

 

 

In addition, we maintain strategic research groups that collaborate with our industry research teams to deliver consultative solutions in the following areas:

 

 

 

We conduct a significant portion of our market research using online data collection. We also conduct computer-assisted telephone interviewing in telephone data collection centers in the United Kingdom, Canada, Hong Kong and Singapore. In addition to these dedicated facilities, we outsource telephone data collection and survey programming to contracted sources in a number of countries including India and Costa Rica.

 

Our Products and Services

 

Custom Research

 

We conduct many types of custom research including customer satisfaction surveys, market share studies, new product introduction studies, brand recognition studies, reputation studies, ad concept testing and more. A custom research project has three distinct phases:

 

 

Our sample design and questionnaire development techniques help ensure that complete and accurate information is collected, and that these data will satisfy the specific inquiries of our clients. We have developed in-depth data collection techniques to enhance the integrity and reliability of our sample database. Our survey methodology is intended to ensure that responses are derived from the appropriate decision-makers in each category. As a result, we have a solid foundation for delivering the data that meets our clients’ needs.

 

Tracking Study Research

 

We apply extensive expertise to the design, execution and maintenance of custom, online tracking studies for clients in a broad range of industries and around the globe. Considered by many to be a vital part of any comprehensive research program, tracking studies regularly ask identical questions to similar demographic groups within a constant interval (once a month, once a quarter, etc.) to feed business decision-makers with dynamic data and intelligence that enables them to:

 

 

 

Service Bureau Research

 

The Harris Interactive Service Bureau (“HISB”) conducts data collection for other market research firms that do not have internal market research capabilities.

 

Research and Development

 

We have not incurred expenditures for the three fiscal years ended June 30, 2009 that would be classified as research and development as defined by accounting principles generally accepted in the United States of America under Statement of Financial Accounting Standards (“SFAS”) No. 2, Accounting for Research and Development Costs.

 

Our Intellectual Property and Other Proprietary Rights

 

We believe that the Harris brand and its associated intellectual property provide us with many competitive advantages. To protect our brand and our intellectual property, we rely on a combination of patent, copyright, trademark and trade-secret laws, as well as confidentiality, non-disclosure, non-compete and license agreements, and clearly defined standard terms and conditions in our sales contracts.

 

We currently have patents and patent applications pending for:

 

 

Additionally, we have registered trademarks for many of our products and services in North America, Europe and Asia, and will continue to protect our intellectual property through those means.

 

We have licensed in the past, and expect to license in the future, certain proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of our brand is maintained by these licenses, licensees may take actions that might harm the value of our proprietary rights or reputation.

 

Seasonality

 

Being project-based, our business has historically exhibited moderate seasonality. Revenue generally tends to ramp upward during the fiscal year, with Q1 (ending September 30) 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 less than Q2. Fiscal Q4 (ending June 30) revenue typically yields the highest revenue of the year. As a result of the seasonality noted, we manage our business based on our annual business cycle. Total consolidated revenue from continuing operations, by quarter, for the fiscal years ended June 30, 2008 and 2009 is shown in Note 23, “Unaudited Quarterly Results of Operations”, to our consolidated financial statements contained in this Form 10-K.

 

The moderate historical seasonality described above is not necessarily indicative of quarterly revenue trends which may occur in the future.

Our Clients

 

At June 30, 2009, we had approximately 1,800 clients, compared with approximately 1,900 at June 30, 2008. In fiscal 2009 and 2008, no single client accounted for more than 10% of our consolidated revenue.

 

Our Competition

 

We compete with numerous market research firms, as well as corporations and individuals that perform market research studies on an isolated basis, many of which have market shares or financial and marketing resources larger than our own. Our competitors include, but are not limited to, Synovate (owned by Aegis Group plc), Arbitron Inc., GfK AG, IMS Health, Inc., Intage Inc., Ipsos SA, National Research Corp., TNS and Millward Brown (owned by WPP Group plc), and YouGov plc.

 

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

 

 

 

 

 

 

 

 

Financial Information about Geographic Areas

 

We are comprised principally of operations in North America, Europe and Asia. Non-U.S. market research operations are located in the United Kingdom, Canada, France, Germany, Hong Kong, Singapore and China. We operate these non-U.S. businesses on a basis consistent with our U.S. operations.

 

Our business model for offering custom market research is consistent across the geographic regions in which we operate. Geographic management facilitates local execution of our global strategies. We maintain global leaders with responsibility across all geographic regions for the majority of our critical business processes, and the most significant performance evaluations and resources allocations made by our chief operating decision-maker are made on a global basis. Accordingly, we have concluded that we have one reportable segment.

 

We have prepared the financial results for geographic information on a basis that is consistent with the manner in which management internally disaggregates information to assist in making internal operating decisions. We have allocated common expenses among these geographic regions differently than we would for stand-alone information prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany sales and transactions have been eliminated upon consolidation. Geographic operating income (loss) may not be consistent with measures used by other companies.

Geographic information from continuing operations for the fiscal years ended June 30 was as follows (amounts in thousands):

 

 

 

 

During fiscal 2009, 2008 and 2007, 61.2%, 64.0%, and 75.5%, respectively, of our total consolidated revenue was derived from our U.S. operations, and 38.8%, 36.0%, and 24.5%, respectively, of our total consolidated revenue was derived from our non-U.S. operations.

 

See “Item 1A. Risk Factors” below for a description of certain risks attendant to our non-U.S. operations.

Backlog

 

At June 30, 2009, we had a revenue backlog from continuing operations of approximately $48,811, as compared to a backlog of approximately $66,793 from continuing operations at June 30, 2008. We estimate that substantially all of the backlog at June 30, 2009 will be recognized as revenue from services during the fiscal year ending June 30, 2010, based on our experience from prior years.

 

Employees

 

At June 30, 2009, we employed a total of 848 full-time individuals on a worldwide basis, 462 of whom were employed in the United States. In addition, we employed 216 part-time and hourly individuals on a worldwide basis for data gathering and processing activities, 61 of whom were employed in the United States. Casual employees of our operations outside of the United States are not included in the headcount numbers provided herein.

 

None of our employees is represented by a collective bargaining agreement. We have not experienced any work stoppages. We consider our relationship with our employees to be good.

 

Executive Officers of Harris Interactive

 

The following table sets forth the name, age and position of each of the persons who were serving as our executive officers as of August 31, 2009. These individuals have been appointed by and are serving at the pleasure of our board of directors.

 

 

Kimberly Till is our President and Chief Executive Officer, positions she has held since October 2008. Ms. Till has been a director of the Company since October 2008. Prior to joining us, Ms. Till served as President and Chief Executive Officer, TNS North America (custom business) from May 2006 to March 2008. From November 2003 to March 2006, Ms. Till served as Vice President, Worldwide Media and Entertainment Group, Communications Sector, Microsoft Corporation. Prior to joining Microsoft, from 2000 to October 2003, Ms. Till served at AOL Time Warner America Online, Inc., first as Senior Vice President of International Operations and General Manager of AOL International, then as senior strategic financial advisor at the Warner Music Group. In 1990, Ms. Till was selected for the prestigious White House Fellowship, where she served as a Special Assistant to the former U.S. Trade Representative and Secretary of Agriculture and to the Director of the FBI.

 

Robert J. Cox is our Executive Vice President, Chief Financial Officer and Treasurer, positions he has held since June 2009. Prior to joining us, Mr. Cox served as Senior Vice President, Chief Financial Officer and Treasurer at DealerTrack Holdings, Inc., a publicly traded provider of on-demand software and data solutions for the automotive retail industry, from November 2004 to March 2009. He joined DealerTrack in June 2001 and held the top finance position at all times during his tenure with the company. Prior to joining DealerTrack, Mr. Cox held senior financial positions at Triton

International, Inc. and Green Stamp America, Inc. between 1991 and 2001. Mr. Cox began his career in the audit practice at KPMG LLP in 1987 and is a New York State Certified Public Accountant.

 

Frank E. Forkin is our President, North America Client Services, a position he has held since June 2009. From February to June 2009, Mr. Forkin served as Vice President of Strategy and Consumer Insights Management for Dominos Pizza. Prior to joining Dominos, Mr. Forkin was with J.D. Power and Associates for more than ten years and served there in progressively senior roles, most recently as Vice President and General Manager. Prior to joining J.D. Power and Associates, Mr. Forkin was Senior Vice President of the RDA Group, where his focus was business development, research, strategic design and consulting.

 

Patti B. Hoffman is our Interim Head of Human Resources, a position she has held since May 2009. Prior to joining us, Ms. Hoffman worked for six years as an independent human resources consultant providing her clients with the design, development and implementation of human resources programs relating to compensation, including flexible pay programs, benefits, career progression plans and contingency planning. Prior to her consulting role, Ms. Hoffman spent seven years with Total Research Corporation serving in progressively senior roles, most recently as Chief Administrative Officer.

