Attached files
file | filename |
---|---|
EX-31.2 - EX-31.2 - HARRIS INTERACTIVE INC | l42586exv31w2.htm |
EX-31.1 - EX-31.1 - HARRIS INTERACTIVE INC | l42586exv31w1.htm |
EX-10.1 - EX-10.1 - HARRIS INTERACTIVE INC | l42586exv10w1.htm |
EX-32.1 - EX-32.1 - HARRIS INTERACTIVE INC | l42586exv32w1.htm |
EX-32.2 - EX-32.2 - HARRIS INTERACTIVE INC | l42586exv32w2.htm |
EX-10.2 - EX-10.2 - HARRIS INTERACTIVE INC | l42586exv10w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTER ENDED MARCH 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-27577
HARRIS INTERACTIVE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE (State or Other Jurisdiction of |
16-1538028 (I.R.S. Employer |
|
Incorporation or Organization) | Identification No.) |
161 Sixth Avenue, New York, New York 10013
(Address of principal executive offices)
(212) 539-9600
(Registrants telephone number, including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
(Address of principal executive offices)
(212) 539-9600
(Registrants telephone number, including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by checkmark 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 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.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
On April 29, 2011, 54,755,324 shares of the Registrants Common Stock, $.001 par value, were
outstanding.
HARRIS INTERACTIVE INC.
FORM 10-Q
FORM 10-Q
QUARTER ENDED MARCH 31, 2011
INDEX
2
Table of Contents
Part I: Financial Information
Item 1 Financial Statements
HARRIS INTERACTIVE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
(Unaudited)
March 31, | June 30, | ||||||||
2011 | 2010 | ||||||||
ASSETS |
|||||||||
Current assets: |
|||||||||
Cash and cash equivalents |
$ | 12,500 | $ | 14,158 | |||||
Accounts receivable, net |
23,614 | 23,735 | |||||||
Unbilled receivables |
8,200 | 7,566 | |||||||
Prepaid expenses and other current assets |
4,682 | 3,722 | |||||||
Deferred tax assets |
547 | 375 | |||||||
Total current assets |
49,543 | 49,556 | |||||||
Property, plant and equipment, net |
3,964 | 5,626 | |||||||
Other intangibles, net |
15,217 | 16,382 | |||||||
Other assets |
1,589 | 1,566 | |||||||
Total assets |
$ | 70,313 | $ | 73,130 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
|||||||||
Current liabilities: |
|||||||||
Accounts payable |
$ | 6,742 | $ | 8,952 | |||||
Accrued expenses |
16,697 | 16,768 | |||||||
Current portion of long-term debt |
4,794 | 4,794 | |||||||
Deferred revenue |
14,942 | 11,612 | |||||||
Total current liabilities |
43,175 | 42,126 | |||||||
Long-term debt |
7,191 | 10,787 | |||||||
Deferred tax liabilities |
2,363 | 2,391 | |||||||
Other long-term liabilities |
1,518 | 1,792 | |||||||
Commitments and contingencies (Note 14) |
|||||||||
Stockholders equity: |
|||||||||
Preferred stock, $.001 par value, 5,000,000
shares authorized; 0 shares issued and
outstanding at March 31, 2011 and June 30, 2010 |
| | |||||||
Common stock, $.001 par value, 100,000,000
shares authorized; 54,755,324 shares issued and
outstanding at March 31, 2011 and 54,465,449
shares issued and outstanding at June 30, 2010 |
55 | 54 | |||||||
Additional paid-in capital |
186,405 | 185,726 | |||||||
Accumulated other comprehensive income |
5,240 | 2,558 | |||||||
Accumulated deficit |
(175,634 | ) | (172,304 | ) | |||||
Total stockholders equity |
16,066 | 16,034 | |||||||
Total liabilities and stockholders equity |
$ | 70,313 | $ | 73,130 | |||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Table of Contents
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue from services |
$ | 38,087 | $ | 41,203 | $ | 120,041 | $ | 124,767 | ||||||||
Operating expenses: |
||||||||||||||||
Cost of services |
25,138 | 26,569 | 78,892 | 79,083 | ||||||||||||
Selling, general and administrative |
12,870 | 13,829 | 37,745 | 40,641 | ||||||||||||
Depreciation and amortization |
1,517 | 1,656 | 4,560 | 5,130 | ||||||||||||
Restructuring and other charges |
448 | 92 | 1,127 | 623 | ||||||||||||
Total operating expenses |
39,973 | 42,146 | 122,324 | 125,477 | ||||||||||||
Operating loss |
(1,886 | ) | (943 | ) | (2,283 | ) | (710 | ) | ||||||||
Interest and other income |
(13 | ) | (30 | ) | (35 | ) | (57 | ) | ||||||||
Interest expense |
285 | 524 | 1,070 | 1,560 | ||||||||||||
Loss from operations before income taxes |
(2,158 | ) | (1,437 | ) | (3,318 | ) | (2,213 | ) | ||||||||
Provision (benefit) for income taxes |
177 | 121 | 12 | (1,354 | ) | |||||||||||
Net loss |
$ | (2,335 | ) | $ | (1,558 | ) | $ | (3,330 | ) | $ | (859 | ) | ||||
Basic and diluted net loss per share |
$ | (0.04 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.02 | ) | ||||
Weighted-average shares outstanding basic
and diluted |
54,658,105 | 54,247,286 | 54,516,793 | 54,027,408 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Table of Contents
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Unaudited)
For the Nine Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (3,330 | ) | $ | (859 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities |
||||||||
Depreciation and amortization |
5,715 | 6,225 | ||||||
Deferred taxes |
(122 | ) | (359 | ) | ||||
Stock-based compensation |
523 | 523 | ||||||
Amortization of deferred financing costs |
53 | 333 | ||||||
(Increase) decrease in assets |
||||||||
Accounts receivable |
1,133 | (175 | ) | |||||
Unbilled receivables |
(8 | ) | (336 | ) | ||||
Prepaid expenses and other current assets |
(2,019 | ) | (48 | ) | ||||
Other assets |
1 | 123 | ||||||
(Decrease) increase in liabilities |
||||||||
Accounts payable |
(2,442 | ) | 426 | |||||
Accrued expenses |
(990 | ) | (1,754 | ) | ||||
Deferred revenue |
2,862 | (1,236 | ) | |||||
Other liabilities |
(276 | ) | (896 | ) | ||||
Net cash provided by operating activities |
1,100 | 1,967 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from maturities and sales of marketable securities |
| 500 | ||||||
Capital expenditures |
(577 | ) | (480 | ) | ||||
Net cash provided by (used in) investing activities |
(577 | ) | 20 | |||||
Cash flows from financing activities: |
||||||||
Repayment of borrowings |
(3,596 | ) | (5,194 | ) | ||||
Proceeds from employee stock purchases and stock option exercises |
157 | 116 | ||||||
Net cash used in financing activities |
(3,439 | ) | (5,078 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
1,258 | (964 | ) | |||||
Net decrease in cash and cash equivalents |
(1,658 | ) | (4,055 | ) | ||||
Cash and cash equivalents at beginning of period |
14,158 | 16,752 | ||||||
Cash and cash equivalents at end of period |
$ | 12,500 | $ | 12,697 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
Table of Contents
HARRIS INTERACTIVE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Financial Statements
The unaudited consolidated financial statements included herein reflect, in the opinion of the
management of Harris Interactive Inc. and its subsidiaries (collectively, the Company), all
normal recurring adjustments necessary for a fair statement of the Companys financial position,
operating results and cash flows for the interim periods presented.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in the United States of America
(GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
GAAP for complete financial statements. The consolidated balance sheet as of June 30, 2010 has
been derived from the audited consolidated financial statements of the Company.
These unaudited consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for
the fiscal year ended June 30, 2010, filed by the Company with the Securities and Exchange
Commission (SEC) on August 31, 2010.
3. Recent Accounting Pronouncements
Fair Value Disclosures
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 provides
amendments to subtopic 820-10 that require separate disclosure of significant transfers in and out
of Level 1 and Level 2 fair value measurements, in addition to the presentation of purchases,
sales, issuances and settlements for Level 3 fair value measurements. ASU 2010-06 also provides
amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation
and inputs and valuation techniques. The new disclosure requirements are effective for interim and
annual periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements of Level 3 fair value measurements. Those disclosures are
effective for interim and annual periods beginning after December 15, 2010. The Company adopted the
disclosures involving Level 1 and Level 2 fair value measurements on January 1, 2010, and on
January 1, 2011, adopted the disclosures involving Level 3 fair value measurements. Adoption did
not have a material effect on the Companys consolidated financial statements.