 

Enzo Micali is our Global Executive Vice President, Technology and Operations, a position he has held since March 2009. Prior to joining us, Mr. Micali served as the Chief Information Officer and Executive Vice President of Operations for TNS North America (custom business), a position he assumed in January 2007. Prior to joining TNS, Mr. Micali served as Chief Information Officer and Senior Vice President for 1-800-FLOWERS.COM from 2000 through 2006, where he was responsible for overseeing all technology plans and programs for the online retailer and its eight subsidiaries. Mr. Micali also has served as Chief Technology Officer for Inslogic, a business-to-business software provider supporting financial institutions and internet portals serving the insurance industry, and has held key IT roles at Chase Manhattan Bank, PricewaterhouseCoopers Consulting, Deloitte & Touche, and Chemical Bank.

 

Eric W. Narowski is our Principal Accounting Officer and Senior Vice President, Global Controller, positions he has held since February 2006 and October 2007, respectively. From January 2000 to October 2007, Mr. Narowski served as our Vice President, Corporate Controller. Mr. Narowski joined us in July 1997 as our Controller, and is a New York State Certified Public Accountant.

 

Robert Salvoni is our Managing Director, Europe, a position he has held since May 2009. Prior to joining us, Mr. Salvoni served as Managing Director at Iris Accountancy Practice Solutions from 2007 to 2009. Prior to 2007, Mr. Salvoni spent 15 years at British Telecom (BT) serving in progressively senior roles, running joint ventures and subsidiary companies, and most recently as Sales Director for BT Wholesale.

 

George H. Terhanian, Ph.D. is currently our President, Global Solutions, a position he has held since December 2008. Prior to serving as President, Global Solutions, Dr. Terhanian served as President of Harris Interactive Europe and Global Internet Research, from July 2003 and June 2002, respectively. Prior to joining us in 1996, Dr. Terhanian taught in elementary and secondary schools in the United States. He also has served an appointment as an American Educational Research Association Fellow at the National Center for Educational Statistics.

 

Available Information

 

Information about our products and services, shareholder information, press releases and SEC filings can be found on our website at www.harrisinteractive.com. Through our website, we make available free of charge the documents and reports we file with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or

furnish it to, the SEC. Information on our website (or the websites of our subsidiaries) does not constitute part of this Report on Form 10-K.

 

The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

 

Factors That May Affect Future Performance.

 

We operate in a very competitive and rapidly changing environment that involves numerous risks and uncertainties, some of which are beyond our control. In addition, we and our clients are affected by global economic conditions. The following section discusses many of these risks and uncertainties, but is not intended to be all-inclusive.

 

Risks Related to Our Business

 

Our business is vulnerable to fluctuations in general economic conditions.

 

Our business tends to be adversely affected by slow or depressed business conditions in the market as a whole. Many of our clients treat all or a portion of their market research expenditures as discretionary. As global macroeconomic conditions decline and our clients seek to control variable costs, new bookings tend to slow, existing bookings become increasingly vulnerable to subsequent cancellations and delays, and our sales backlog may convert to revenue more slowly than it has historically. A portion of our business involves longer-term tracking studies, which are often renewable on an annual basis. Non-renewal of a large tracking study can have an immediate disproportionate impact on our revenues, and we may have a lag time in adjusting our cost structure to reflect the effects of the non-renewal. Any of the above factors may result in a material adverse impact to our growth, revenues, and earnings.

 

Failure to maintain our brand reputation and recognition could impair our ability to remain competitive.

 

We believe that maintaining our good brand reputation and recognition is critical to attracting and expanding our current client base as well as attracting and retaining qualified employees. If our reputation and name are damaged through our participation in surveys involving controversial topics or if the results of our surveys are inaccurate or are misused or used out of context by one of our clients, we may become less competitive or lose market share.

 

If we are unable to maintain adequate capacity and demographic composition of our existing online panel, our business, financial condition and results of operations may be adversely affected.

 

Our success is highly dependent on our ability to maintain sufficient capacity of our online panel and its specialty sub-panels. Our ability to do this may be harmed if we lose panel capacity or are unable to attract and maintain an adequate number of replacement panelists and specialty sub-panel members. There are currently no industry or other benchmarks for determining the optimal size and composition of an online respondent panel. Among other factors, panelist response rates vary with differing survey content, and the frequency with which panelists are willing to respond to survey invitations is variable. We constantly reassess our panel size and demographics as survey requests are made and, based upon availability of existing panelists to fulfill project requests, determine our need to recruit additional panelists. We are not always able to accommodate client requests to survey low-incidence, limited populations with specific demographic characteristics. If our need to recruit

panelists or specialty sub-panel members increases significantly, our operating costs will rise. Further, our business will be adversely affected if we do not achieve sufficient response rates with our existing panelists or our panel narrows and we are unable to spend the funds necessary to recruit additional panelists.

 

We face competitive pressures within our industry and must continuously replace completed work with new projects.

 

The market research industry includes many competitors, some of which are much larger than we are, have a greater global presence, and/or have specialized products and services we do not offer. There can be no assurance that we will be able to successfully compete against current and future competitors and our failure to do so could result in loss of market share, diminished value in our products and services, reduced pricing and increased marketing expenditures. Furthermore, we may not be successful if we cannot compete effectively on quality of our services, timely delivery of information, customer service, and the ability to offer products to meet changing market needs or prices.

 

No one client accounts for more than 10% of our revenues and most of our revenues are derived on a project by project basis. We must continuously replace completed work with new projects from both existing and new clients, and these competitive pressures may make it more difficult for us to do so and to sustain and grow our revenues.

 

Our outstanding debt obligations could impact our financial condition or future operating results.

 

At June 30, 2009, we had $22.5 million outstanding under our Credit Agreement, which provides for amortizing term loans with quarterly payments and, subject to certain conditions, the availability of a maximum amount of $5.0 million under a revolving credit facility.

 

The affirmative, negative and financial covenants of our Credit Agreement could limit our future financial flexibility and could adversely impact our ability to conduct our business. Additionally, a failure to comply with these covenants could result in acceleration of all amounts outstanding under our Credit Agreement, which would materially impact our financial condition unless accommodations could be negotiated with our lenders. No assurance can be given that we would be successful in doing so in this current financial climate, or that any accommodations that we were able to negotiate would be on terms as favorable as those presently contained in our Credit Agreement.

 

The associated debt service costs of the borrowing arrangement under our Credit Agreement will continue to be reflected in operating results. The outstanding debt may limit the amount of cash or additional credit available to us, which could restrain our ability to expand or enhance products and services, respond to competitive pressures, or pursue future business opportunities requiring substantial investments of additional capital.

 

A breach of our Internet security measures, security concerns, or liability arising from the use of the personal information of our Internet panel, could adversely affect our business.

 

A failure in our Internet security measures could result in the misappropriation of private data. As a result, we may be required to expend capital and other resources to protect against the threat of such security breaches or to alleviate problems caused by such breaches, which could have a material adverse effect on our business, financial condition and results of operations.

 

Internet security concerns could cause some online panelists to reduce their participation levels, provide inaccurate responses or end their membership in our Internet panel. This could harm our credibility with our current clients. If our clients become dissatisfied, they may stop using our products and services. In addition, dissatisfied and lost clients could damage our reputation. A loss of online

panelists or a loss of clients would hurt our efforts to generate increased revenues and impair our ability to attract potential clients.

 

We could be subject to liability claims by our online panelists for any misuse of the demographic personal information. These claims could result in costly litigation. We could also incur additional costs and expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated by a governmental body.

 

We must continue to attract and retain highly skilled employees.

 

Our future success will depend, in part, on our ability to continue to attract, retain and motivate highly skilled technical, managerial, marketing, sales and client support personnel. Project managers with industry expertise are important to our ability to retain and expand our business. Intense competition for these personnel exists, and we may be unable to attract, integrate or retain the proper numbers of sufficiently qualified personnel that our business plan assumes. In the past, we have from time to time experienced difficulty hiring and retaining qualified employees. There are few, if any, educational institutions that provide specialized training related to market research. Therefore, employees must be recruited in competition with other industries. In the past, competition for highly skilled employees has resulted in additional costs for recruitment, training, compensation and relocation or the provision of remote access to our facilities. We may continue in the future to experience difficulty in hiring and retaining employees with appropriate qualifications. To the extent that we are unable to hire and retain skilled employees in the future, our business, financial condition and results of operations would likely suffer.

 

If our new senior management team is unsuccessful in rebuilding our business, it could have an adverse impact on our revenues, operations, results, or stock value.

 

During fiscal 2009, we rebuilt virtually our entire senior management team by recruiting talent from outside the Company and also by promoting from within. Our success will be dependent upon the ability of our new senior management team to gain proficiency in leading our Company, effectively implement our corporate strategy and initiatives, and develop key professional relationships. If our new senior management team is unable to achieve success in these areas, it could have an adverse impact on our revenues, operations, results or stock value.

 

We may require additional cash resources which may not be available on favorable terms or at all.

 

We believe that our existing cash balances, projected cash flow from operations, and the remaining borrowing capacity we have under our revolving credit facility will be sufficient for our expected short-term and foreseeable long-term operating needs.