4. Restructuring and Other Charges
Restructuring Charges
The following table summarizes activity during the nine months ended March 31, 2011 with
respect to the Companys remaining reserves for the restructuring activities undertaken in prior
fiscal years:
Balance, | Balance, | |||||||||||||||||||||||
July 1, | Costs | Changes in | Cash | Non-Cash | March 31, | |||||||||||||||||||
2010 | Incurred | Estimate | Payments | Settlements | 2011 | |||||||||||||||||||
Lease commitments |
$ | 408 | $ | | $ | 45 | $ | (107 | ) | $ | | $ | 346 | |||||||||||
Remaining reserve |
$ | 408 | $ | | $ | 45 | $ | (107 | ) | $ | | $ | 346 | |||||||||||
6
Table of Contents
Other Charges
For both the three and nine months ended March 31, 2011, other charges reflected in the
Restructuring and other charges line shown on the Companys unaudited consolidated statements of
operations included:
| $270 in severance costs incurred in connection with headcount reductions involving 15 employees undertaken by the Companys U.S. operations, $210 of which have been paid as of March 31, 2011 and all of which are expected to be paid by June 30, 2011, and |
| Costs associated with reorganizing the operational structure of the Companys U.K. operations. |
For the nine months ended March 31, 2011, other charges reflected in the Restructuring and
other charges line shown on the Companys unaudited consolidated statements of operations also
included:
| $347 in statutorily mandated severance costs incurred in connection with headcount reductions involving 15 employees undertaken by the Companys U.K. operations, $265 of which have been paid as of March 31, 2011, and all of which are expected to be paid by June 30, 2011, and |
| Costs associated with reorganizing the operational structure of the Companys Canadian operations. |
For the three and nine months ended March 31, 2010, other charges reflected in the
Restructuring and other charges line included:
| Additional legal fees associated with the fiscal 2009 amendment of the Companys credit agreement, |
| Costs incurred to close the Companys telephone-based data collection center in Brentford, United Kingdom, and |
| Costs associated with reorganizing the operational structure of the Companys Asian operations. |
5. Fair Value Measurements
The hierarchy for inputs used in measuring fair value for financial assets and liabilities is
designed to maximize the use of observable inputs and minimize the use of unobservable inputs by
requiring that the most observable inputs be used when available. The hierarchy is broken down into
three levels:
| Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| Level 2 inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset and liability, either directly or indirectly. |
| Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. |
7
Table of Contents
The following table presents the fair value hierarchy for the Companys financial assets and
liabilities measured at fair value on a recurring basis:
Quoted | Significant | |||||||||||||||
Prices in | Other | Significant | ||||||||||||||
Active | Observable | Unobservable | ||||||||||||||
Markets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
At
March 31, 2011 |
||||||||||||||||
Financial liabilities: |
||||||||||||||||
Interest rate swap contract |
$ | | $ | 581 | $ | | $ | 581 | ||||||||
At
June 30, 2010 |
||||||||||||||||
Financial liabilities: |
||||||||||||||||
Interest rate swap contract |
$ | | $ | 889 | $ | | $ | 889 |
The fair value of the Companys interest rate swap was based on quotes from the respective
counterparty, which are corroborated by the Company using discounted cash flow calculations based
upon forward interest-rate yield curves obtained from independent pricing services.
6. Derivative Financial Instruments
As discussed in Note 8, Borrowings, the Company uses an interest rate swap to manage the
economic effect of the variable interest obligation on its outstanding debt under its credit
facilities so that the interest payable on the outstanding debt effectively becomes fixed at a
certain rate, thereby reducing the impact of future interest rate changes on the Companys future
interest expense. The critical terms of the interest rate swap match those of the outstanding
debt, including the notional amounts, interest rate reset dates, maturity dates and underlying
market indices. Accordingly, the Company has designated its interest rate swap as a qualifying
instrument. The unrealized losses on the interest rate swap are included in accumulated other
comprehensive loss and the corresponding fair value payables are included in other liabilities in
the Companys unaudited consolidated balance sheet. The periodic interest settlements, which occur
at the same interval as the outstanding debt, are recorded as interest expense.
March 31, | June 30, | |||||||
Balance Sheet Location | 2011 | 2010 | ||||||
Derivative instruments designated as hedging instruments: |
||||||||
Interest
rate swap contracts |
||||||||
Other liabilities |
$ | 581 | $ | 889 |
Effects of Derivative Instruments on Income and Accumulated Other Comprehensive Income (OCI)
Amount of Gain | ||||||||||||
(Loss) Recognized in | Amount and Location of | Amount and Location of Gain (Loss) | ||||||||||
Accumulated OCI on | Gain (Loss) Reclassified | Recognized in Income on Derivative | ||||||||||
Derivative (Effective | from Accumulated OCI into | (Ineffective Portion and Amount | ||||||||||
Portion) | Income (Effective Portion) | Excluded from Effectiveness Testing) | ||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||
March 31, 2011 | March 31, 2011 | March 31, 2011 | ||||||||||
Cash flow hedges: |
||||||||||||
Interest rate swap |
$ | 20 | $72 Interest expense | $ Interest and other income |
Amount of Gain | ||||||||||||
(Loss) Recognized in | Amount and Location of | Amount and Location of Gain (Loss) | ||||||||||
Accumulated OCI on | Gain (Loss) Reclassified | Recognized in Income on Derivative | ||||||||||
Derivative (Effective | from Accumulated OCI into | (Ineffective Portion and Amount | ||||||||||
Portion) | Income (Effective Portion) | Excluded from Effectiveness Testing) | ||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||
March 31, 2010 | March 31, 2010 | March 31, 2010 | ||||||||||
Cash flow hedges: |
||||||||||||
Interest rate swap |
$ | 72 | $173 Interest expense | $ Interest and other income |
8
Table of Contents
Amount of Gain | ||||||||||||
(Loss) Recognized in | Amount and Location of | Amount and Location of Gain (Loss) | ||||||||||
Accumulated OCI on | Gain (Loss) Reclassified | Recognized in Income on Derivative | ||||||||||
Derivative (Effective | from Accumulated OCI into | (Ineffective Portion and Amount | ||||||||||
Portion) | Income (Effective Portion) | Excluded from Effectiveness Testing) | ||||||||||
Nine Months Ended | Nine Months Ended | Nine Months Ended | ||||||||||
March 31, 2011 | March 31, 2011 | March 31, 2011 | ||||||||||
Cash flow hedges: |
||||||||||||
Interest rate swap |
$ | 62 | $233 Interest expense | $ Interest and other income |
Amount of Gain | ||||||||||||
(Loss) Recognized in | Amount and Location of | Amount and Location of Gain (Loss) | ||||||||||
Accumulated OCI on | Gain (Loss) Reclassified | Recognized in Income on Derivative | ||||||||||
Derivative (Effective | from Accumulated OCI into | (Ineffective Portion and Amount | ||||||||||
Portion) | Income (Effective Portion) | Excluded from Effectiveness Testing) | ||||||||||
Nine Months Ended | Nine Months Ended | Nine Months Ended | ||||||||||
March 31, 2010 | March 31, 2010 | March 31, 2010 | ||||||||||
Cash flow hedges: |
||||||||||||
Interest rate swap |
$ | 295 | $686 Interest expense | $ Interest and other income |
7. Acquired Intangible Assets Subject to Amortization
At March 31, 2011 and June 30, 2010, acquired intangible assets subject to amortization
consisted of the following:
March 31, 2011 | ||||||||||||||||
Weighted- | ||||||||||||||||
Average | ||||||||||||||||
Useful | ||||||||||||||||
Amortization | Gross | Net | ||||||||||||||
Period (in | Carrying | Accumulated | Book | |||||||||||||
years) | Amount | Amortization | Value | |||||||||||||
Contract-based intangibles |
3 | $ | 1,768 | $ | 1,768 | $ | | |||||||||
Internet respondent database |
7 | 3,390 | 2,737 | 653 | ||||||||||||
Customer relationships |
10 | 22,499 | 10,952 | 11,547 | ||||||||||||
Trade names |
16 | 5,335 | 2,318 | 3,017 | ||||||||||||
Total |
$ | 32,992 | $ | 17,775 | $ | 15,217 | ||||||||||
June 30, 2010 | ||||||||||||||||
Weighted- | ||||||||||||||||
Average | ||||||||||||||||
Useful | ||||||||||||||||
Amortization | Gross | Net | ||||||||||||||
Period (in | Carrying | Accumulated | Book | |||||||||||||
years) | Amount | Amortization | Value | |||||||||||||
Contract-based intangibles |
3 | $ | 1,768 | $ | 1,768 | $ | | |||||||||
Internet respondent database |
7 | 3,000 | 2,187 | 813 | ||||||||||||
Customer relationships |
10 | 21,039 | 8,677 | 12,362 | ||||||||||||
Trade names |
16 | 5,283 | 2,076 | 3,207 | ||||||||||||
Total |
$ | 31,090 | $ | 14,708 | $ | 16,382 | ||||||||||
The gross carrying amount and accumulated amortization of the Companys acquired intangible
assets for the nine months ended March 31, 2011, as well as the related amortization expense,
reflect the impact of foreign currency exchange rate fluctuations during the period.