 

We may, however, require additional cash resources due to unanticipated business conditions, to repay indebtedness or to pursue future business opportunities requiring substantial investments of additional capital. If our existing financial resources are insufficient to satisfy our requirements, we may seek additional borrowings. Prevailing credit market conditions may negatively affect debt availability and cost, and, as a result, financing may not be available in amounts or on terms acceptable to us, if at all. In addition, the incurrence of additional indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would further restrict our operations.

 

Our international operations expose us to a variety of operational risks which could negatively impact our future revenue and growth.

 

Our operating results are subject to the risks inherent in international business activities, including general political and economic conditions in each country, changes in market demand as a result of tariffs and other trade barriers, challenges in staffing and managing foreign operations, changes in

regulatory requirements, compliance with numerous foreign laws and regulations, differences between U.S. and foreign tax rates and laws, currency exchange fluctuations, problems in collecting accounts receivable and longer collection periods, issues related to repatriation of earnings of foreign subsidiaries, Internet access restrictions, protecting intellectual property rights in international jurisdictions, political instability, and anti-U.S. sentiment or terrorist activity against U.S. interests abroad. We have little or no control over these risks. For example, we have encountered more restrictive privacy laws in connection with our business operations in Europe, which have inhibited the growth of our European Internet panel. As we increase our global operations in the future, we may experience some or all of these risks, which may have a material adverse effect on our business, financial condition and results of operations.

 

In addition, we rely on off-shore providers in countries, such as India and Costa Rica, to provide certain of our programming services, as well as telephone and online data collection. Political or economic instability in countries where such support services are provided, or a significant increase in the costs of such services, could adversely affect our business. From time to time, laws and regulations are proposed in the jurisdictions where we operate that would restrict or limit the benefits of off-shore operations, and enactment of any such legal restrictions could harm our results of operations.

 

If we are unable to enforce and protect our intellectual property rights our competitive position may be harmed.

 

We rely on a combination of copyright, trademark, trade secret, confidentiality, non-compete and other contractual provisions to protect our intellectual property rights. Despite our efforts to protect our intellectual property rights, unauthorized third parties may obtain and use technology or other information that we regard as proprietary. Our intellectual property rights may not survive a legal challenge to their validity or provide significant protection for us. The laws of certain countries do not protect our proprietary rights to the same extent as the laws of the United States. Accordingly, we may not be able to protect our intellectual property in such countries against unauthorized third-party copying or use, which could adversely affect our competitive position.

 

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

 

We may be subject to claims relating to content that is published on or downloaded from our websites. We may also be subject to liability for content that is accessible from our website through links to other websites. For example, as part of our surveys panelists sometimes access, through our websites or linkages to our client’s or other third party websites, content provided by our clients, such as advertising copy, that may be incomplete or contain inaccuracies. We also recruit panelists to participate in research sponsored and hosted by our clients on the client’s website, and we cannot completely control breaches of privacy policies, warranties, or other claims that may be made by those third parties. We may be accused of sending bulk unsolicited email and have our email blocked by one or more Internet service providers and, therefore, our online data collection efforts may suffer.

 

Although we carry general and professional liability insurance, our insurance may not cover potential liability claims for publishing or distributing content over the Internet, or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed. In addition, any claims of this type, with or without merit, would result in the diversion of our financial resources and management personnel.

 

Any failure in the performance of our technology infrastructure or the Internet backbone could harm our business.

 

Any system delays or failures, including network, software or hardware failures, that cause an interruption in our ability to communicate with our Internet panel, collect research data, or protect

visual materials included in our surveys, could result in reduced revenue, impair our reputation, and have a material adverse effect on our business, financial condition and results of operations.

 

Our systems and operations are vulnerable to damage or interruption from fire, earthquake, flooding, power loss, telecommunications failure, break-ins and similar events. The redundancy of our systems may not be adequate, as we depend upon third-party suppliers to protect our systems and operations from the events described above. We have experienced technical difficulties and downtime of individual components of our systems in the past, and we believe that technical difficulties and downtime may occur from time to time in the future. The impact of technical difficulties and downtime may be severe. We have developed, however have not fully implemented, a formal disaster recovery plan, and our business interruption insurance may not adequately compensate us for any losses that may occur due to failures in our systems.

 

Major components of the Internet backbone itself could fail due to terrorist attack, war or natural disaster. Further, our servers could be the subject of cyber attacks or outages could be experienced with Internet service providers. Our business is particularly vulnerable to such occurrences because we not only would suffer the effects experienced by businesses in general, we would be unable to perform online surveys, which represent a significant portion of our business. Thus, we would have to find alternative means to conduct surveys or would be unable to effectively service the needs of many of our clients.

 

Risks Related to Our Common Stock

 

Our business may be harmed if we cannot maintain our listing on the Nasdaq Global Select Stock Market.

 

Variations in our operating results may cause our stock price to fluctuate. Our quarterly operating results have in the past, and may in the future, fluctuate significantly and we have and may continue to incur losses in any given quarter. Our future results of operations have and may again fall below the expectations of public market analysts and investors. If this happens, the price of our common stock would likely decline. Other factors, such as general market conditions and investor’s perceptions of our longer term prospects, also may cause fluctuations in the price of our common stock.

 

To maintain our listing on the Nasdaq Global Select Market we must satisfy certain minimum financial and other continued listing standards, including, among other requirements (amounts below are in thousands of U.S. Dollars, except for share and per share data):

 

 

Citing extraordinary market conditions, on October 16, 2008 and again on December 19, 2008, March 23, 2009 and July 13, 2009, Nasdaq suspended application of the requirements related to minimum market value of listed securities and minimum bid price. On August 3, 2009, the requirements were reinstated with a new measurement period commencing on that date.

 

Any failure to meet the market value requirement must continue for 10 consecutive days and may be cured within 30 days after notification by Nasdaq of non-compliance by meeting the standard for 10 consecutive business days. Any failure to meet the minimum bid price requirement must continue for 30 consecutive business days and may be cured within 180 days after notification by Nasdaq of non-compliance by meeting the standard for 10, or in Nasdaq’s discretion 20 or more, consecutive business days. If we fail to meet these requirements, we would have the option to apply to transfer our securities to the Nasdaq Capital Market, which would provide us with an additional 180 days to

meet the $1.00 minimum bid requirement. If we fail to meet the minimum bid requirement after that additional 180 days have elapsed, Nasdaq may provide written notification to us regarding the de-listing of our common stock. At that time, we would have the right to request a hearing to appeal the Nasdaq de-listing determination.

 

Since November 14, 2008, the bid price of our common stock has been below $1.00 per share. As of August 25, 2009, the bid price of our common stock was $0.82 per share and our approximate market value for listed securities was $44.2 million. There can be no assurance that we will meet the continued listing requirements for the Nasdaq Global Select Market, or that any appeal of a decision to de-list our common stock will be successful. If our common stock loses its status on the Nasdaq Global Select Market and we are not successful in obtaining a listing on the Nasdaq Capital Market, shares of our common stock would likely trade in the over-the-counter market bulletin board, commonly referred to as the “pink sheets.” If our stock were to trade on the over-the-counter market, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our common stock is de-listed, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our common stock, further limiting the liquidity of our common stock. These factors could have a material adverse effect on the trading price, liquidity, value and marketability of our common stock.

 

Our operating results may fluctuate from period to period and may not meet the expectations of securities analysts or investors or forward-looking statements we have made, which may cause the price of our common stock to decline.

 

Our quarterly and annual operating results may fluctuate in the future as a result of many factors, some of which are outside our control, including declines in general economic conditions or the budgets of our clients, changes in the demand for market research and polling products and services, currency fluctuations, the timing of client projects, and competition in the industry, and others which are partially within our control, including the amount of new business generated, effective management of the professional services aspects of our business, including utilization and realization rates, the mix of domestic and international business, and the timing of the development, introduction and marketing of new products and services. An inability to generate sufficient earnings and cash flow may impact our operating and other activities. The potential fluctuations in our operating results could cause period-to-period comparisons of operating results not to be meaningful and may provide an unreliable indication of future operating results. Furthermore, our operating results may not meet the expectations of securities analysts or investors in the future or forward-looking statements we have made. If this occurs, the price of our stock would likely decline.

 

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

 

The trading prices of our common stock could be subject to significant fluctuations in response to, among other factors, variations in operating results, developments in the industries in which we do business, general economic conditions, general market conditions, changes in the nature and composition of our stockholder base, changes in securities analysts’ recommendations regarding our securities, and our performance relative to securities analysts’ expectations for any quarterly period. Further, even though our stock is quoted on the Nasdaq Global Select Market, our stock has had and may continue to have low trading volume and high volatility. The historically low trading volume of our stock makes it more likely that a significant fluctuation in volume, either up or down, will significantly impact the stock price. Because of the relatively low trading volume of our stock, our stockholders may have difficulty selling our common stock. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Such volatility may adversely affect the market price of our common stock.

Anti-takeover provisions in our charter and applicable law could delay or prevent an acquisition of our company.