9
Table of Contents
For the Three | For the Nine | |||||||||||||||
Months Ended | Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Amortization expense |
$ | 723 | $ | 701 | $ | 2,127 | $ | 2,106 | ||||||||
Estimated amortization expense for the fiscal years ending June 30: |
||||||||||||||||
2011 |
$ | 2,611 | ||||||||||||||
2012 |
$ | 2,912 | ||||||||||||||
2013 |
$ | 2,743 | ||||||||||||||
2014 |
$ | 2,306 | ||||||||||||||
2015 |
$ | 1,727 | ||||||||||||||
2016 |
$ | 1,603 | ||||||||||||||
Thereafter |
$ | 3,442 | ||||||||||||||
8. Borrowings
On June 30, 2010, the Company entered into an Amended and Restated Credit Agreement (the
Amended and Restated Credit Agreement) with JPMorgan Chase Bank, N.A. (JPMC), as Administrative
Agent (the Administrative Agent) and Issuing Bank (the Issuing Bank), and the Lenders party
thereto (the Lenders). The Amended and Restated Credit Agreement supersedes and replaces the
Credit Agreement, dated September 21, 2007, as amended on December 31, 2008, March 6, 2009 and
May 6, 2009 (the Original Credit Agreement), by and among the Company, JPMC, as Administrative
Agent, and the Lenders party thereto. Pursuant to the Amended and Restated Credit Agreement, the
Lenders made available certain credit facilities (the Credit Facilities) as more fully described
below. The Credit Facilities replace existing credit arrangements under the Original Credit
Agreement. In accordance with ASC Topic 470, the Company evaluated the change in cash flows,
determined that there was a greater than 10% change, and concluded that treatment of the amendment
and restatement of its credit agreement as an extinguishment of debt was appropriate.
On August 27, 2010, the Company entered into Amendment Agreement No. 1 to the Amended and
Restated Credit Agreement (the Amendment), dated as of August 26, 2010, among the Company, JPMC,
as Administrative Agent for itself and the Lenders, and the Lenders parties thereto. The Amendment
provides that certain banking services furnished to the Company and its subsidiaries by JPMC and
its affiliates, including among others corporate credit cards and treasury management services,
constitute obligations under the Amended and Restated Credit Agreement and are collateralized by
the security interests in the assets, including among others patents and trademarks, of the Company
and its domestic subsidiaries, and the pledges of the outstanding stock and membership interests in
the Companys domestic subsidiaries (but not the pledges of 66% of the outstanding stock and
membership interests in first tier foreign subsidiaries of the Company and its domestic
subsidiaries).
10
Table of Contents
The principal terms of the Original Credit Agreement and Amended and Restated Credit Agreement
are described below:
Original Credit Agreement | Amended and Restated Credit Agreement | |
Availability: |
||
$5,000 Revolving Line
|
$5,000 Revolving Line |
|
Until certain leverage ratios are achieved, advances
require minimum cash balances and no outstanding balance
may exist at least 5 consecutive days in every 30-day
period
|
The Revolving Line may be used to back Letters of Credit. |
|
The Revolving Line may be used to back Letters of Credit
|
Requires the Company to maintain a minimum cash balance of
the greater of $5,000 and 1.2 times the outstanding amount
under the Revolving Line (including outstanding letters of
credit) |
|
Term Loan A original principal, $12,000
|
New Term Loan original principal, $15,581 |
|
Term Loan B, as consolidated with Term Loan C original principal $22,625 |
||
Pricing
Grid: |
||
Not applicable
|
See below |
|
Interest: |
||
Company option:
|
Company option: |
|
Base Rate (greater of Federal Funds Rate plus 0.5%,
LIBOR plus 1%, or Prime) plus 4%
|
Base Rate (greater of Federal Funds Rate plus 0.5%, LIBOR
plus 1%, or Prime) plus an Applicable Rate based on the
pricing grid tied to the Companys Consolidated Total
Leverage Ratio, as described below (the Pricing Grid) |
|
OR |
||
LIBOR plus 5%
|
OR | |
LIBOR plus an Applicable Rate based on the Pricing Grid |
||
The Company elected LIBOR and the interest swap
agreement, which fixed the LIBOR-based portion of the
rate at 5.08%, remained unchanged. With the spread, the
effective rate on the Term Loans was 10.08%.