 

Our restated certificate of incorporation provides for the division of our board of directors into three classes, eliminates the right of stockholders to act by written consent without a meeting, and provides our board of directors with the power to issue shares of preferred stock without stockholder approval. The preferred stock could have voting, dividend, liquidation, and other rights established by the board of directors that are superior to those of our common stock.

 

Our board of directors also adopted a stockholder rights plan, pursuant to which we declared and paid a dividend of one right for each share of common stock outstanding as of March 29, 2005, and one right attaches to each share issued thereafter until a specified date. Unless redeemed by us prior to the time the rights are exercised, upon the occurrence of certain events, the rights will entitle the holders to receive upon exercise of each right shares of our preferred stock, or shares of an acquiring entity, having a value equal to the exercise price of the right divided by 50% of the then market price of our common stock. The issuance of the rights could have the effect of delaying or preventing a change in control of our company.

 

In addition, Section 203 of the Delaware General Corporation Law contains provisions that impose restrictions on stockholder action to acquire our company. The effect of these provisions of our certificate of incorporation and Delaware law could discourage or prevent third parties from seeking to obtain control of us, including transactions in which the holders of common stock might receive a premium for their shares over prevailing market prices.

 

 

None.

 

 

Our corporate headquarters and principal United States operating facility is located at 60 Corporate Woods, Rochester, New York, 14623, under an operating lease that expires in July 2015. We plan to move our corporate headquarters to 161 Sixth Avenue, New York, New York, effective September 15, 2009, where we have an office under an operating lease that expires in April 2012. In addition, we lease data collection centers to house our telephone interviewing centers in both Canada and the United Kingdom. We also lease service offices to house our project, administrative and processing staff in the following locations:

 

 

 

We lease all of our facilities and believe our current facilities are adequate to meet our needs for the foreseeable future. We continually assess the adequacy of our space needs relative to the size and scope of our business and may, from time to time, reduce our leased space accordingly. We believe that additional or alternative facilities can be leased to meet our future needs on commercially reasonable terms.

 

Information concerning each of our material properties is as follows (amounts in thousands):

 

 

 

In the normal course of business, we are at times subject to pending and threatened legal actions and proceedings. After reviewing with counsel pending and threatened actions and proceedings, management believes that the outcome of such actions or proceedings is not expected to have a material adverse effect on our business, financial condition or results of operations.

 

 

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2009.

 

 

Market Information

 

Our common stock is traded on the Global Select Market of Nasdaq under the symbol “HPOL”. The following table shows, the high and low sales prices per share of our common stock on the Nasdaq exchange for fiscal 2009 and 2008.

 

 

Holders

 

At August 24, 2009, our common stock was held by approximately 6,200 stockholders, reflecting stockholders of record or persons holding stock through nominee or street name accounts with brokers.

 

Dividends

 

We have never declared nor paid any cash dividends on our common stock. We currently anticipate that we will retain any future earnings for internal purposes, such as investing in our key strategic initiatives. Accordingly, we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

Issuer Purchases of Equity Securities

 

There were no repurchases of our equity securities for the three months ended June 30, 2009.

Performance Graph

 

The graph below matches the cumulative 5-year total return of holders of our common stock with the cumulative total returns of the NASDAQ Composite index, the S&P Smallcap 600 index and a customized peer group of seven companies that includes: Aegis Group plc, GFK AG, Intage Inc., National Research Corp., Ipsos SA, WPP Group plc and Yougov plc. The peer group previously also included Greenfield Online, Inc. and Taylor Nelson Sofres plc, neither of which continues to be publicly traded. The graph tracks the performance of a $100 investment in our common stock, in each index and in the peer group (assuming the reinvestment of all dividends) from June 30, 2004 to June 30, 2009.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Harris Interactive Inc., The NASDAQ Composite Index,
The S&P Smallcap 600 Index And A Peer Group

 

 

 

* $100 invested on 6/30/04 in stock or index, including reinvestment of dividends. Fiscal year ending June 30. Copyright ^© 2009 S&P, a division of The McGraw -Hill Companies Inc. All rights reserved.

 

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

 

The cumulative total shareholder return graph and accompanying information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C promulgated by the SEC or the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act. The cumulative total shareholder return graph and accompanying information shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent Harris Interactive specifically incorporates it by reference.

 

The following selected consolidated financial data of Harris Interactive should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes to those statements and other financial information appearing elsewhere in this Form 10-K. The selected consolidated financial data reported below includes the financial results of the following entities which we acquired as of the dates indicated: Decima (August 2007), Marketshare (August 2007), MediaTransfer (April 2007), and Wirthlin (September 2004). In addition, information reported for fiscal years 2005 through 2008 has been reclassified to reflect our Japanese and Rent and Recruit operations as discontinued operations for all periods presented.

 

 

 

 

Note: All amounts shown below are in thousands of U.S. Dollars, unless otherwise noted.

 

Overview

 

Throughout fiscal 2009, we have taken a number of steps that we believe are critical to our ability to restore revenue and profitability, including:

 

 

We believe it is likely that the unfavorable global macroeconomic conditions, which have negatively impacted our revenue and profitability during fiscal 2009 as described in more detail below, may continue to persist. According to industry analysts at Inside Research , 80% of market research buyers have faced cutbacks of their market research budgets in calendar 2009, compared with only 30% in calendar 2008. Despite this outlook, we remain focused on continuing to implement our strategy to grow revenue and regain market share by capitalizing on our strong brand and leveraging the expertise and insights our client teams possess, all with an eye toward a sustaining future for Harris.

 

Goodwill Impairment Charges

 

Fiscal 2009

 

At September 30, 2008, we considered the incremental decline in our stock price from $2.01 at June 30 to $1.73 at the end of September. At that time, we concluded that this decline was short-term

in nature and absent factors to the contrary, did not trigger a review for impairment outside of our next scheduled annual impairment evaluation date, June 30, 2009.

 

As part of our closing process for the three months ended December 31, 2008, we considered the following factors in determining whether an impairment review outside of our annual impairment evaluation date was necessary:

 

 

Based on our consideration of the above-noted factors, we concluded that an interim period goodwill impairment evaluation was necessary at December 31, 2008. Accordingly, we performed the initial step of our impairment evaluation and determined that the carrying value of our single reporting unit’s net assets exceeded their fair value. The fair value of the reporting unit was determined using a discounted cash flow analysis, which used a discount rate based on our best estimate of the after-tax weighted average cost of capital, adjusted for the financial risk associated with our future operations.

 

In the second step of our impairment evaluation, we determined the implied fair value of goodwill and compared it to the carrying value of the goodwill. The fair value of our reporting unit was allocated to all of its assets and liabilities as if it had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. This allocation resulted in no implied fair value of goodwill. Therefore, we recognized an impairment charge of $40,250, the remaining amount of our previously reported goodwill.

 

During the three months ended December 31, 2008, as a result of the factors discussed above, we also tested our asset groups for recoverability under SFAS No. 144. As the projected undiscounted cash flows for the individual asset groups exceeded the carrying value of the long-lived assets for each asset group, we did not record an impairment charge for any of our long-lived assets during the three months ended December 31, 2008. No additional facts and circumstances arose during the remainder of fiscal 2009 to change this conclusion.

 

Fiscal 2008

 

At March 31, 2008, we considered the decline in our stock price from January 2008 to March 2008. At that time, we concluded that the decline was short-term in nature and did not trigger a review for impairment outside of our annual June 30 impairment evaluation date.

 

At June 30, 2008, we performed the initial step of our impairment evaluation by comparing the fair market value of our single reporting unit, as determined using a discounted cash flow model, to its carrying value. As the carrying amount exceeded the fair value, we performed the second step of our impairment evaluation to calculate impairment and as a result, recorded a pre-tax goodwill impairment charge of $86,497. The primary reason for the impairment charge was the sustained decline of our stock price during the second half of fiscal 2008.

Income Tax Valuation Allowance

 

During the second quarter of fiscal 2009, our judgment regarding our U.S. deferred tax assets changed, as the current macroeconomic environment and our U.S. losses in the most recent three-year period presented significant negative evidence such that a valuation allowance against our net U.S. deferred tax assets was required. Accordingly, we recorded a valuation allowance of $18,861 in the three months ended December 31, 2008 against the deferred tax assets of our U.S. operations. We will continue to assess the realizability of these deferred tax assets in accordance with SFAS No. 109 and will adjust the valuation allowance should all or a portion become realizable in the future.

 

Restructuring and Other Charges

 

Restructuring

 

Fiscal 2009

 

During the third quarter of fiscal 2009, we took actions to re-align the cost structure of our U.S. and U.K. operations. Specifically, we reduced headcount at our U.S. facilities by 92 full-time employees and announced plans to reduce headcount at our U.K. facilities by 25 full-time employees. One-time termination benefits associated with the U.S. and U.K. actions were $2,656 and $389, respectively, all of which involved cash payments. These actions were communicated to the affected employees in March 2009. All actions were completed by March 2009 in the U.S. and May 2009 in the U.K. The related cash payments were completed by June 2009 in the U.K. and will be completed by March 2010 in the U.S.

 

At March 31, 2009, we reviewed the estimate of anticipated sublease rental income for our Rochester, New York offices, located at 135 Corporate Woods. This review, prompted by adverse changes in real estate market conditions, resulted in a decrease to our estimate of the portion of the remaining lease obligation period over which we expect to derive sublease rental income. This change in estimate resulted in a charge of $35 in the third quarter of fiscal 2009.

 

Previously, during the second quarter of fiscal 2009, we took actions to re-align the cost structure of our U.S. operations. Specifically, we reduced headcount at our U.S. facilities by 78 full-time employees and incurred $2,261 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in October and December 2008. All actions were completed by December 2008 and we expect the related cash payments to be completed by December 2009.

 

Additionally during the second quarter of fiscal 2009, we substantially vacated leased space at 135 Corporate Woods. We incurred $493 in charges related to the remaining operating lease obligation, all of which involved cash payments. All actions associated with this vacated space were completed by December 2008. We expect the related cash payments to be completed by June 2010.

 

At December 31, 2008, we reviewed the estimates of anticipated sublease rental income for our Grandville, MI and Norwalk, CT offices, which were included in restructuring charges taken during the third quarter of fiscal 2008 in conjunction with our reduction of leased space at these facilities. This review, prompted by adverse changes in real estate market conditions within each of these locales, resulted in a decrease to our estimate of the portion of the remaining lease obligation period over which we expect to derive sublease rental income. This change in estimate resulted in a charge of $366 for the three months ended December 31, 2008.

 

Restructuring charges for fiscal 2009 totaled $5,657. The headcount and leased space reductions described above took nearly $22,000 in annualized costs out of the business, approximately $6,000 (on an annualized basis) of which we anticipate will be re-invested in talent during fiscal 2010 to support our key strategic initiatives.

Fiscal 2008

 

During the fourth quarter of fiscal 2008, we took certain actions designed to align the cost structure of our U.K. operations with the evolving operational needs of that business. Specifically, we reduced headcount at our U.K. facilities by 18 full-time employees and incurred $544 in one-time termination benefits, all of which involved cash payments. The reduction in staff was communicated to the affected employees in June 2008. All actions were completed by July 31, 2008 and the related cash payments were completed in September 2008.

 

The U.K. restructuring described above follows separate actions we took at various times during the fourth quarter of fiscal 2008 to strategically reduce headcount at several of our U.S. facilities by a total of 24 full-time equivalents, as a result of which we incurred $512 in one-time termination benefits, all of which involved cash payments. The reduction in staff was communicated to the affected employees in April 2008. Additionally, we took steps to reduce costs associated with our U.S. operations by reducing leased space at our Cincinnati, Ohio facility. We incurred $135 in contract termination charges related to the remaining operating lease obligation, all of which involved cash payments. All actions associated with these headcount and leased space reductions were completed in April and May 2008, respectively, and the related cash payments were completed in October 2008 and April 2009, respectively.

 

During the third quarter of fiscal 2008, we recorded $1,138 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 $166 in one-time termination benefits. The reduction in staff was communicated to the affected employees in January 2008. Additionally, we incurred $120 in contract termination charges related to the remaining operating lease obligation. All actions were completed by March 31, 2008 and involved cash payments, which were 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 involved cash payments. The reduction in staff was communicated to the affected employees in February 2008. All actions associated with this headcount reduction were completed in February 2008, and cash payments in connection with the one-time termination benefits were completed in September 2008.

 

In connection with the leased space reductions in Grandville and Norwalk, we incurred $518 in contract termination charges related to the remaining operating lease obligations, all of which involved 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.

 

As a result of the actions described above, we realized approximately $1,800 in cash savings during fiscal 2008 and approximately $5,800 during fiscal 2009.

 

Fiscal 2007

 

During the fourth quarter of fiscal 2007, we recorded $337 in restructuring charges directly related to a facilities consolidation and headcount reduction, both designed to ensure the alignment of our cost structure with the operational needs of the business. We negotiated an amendment to the lease agreement for our Reston, Virginia office, terminating our lease with respect to a portion of our space in exchange for a payment of $230 to the landlord, subject to conditions which have since been met. As a result of the amendment, our lease obligation over the remaining term of the lease was reduced by approximately $500 from the initial lease, which, when offset against the payment to the landlord for the space reduction noted above, resulted in anticipated net savings of approximately $300 over the remaining lease term.

We also reduced the staff of our U.S. operations by 6 full-time equivalents and incurred $107 in severance charges, all of which involved cash payments. The reduction in staff was communicated to the affected employees during the fourth quarter of fiscal 2007. All actions in the plan were completed by June 30, 2007. Cash payments in connection with the plan were completed in December 2007.

 

As a result of the actions described above, we realized cash savings of approximately $800 in fiscal 2008, consistent with our savings expectation at the time that these actions were taken.

 

Other Charges

 

Other charges totaled $6,353 and $2,346 for fiscal 2009 and 2008, respectively, and included the following:

 

 

During fiscal 2008, we incurred $762 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. This amount was reclassified from the “Selling, general and administrative” expense line in our consolidated statements of operations to conform to the current year presentation, as more fully described in Note 2, “Summary of Significant Accounting Policies — Reclassifications,” to our consolidated financial statements included in this Form 10-K.

 

 

Further financial information about our restructuring plans and activities is included in Note 4, “Restructuring and Other Charges,” to our consolidated financial statements contained in this Form 10-K.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The most significant of these areas involving difficult or complex judgments made by management with respect to the preparation of our financial statements in fiscal 2009 include:

 

 

 

In each situation, management is required to make estimates about the effects of matters or future events that are inherently uncertain.

 

Revenue Recognition

 

We recognize revenue from services on a proportional performance basis. In assessing contract performance, both input and output criteria are reviewed. Costs incurred are used as an objective input measure of performance. The primary input of all work performed under these arrangements is labor. As a result of the relationship between labor and cost, there is normally a direct relationship between the costs incurred and the proportion of the contract performed to date. Costs incurred as an initial proportion of expected total costs is used as an initial proportional performance measure. This indicative proportional performance measure is always subsequently validated against more subjective criteria (i.e. relevant output measures) such as the percentage of interviews completed, percentage of reports delivered to a client and the achievement of any project milestones stipulated in the contract. In the event of divergence between the objective and more subjective measures, the more subjective measures take precedence since these are output measures.

 

Clients are obligated to pay based upon services performed, and in the event that a client cancels the contract, the client is responsible for payment for services performed through the date of cancellation. Losses expected to be incurred, if any, on jobs in progress are charged to income as soon as it becomes probable that such losses will occur. Invoices to clients in the ordinary course are generated based upon the achievement of specific events, as defined by each contract, including deliverables, timetables, and incurrence of certain costs. Such events may not be directly related to the performance of services. Revenues earned on contracts in progress in excess of billings are classified as unbilled receivables. Amounts billed in excess of revenues earned are classified as deferred revenue.

 

Revisions to estimated costs and differences between actual contract losses and estimated contract losses would affect both the timing of revenue allocated and the results of our operations.

 

Impairment of Goodwill and Other Intangible Assets

 

SFAS No. 142, Goodwill and Other Intangible Assets , requires us to test goodwill for impairment on an annual basis and between annual tests in certain circumstances, and to write down goodwill and non-amortizable intangible assets when impaired. The evaluation of other intangible assets is performed on a periodic basis. These assessments require us to estimate the fair market value of our single reporting unit. If we determine that the fair value of our reporting unit is less than its carrying amount, absent other facts to the contrary, we must recognize an impairment charge for the associated goodwill of the reporting unit against earnings in our consolidated financial statements. As we have one reportable segment, we utilize the entity-wide approach for assessing goodwill.

 

Goodwill is evaluated for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger a review for impairment include the following:

 

 

 

Due to the numerous variables associated with our judgments and assumptions relating to the valuation of the reporting unit and the effects of changes in circumstances affecting this valuation, both the precision and reliability of the resulting estimates are subject to uncertainty, and as additional information becomes known, we may change our estimates.

 

Goodwill is evaluated for impairment using the two-step process as prescribed in SFAS No. 142. The first step is to compare the fair value of the reporting unit to its carrying amount. If the carrying amount exceeds the fair value, a second step must be followed to calculate impairment. Otherwise, if the fair value of our reporting unit exceeds the carrying amount, the goodwill is not considered to be impaired as of the measurement date. To determine fair value for our reporting unit, we use the fair value of the cash flows that the reporting unit can be expected to generate in the future. This valuation method requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for our reporting unit over a multiyear period, as well as determine the weighted average cost of capital to be used as a discount rate. Significant management judgment is involved in preparing these estimates. Changes in projections or estimates could significantly change the estimated fair value of our reporting unit and affect the recorded balance of goodwill. In addition, if management uses different assumptions or estimates in the future or if conditions exist in future periods that are different than those anticipated, future operating results and the balance of goodwill in the future could be affected by impairment charges.

 

Impairment of Long-Lived Assets

 

We account for the impairment or disposal of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . Events that trigger a test for recoverability include material adverse changes in the projected revenues and expenses, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. A test for recoverability also is performed when we have committed to a plan to sell or otherwise dispose of an asset group and the plan is expected to be completed within a year. Recoverability of an asset group is evaluated by comparing its carrying value to the future net undiscounted cash flows expected to be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, an impairment loss is recognized. The impairment loss is measured by the amount by which the carrying amount of the asset group exceeds the estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over its remaining useful life. Restoration of a previously-recognized long-lived asset impairment loss is not allowed.

 

We estimate the fair value of an asset group based on market prices (i.e., the amount for which the asset could be bought by or sold to a third party), when available. When market prices are not available, we estimate the fair value of the asset group using the income approach and/or the market approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, approved business plans, expected growth rates and cost of capital, among others. We also make certain assumptions about future economic conditions, interest rates, and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods.

 

Changes in assumptions or estimates could materially affect the determination of fair value of an asset group, and therefore could affect the amount of potential impairment of the asset. The following assumptions are key to our income approach:

 

 

 

Income Taxes

 

We account for income taxes using the asset and liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized for future tax consequences attributable to operating loss carryforwards and differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases for operating profit and tax liability carryforward.

 

SFAS No. 109 requires the establishment of a valuation allowance to reflect the likelihood of the realization of deferred tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We evaluate the weight of the available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The decision to record a valuation allowance requires varying degrees of judgment based upon the nature of the item giving rise to the deferred tax asset. The amount of the deferred tax asset considered realizable is based on significant estimates, and it is at least reasonably possible that changes in these estimates in the near term could materially affect our financial condition and results of operations.

 

On July 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 , which contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Although we believe we have adequately provided for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate and also include the related interest and penalties.

 

Stock-Based Compensation

 

On July 1, 2005, we adopted SFAS No. 123(R), Share-Based Payment , which requires the recognition of compensation expense for all share-based payments made to employees based on the fair value of the share-based payment on the date of grant. We elected to use the modified prospective approach for adoption, which requires that compensation expense be recorded for the unvested portion of previously issued awards that remain outstanding at July 1, 2005 using the same estimate of the grant date fair value and the same attribution method used to determine the pro forma disclosure under SFAS No. 123, Accounting for Stock-Based Compensation.

 

For share-based payments granted subsequent to July 1, 2005, compensation expense based on the grant date fair value is recognized in our consolidated statements of operations over the requisite

service period. In determining the fair value of stock options, we use the Black-Scholes option pricing model, which employs the following assumptions:

 

 

Expected volatility and the expected life of the options granted, both of which impact the fair value of the option calculated under the Black-Scholes option pricing model, involve management’s best estimates at that time. The weighted-average assumptions used to value options during the fiscal years ended June 30, 2007, 2008 and 2009, respectively, are set forth in Note 14, “Stock-Based Compensation,” to our consolidated financial statements contained in this Form 10-K. The fair value of our restricted stock awards is based on the price per share of our common stock on the date of grant. We grant options to purchase our stock at fair value as of the date of grant.

 

SFAS No. 123(R) also requires that we recognize compensation expense for only the portion of options or restricted shares that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee termination behavior and the vesting period of the respective stock options or restricted shares. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

 

HIpoints Loyalty Program

 

In July 2001, we initiated HIpoints, a loyalty program designed to reward respondents who register for our online panel, complete online surveys and refer others to join our online panel. The earned points are non-transferable and may be redeemed for gifts from a specific product folio at any time prior to expiration. We maintain a reserve for our obligations with respect to future redemption of outstanding points based on the expected redemption rate of the points. This expected redemption rate is based on our actual redemption rates since the inception of the program. An actual redemption rate that differs from the expected redemption rate could have a material impact on our results of operations.

 

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 an approximately $800 reduction in our reserve for obligations with respect to future redemption of outstanding points during the second quarter of fiscal 2008, which was recorded in the “Cost of services” line of our consolidated statement of operations.

 

Contingencies and Other Accruals

 

From time to time, we record accruals for severance costs both in connection with formal restructuring programs and in the normal course, lease costs associated with excess facilities, contract terminations and asset impairments as a result of actions we undertake to streamline our organization, reposition certain businesses and reduce ongoing costs. Estimates of costs to be incurred to complete these actions, such as future lease payments, sublease income, the fair value of

assets, and severance and related benefits, are based on assumptions at the time the actions are initiated. To the extent actual costs differ from those estimates, reserve levels may need to be adjusted. In addition, these actions may be revised due to changes in business conditions that we did not foresee at the time such actions were approved. Additionally, we record accruals for estimated incentive compensation costs during each year. Amounts accrued at the end of each reporting period are based on our estimates and may require adjustment as the ultimate amount paid for these incentives are sometimes not finally determinable until the completion of our fiscal year end closing process.

 

Explanation of Key Financial Statement Captions

 

Revenue from Services

 

We recognize revenue from services on a proportional performance basis, as more particularly described above in “Critical Accounting Policies and Estimates — Revenue Recognition”.

 

Our revenue from services is derived principally from the following:

 

 

Cost of Services

 

Our direct costs associated with generating revenues principally consist of the following items:

 

 

Selling, General and Administrative

 

Selling, general and administrative expense includes the following:

 

 

 

Provision for Income Taxes

 

The provision for income taxes includes current and deferred income taxes. Furthermore, deferred tax assets are recognized for the expected realization of available net operating loss carryforwards. A valuation allowance is recorded when it is necessary to reduce a deferred tax asset to an amount that we expect to realize in the future. We continually review the adequacy of our valuation allowance and adjust it based on whether or not our assessment indicates that it is more likely than not that these benefits will be realized.

 

Results of Operations

 

The following table sets forth the results of our continuing operations, expressed both as a dollar amount and as a percentage of revenue from services, for the fiscal years ended June 30:

 

 

The results of continuing operations as presented and discussed herein do not include the results of our discontinued Rent and Recruit business. Additionally, certain amounts in prior years’ consolidated financial statements have been reclassified to conform to the current year’s presentation, as more fully described in Note 2, “Summary of Significant Accounting Policies — Reclassifications.”

 

Fiscal Year Ended June 30, 2009 Versus Fiscal Year Ended June 30, 2008

 

Revenue from services.   Revenue from services decreased by $54,389, or 22.8%, to $184,334 for fiscal 2009 compared with fiscal 2008. As more fully described below, revenue from services was

impacted by several factors and included a negative foreign exchange rate impact of $12,148 in fiscal 2009 compared with fiscal 2008.

 

North American revenue decreased by $44,762 to $132,760 for fiscal 2009 compared with fiscal 2008, a decrease of 25.2%. By country, North American revenue for fiscal 2009 was comprised of:

 

 

European revenue decreased by $11,691 to $46,990 for fiscal 2009 compared with fiscal 2008, a decrease of 19.9%. By country, European revenue for fiscal 2009 was comprised of:

 

 

Asian revenue increased by $2,064 to $4,584 for fiscal 2009, an increase of 81.9% compared with fiscal 2008. The increase was principally impacted by increased focus on driving business with clients in the pharmaceutical, telecommunications and hotel industries. The impact of the foreign exchange rate on Asian revenue was inconsequential compared with fiscal 2008.

 

Cost of services.   Cost of services was $115,235 or 62.5% of total revenue for fiscal 2009, compared with $140,578 or 58.9% of total revenue for fiscal 2008. Cost of services was impacted by the declines in revenue discussed above, the headcount reductions taken throughout fiscal 2009, as more fully described above under “Restructuring and Other Charges,” and the differing types of custom research projects performed in fiscal 2009 compared with fiscal 2008. Cost of services as a percentage of revenue for fiscal 2009 was greater than fiscal 2008 given the pace of the declines in revenue relative to the timing of our cost reductions.

 

Selling, general and administrative.   Selling, general and administrative expense for fiscal 2009 was $65,678 or 35.6% of total revenue for fiscal 2009, compared with $83,084 or 34.8% of total

revenue for fiscal 2008. Selling, general and administrative expense was principally impacted by the following:

 

 

The remainder of the decrease in selling, general and administrative expense was the result of decreases across a number of other operating expense categories because of our continued focus on ensuring appropriate alignment of our cost structure relative to the needs of our business.

 

Depreciation and amortization.   Depreciation and amortization was $7,610 or 4.1% of total revenue for fiscal 2009, compared with $8,526 or 3.6% of total revenue for fiscal 2008. The decrease in depreciation and amortization expense when compared with fiscal 2008 was the result of fixed and intangible assets that became fully depreciated or amortized during fiscal 2009 combined with decreased capital spending during fiscal 2009 as part of our overall focus on controlling costs.

 

Restructuring and other charges.    See above under “Restructuring and Other Charges” for a discussion of restructuring charges incurred during fiscal 2009 and 2008.

 

Goodwill impairment charge.   See above under “Goodwill Impairment Charges” for a discussion of the goodwill impairment charges incurred during fiscal 2009 and 2008.

 

Interest and other income.   Interest and other income was $400 or 0.2% of total revenue for fiscal 2009, compared with $1,119 or 0.5% of total revenue for fiscal 2008. The decrease in interest and other income was principally the result of having a lower average cash balance and lower rate of return for fiscal 2009 when compared with fiscal 2008.

 

Interest expense.   Interest expense was $3,433 or 1.9% of total revenue for fiscal 2009, compared with $1,951 or 0.8% of total revenue for fiscal 2008. The increase in interest expense was principally the result of a $1,017 charge recorded during fiscal 2009 to reflect the ineffectiveness of our interest rate swap as a cash flow hedge during the second and third quarters of fiscal 2009, along with an increase in the applicable spread under our credit facilities from 0.875% to 5.00%, each as a result of the covenant violations and subsequent waivers and amendments to our credit agreement described below under “Liquidity and Capital Resources — Credit Facilities”.

 

Income taxes.   We recorded an income tax provision of $15,849 for fiscal 2009, compared with an income tax benefit of $(661) for fiscal 2008. The tax provision for fiscal 2009 was principally impacted by the valuation allowance recorded against our U.S. deferred tax assets, as discussed above under “Income Taxes” and the tax non-deductibility of the goodwill impairment charge described above under “Goodwill Impairment Charges.”

 

Fiscal Year Ended June 30, 2008 Versus Fiscal Year Ended June 30, 2007

 

Revenue from services.   Revenue from services increased by $26,920 to $238,723 for fiscal 2008, an increase of 12.7% over fiscal 2007. Revenue from services was impacted by several factors, as more fully described below.

North American revenue increased by $17,679 to $177,522 for fiscal 2008, an increase of 11.1% over fiscal 2007. For fiscal 2008, North American revenue was comprised of:

 

 

 

 

European revenue increased by $6,721 to $58,681 for fiscal 2008, an increase of 12.9% over fiscal 2007. For fiscal 2008, European revenue was comprised of:

 

 

European revenue for fiscal 2008 included a favorable impact of $2,546 as a result of foreign exchange rate differences and the depreciation of the U.S. Dollar against the British Pound and the Euro.

 

Cost of services.   Cost of services was $140,578 or 58.9% of total revenue for fiscal 2008, compared with $122,052 or 57.6% of total revenue for fiscal 2007. Cost of services was principally impacted by the increase in revenue from services discussed above, as well as the differing types of custom research projects performed in fiscal 2008 compared with fiscal 2007. Additionally, cost of services was favorably impacted by the $800 reduction in our reserve for obligations with respect to future redemption of outstanding points under our HIpoints program discussed above.

 

Selling, general and administrative.   Selling, general and administrative expense increased to $83,084 or 34.8% of total revenue for fiscal 2008, compared with $72,590 or 34.3% of total revenue for fiscal 2007. Selling, general and administrative expense was principally impacted by $13,572 in incremental expenses attributable to our MediaTransfer, Decima and Marketshare acquisitions.

 

Depreciation and amortization.   Depreciation and amortization was $8,526 or 3.6% of total revenue for fiscal 2008, compared with $5,295 or 2.5% of total revenue for fiscal 2007. The increase in depreciation and amortization was principally the result of $2,960 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 fiscal 2008. Gain on sale of assets during fiscal 2007 consisted of a $410 gain realized on the December 2006 sale of our Stockport facility, along with $378 in net proceeds from the June 2007 sale of two internally developed patents.

 

Restructuring and other charges.   See above under “Restructuring and Other Charges” for a discussion of restructuring charges incurred during fiscal 2008 and 2007.

 

Goodwill impairment charge.   See above under “Goodwill Impairment Charges” for a discussion of the goodwill impairment charge incurred during fiscal 2008.

 

Interest and other income.   Interest and other income was $1,119 or 0.5% of total revenue for fiscal 2008, compared with $2,246 or 1.1% of total revenue for fiscal 2007. The decrease in interest

and other income was due to a decrease in the average balance of cash and marketable securities for fiscal 2008 when compared with fiscal 2007.

 

Interest expense.   Interest expense was $1,951 or 0.8% of total revenue for fiscal 2008, compared with $290 or 0.1% of total revenue for fiscal 2007. The increase in interest expense was the result of our outstanding debt in fiscal 2008 compared with fiscal 2007, during which we did not have any outstanding debt for the first nine months of the fiscal year. The debt incurred was used to fund a portion of the consideration for our MediaTransfer acquisition in fiscal 2007, and our Decima and Marketshare acquisitions in fiscal 2008.

 

Income taxes.   We recorded an income tax benefit from continuing operations of $(661) for fiscal 2008, compared with an income tax provision of $5,319 for fiscal 2007. This was principally impacted by a $2,400 tax charge which resulted from the goodwill impairment charge discussed above, which was largely non deductible for tax purposes. For further explanation of our actual tax rate for fiscal 2008 compared with our U.S. statutory rate, see Note 16, “Income Taxes,” to our consolidated financial statements contained in this Form 10-K.

 

Significant Factors Affecting Company Performance

 

Our Revenue Mix

 

In reports filed with the SEC for periods prior to the fiscal quarter ended December 31, 2008, in addition to reporting revenue from services, we provided detail as to the portion of revenue that was Internet-based. We treated all of the revenue from a project as Internet-based whenever more than 50% of the data collection for that project was completed online. During the periods in which we were one of the few providers of Internet-based market research, an understanding of Internet-based revenue was helpful in understanding the speed of conversion of clients to the Internet and our growth prospects. Costs related to Internet data collection also are different than those related to traditional methods of data collection, so an understanding of our Internet-based revenue was helpful in comparing our margins with those of others in the market research industry. Internet-based research now has gained wide market acceptance, both with providers and clients, and is less a differentiating factor for us than it historically was. Moreover, the percentage of our revenue in the United States that is Internet-based has stabilized within a range of 65-75% of total U.S. revenue during the most recent fiscal years, and the percentage of our revenue generated in Europe has grown to be within a similar range. Rather than focusing on Internet-based revenue growth, our current business model emphasizes utilizing the most efficient and effective data collection method for the specific project, whether Internet-based, traditional, or otherwise. Therefore, we no longer believe that separate reporting of Internet-based revenue provides materially helpful information to investors, and discontinued separate reporting of that metric for periods after December 31, 2008.

 

Our Ability to Measure Our Performance

 

We closely track certain key operating metrics, specifically bookings and ending sales backlog. These key operating metrics enable us to measure the current and forecasted performance of our business relative to historical trends. In prior periods, we have also reported days of sales outstanding, utilization and average billable full-time equivalents. We are no longer reporting these metrics and have limited the metrics reported below to those that we believe are most useful to investors in tracking trends within our business.

Key operating metrics for continuing operations, by quarter, for the fiscal years ended June 30, 2008 and 2009, were as follows (U.S. Dollar amounts in millions):

 

 

Additional information regarding each of the key operating metrics noted above is as follows:

 

Bookings are defined as the contract value of revenue-generating projects that are anticipated to take place during the next four fiscal quarters for which a firm client commitment was received during the current period, less any adjustments to prior period bookings due to contract value adjustments or project cancellations during the current period.

 

Bookings for the three months ended June 30, 2009 were $36.3 million, compared with $53.3 million for the same prior year period. The decrease in bookings was principally impacted by the challenging global macroeconomic conditions discussed above under “Risks Related to Our Business.”

 

Monitoring bookings enhances our ability to forecast long-term revenue and to measure the effectiveness of our marketing and sales initiatives. However, we also are mindful that bookings often vary significantly from quarter to quarter. Information concerning our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenue over time. There are no third-party standards or requirements governing the calculation of bookings. New bookings involve estimates and judgments regarding new contracts and renewals, as well as extensions and additions to existing contracts. Subsequent cancellations, extensions and other matters may affect the amount of bookings previously reported.

 

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 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. However, it is unclear what effect current global macroeconomic conditions will have on the conversion of backlog to revenue over the next few quarters, as projects currently in backlog remain subject to cancellation if the project has not already commenced.

 

Ending sales backlog for the three months ended June 30, 2009 was $48.8 million, compared with $66.8 million for the same prior year period. The decrease in ending sales backlog was principally impacted by the challenging global macroeconomic conditions discussed above under “Risks Related to Our Business”.

 

Liquidity and Capital Resources

 

Cash and Cash Equivalents

 

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

 

Net cash provided by (used in) operating activities.   Net cash used in operating activities was $(4,334) for fiscal 2009, compared with $17,972 provided by operating activities for fiscal 2008. The change from fiscal 2008 was principally the result of our net loss for fiscal 2009 and decreases in accounts payable and accrued expenses, many of which are project-related and were impacted by current fiscal year revenue declines, partially offset by decreases in accounts receivable and unbilled receivables.

 

Net cash provided by operating activities increased to $17,972 for fiscal 2008, compared with $16,639 for fiscal 2007. The increase in net cash provided by operating activities was primarily the result of the cash contributed from the operations of MediaTransfer, Decima and Marketshare.

 

Net cash provided by (used in) investing activities.   Net cash used in investing activities was $(2,256) for fiscal 2009, compared with $(20,813) for fiscal 2008. This change was principally the result of having no cash outlay for acquisitions during fiscal 2009, compared with $21,727 used during fiscal 2008 for acquisitions, and $1,015 in net purchases of marketable securities during the fiscal 2009, compared with net proceeds from the maturities and sales of marketable securities of $4,420 for fiscal 2008.

 

Net cash used in investing activities was $(20,813) for fiscal 2008, compared with $28,800 in net cash provided by investing activities for fiscal 2007. When compared with fiscal 2007, this change was principally the result of $21,727 in net cash used for acquisitions, compared with $9,790 used in fiscal 2007, along with a decline in net proceeds generated from maturities and sales of marketable securities from $40,831 in fiscal 2007 to $4,420 in fiscal 2008.

 

Net cash provided by (used in) financing activities.   Net cash used in financing activities was $(8,015) for fiscal 2009, compared with $6,436 provided by financing activities for fiscal 2008. This change was partially the result of having no borrowings during fiscal 2009, compared with $14,525 in net borrowings for fiscal 2008, and a $1,723 decrease in repayments of outstanding borrowings for fiscal 2009 when compared with fiscal 2008. In addition, fiscal 2009 included $1,274 in cash used to pay the costs associated with the amendments to our credit agreement discussed below under “Credit Facilities”.

 

Net cash provided by financing activities was $6,436 for fiscal 2008, compared with $(28,251) used in financing activities for fiscal 2007. This change was the result of $14,525 in net proceeds from borrowings, which were used to fund a portion of the consideration for our acquisitions of Decima and Marketshare, partially offset by $8,648 in payments on outstanding borrowings. Comparatively, $50,540 was used during fiscal 2007 to fund repurchases of our common stock under our Share Repurchase Program, which expired on December 31, 2007. The Share Repurchase Program was not renewed, and no purchases were made under it after fiscal 2007.

 

Working Capital

 

At June 30, 2009, we had cash, cash equivalents, and marketable securities of $17,762, compared with $32,874 at June 30, 2008. Available sources of cash to support known or reasonably likely cash requirements over the next 12 months include cash, cash equivalents and marketable securities on hand at June 30, additional cash that may be generated from our operations and funds to the extent available through our credit facilities discussed below. Until we achieve leverage ratios specified in our amended credit facility, we must have minimum cash balances ranging between 1.2 and 1.5 times the amount of borrowings we make under the revolving line that is part of our amended credit facilities. While we believe that our available sources of cash will support known or reasonably likely cash requirements over the next 12 months, our ability to generate cash from our operations is dependent upon the factors discussed below.

 

Generating cash from our operations significantly depends on our ability to profitably generate revenue, which requires that we continually develop new business, both for growth and to replace completed projects. Although work for no one client constitutes more than 10% of our revenue, we

have had to find significant amounts of replacement and additional revenue as client relationships and work for continuing clients change and will likely have to continue to do so in the future. Our ability to generate revenue depends not only on execution of our business plans, but also on general market factors outside of our control. As many of our clients treat all or a portion of their market research expenditures as discretionary, our ability to generate revenue is adversely impacted whenever there are adverse macroeconomic conditions in the markets we serve. As discussed above under “Risks Related to Our Business”, the adverse global macroeconomic environment has significantly impacted our operations during fiscal 2009. Industry analysts at Inside Research have indicated that these trends may continue to persist, given the expected decrease in market research spending described above under “Overview.”

 

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 new products and services, our technology infrastructure and online panel, and the marketing and selling of our services. Our capital expenditures are not expected to exceed $4,500 for fiscal 2010.

 

Credit Facilities

 

On September 21, 2007, we entered into a Credit Agreement (the “2007 Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, and the Lenders party thereto, pursuant to which the Lenders made available certain credit facilities. As of December 31, 2008, we were in violation of the leverage and interest coverage covenants under the terms of the 2007 Credit Agreement. We obtained a 30-day waiver of the covenant violations from the Lenders on February 5, 2009, and in connection with the waiver, the 2007 Credit Agreement was amended (the “First Amendment”). We obtained an additional 60-day extension of the waiver on March 6, 2009, and in connection with the waiver, the 2007 Credit Agreement was further amended in immaterial respects. On May 6, 2009 and effective as of that date, we entered into a further amendment (the “Second Amendment”) to the 2007 Credit Agreement, pursuant to which the prior covenant defaults were permanently waived and we were again in compliance with the terms of the 2007 Credit Agreement, as amended.

 

At June 30, 2009, we were in compliance with all of the covenants under the 2007 Credit Agreement, as amended.

The Credit Agreement

 

The principal terms of the 2007 Credit Agreement, as amended, are described below:

 

 

The 2007 Credit Agreement, as amended, contains customary representations, default provisions, and affirmative and negative covenants, including among others prohibitions of dividends, sales of certain assets and mergers, and restrictions related to acquisitions, indebtedness, liens, investments, share repurchases and capital expenditures. Among others, we may freely transfer assets and incur obligations among our domestic subsidiaries, but limitations apply to transfers of assets and loans to foreign subsidiaries.

 

The required principal repayments of Term Loans A and B (reflecting the consolidation of Term Loans B and C into Term Loan B) for each of the four succeeding fiscal years are set forth in Note 11, “Borrowings,” to our consolidated financial statements included in this Form 10-K. At June 30, 2009, we did not have any amounts outstanding under our revolving line of credit.

 

Interest Rate Swap

 

Effective September 21, 2007, we 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 and B (including as Term Loans B and C were consolidated into Term Loan B) at 5.08% through September 21, 2012. The three-month LIBOR rate received on the swap matches the base rate paid on the term loan since both use three-month LIBOR. The swap had an initial notional value of $34,625 which declines as payments are made on Term Loans A and B so that the amount outstanding under those term loans and the notional amount of the swap are always equal. The interest rate swap had a notional amount of $22,506 at June 30, 2009, which was the same as the outstanding amount of the term loans. The applicable spreads referenced in the table above are added to the 5.08% rate fixed by the interest rate swap.

 

The terms of the interest rate swap remain unaffected by the First or Second Amendments. The interest rate swap continues to be accounted for in accordance with SFAS No. 133.

 

At June 30, 2009, we recorded a liability of $1,351 in the “Other liabilities” line item of our unaudited consolidated balance sheet to reflect the fair value of the interest rate swap. As a result of the covenant violations noted above, it was determined that the interest rate swap was not an effective cash flow hedge at both December 31, 2008 and March 31, 2009. Accordingly, we recorded charges to interest expense to reflect the ineffectiveness of the swap of $1,017 during the second and third quarters of fiscal 2009. At May 6, 2009, the swap was once again deemed an effective cash flow hedge, and continued to be effective at June 30, 2009. As such, changes in the fair value of the interest rate swap were once again recorded through other comprehensive income.

Off-Balance Sheet Risk Disclosure

 

At June 30, 2009 and 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.

 

Contractual Obligations

 

Our consolidated contractual obligations and other commercial commitments at June 30, 2009 are as follows (amounts in thousands):

 

 

 

 

Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted

 

See “Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted” in Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements contained in this Form 10-K for a discussion of the impact of recently issued accounting pronouncements on our consolidated financial statements at June 30, 2009, for the fiscal year then ended, as well as the expected impact on our consolidated financial statements for future periods.

 

 

We have two kinds of market risk exposures, interest rate exposure and foreign currency exposure. We have no market risk sensitive instruments entered into for trading purposes.

 

In light of recent economic conditions, we reviewed the cash equivalents and marketable securities held by us. We do not believe that our holdings have a material liquidity risk under current market conditions.

 

Interest Rate Exposure

 

At June 30, 2009, we had outstanding debt under our credit facilities of $22,506. 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 was fixed at four percentage points in the First Amendment and five percentage points in the Second Amendment. The terms of the interest rate swap remain unchanged by the First or Second Amendments.

 

Using a sensitivity analysis based on a hypothetical 1% increase in prevailing interest rates over a 12-month period, each 1% increase from prevailing interest rates at June 30, 2009 would have increased the fair value of the interest rate swap by $338 and each 1% decrease from prevailing interest rates at June 30, 2009 would have decreased the fair value of the interest rate swap by $356.

 

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 translation 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 country’s functional currency, with our U.S. results. The impact of translation gains or losses on net income from consolidating foreign subsidiaries was not material for the periods presented. We have historically had low exposure to changes in foreign currency exchange rates upon consolidating the results of our foreign subsidiaries with our U.S. results, due to the size of our foreign operations in comparison to our consolidated operations. However, if the operating profits of our international operations increase, 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 June 30, 2009. 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.

 

Index to Consolidated Financial Statements

 

 

All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and have therefore been omitted.

 

To the Board of Directors and Stockholders of Harris Interactive Inc.

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Harris Interactive Inc. and its subsidiaries at June 30, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for uncertain tax positions in 2008.

 

/s/ PricewaterhouseCoopers LLP

 

Rochester, New York

August 31, 2009

HARRIS INTERACTIVE INC.

 

(in thousands, except share and per share amounts)