|
The Company elected LIBOR and the interest swap agreement
fixes the LIBOR-based portion of the rate at 4.32%. At March
31, 2011, with the spread at 4.50%, the effective rate on
the New Term Loan was 8.82%. |
|
Interest payments are due at end of LIBOR interest
periods, but at least quarterly in arrears
|
Interest payments are due at end of LIBOR interest periods,
but at least quarterly in arrears |
|
Letter of credit participation fees equal to 5% of
outstanding face amounts
|
Letter of credit fees equal to 5% of outstanding face
amounts until the first quarterly adjustment pursuant to the Pricing Grid, and are set under the Pricing Grid thereafter |
|
Interest
Rate Swap: |
||
Fixes the floating LIBOR interest portion of the rates on
the amounts outstanding under the Term Loans at 5.08%
through September 21, 2012
|
Fixes the floating LIBOR interest portion of the rates on
the amounts outstanding under the New Term Loan (reflecting
the consolidation of Term Loans A and B into a single New
Term Loan) at 4.32% through September 30, 2013 |
11
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Original Credit Agreement | Amended and Restated Credit Agreement | ||
Three-month LIBOR rate received on the swap matches the LIBOR base rate paid on the Term Loans |
Three-month LIBOR rate received on the swap matches the LIBOR base rate paid on the New Term Loan |
||
Notional amount equal to outstanding amount of the Term
Loans
|
Notional amount of $11,985 at March 31, 2011, equal to
outstanding amount of the New Term Loan |
||
Unused
Facility Fees: |
|||
Fee fixed at 1.0% of unused Revolving Line amount
|
Fee fixed at 0.75% of unused Revolving Line amount |
||
Principal
Payments: |
|||
Term Loans September 21, 2012
|
New Term Loan Maturity September 30, 2013 |
||
Revolving Line Maturity July 15, 2010
|
Revolving Line Maturity September 30, 2013 |
||
Revolving Line payable at maturity
|
Revolving Line payable at maturity |
||
Quarterly Term Loan Payments $1,731
|
Quarterly New Term Loan Payments $1,199 |
||
Financial
Covenants: |
|||
Minimum Consolidated Interest Coverage Ratio ranging over
various quarters between 3.00:1.00 and 1.75:1.00
|
Minimum Consolidated Interest Coverage Ratio of at least
3.00:1.00 |
||
Maximum Consolidated Leverage Ratio ranging over various
quarters between 6.40:1.00 and 2.00:1.00
|
Maximum Consolidated Leverage Ratio of 2.90:1.00 for
quarterly periods ending through December 31, 2010,
2.70:1.00 for the quarterly period ending March 31, 2011,
and 2.50:1.00 for quarterly periods ending thereafter. |
||
Minimum Consolidated Revenue (trailing 3 months) ranging
over various quarters between $33,200 and $45,400
|
Minimum cash balance of the greater of $5,000 and 1.2 times
the outstanding amount under the Revolving Line (including
outstanding letters of credit) |
||
Collateral: |
|||
Secured by all domestic assets and 66% of equity
interests in first tier foreign subsidiaries
|
Secured by all domestic assets and 66% of equity interests
in first tier foreign subsidiaries |
||
The Pricing Grid provides for quarterly adjustment of rates and fees, and is as follows:
ABR | Commitment | |||||||||||||||||||
Consolidated Total | Applicable | Adjusted LIBO | Letter of Credit | Fee | ||||||||||||||||
Pricing Level | Leverage Ratio | Rate | Applicable Rate | Applicable Rate | Rate | |||||||||||||||
1 |
< 1.0 | 2.50 | % | 3.50 | % | 3.50 | % | 0.50 | % | |||||||||||
2 |
≥ 1.0 but < 1.5 | 3.25 | % | 4.25 | % | 4.25 | % | 0.75 | % | |||||||||||
3 |
≥ 1.5 but < 2.0 | 3.50 | % | 4.50 | % | 4.50 | % | 0.75 | % | |||||||||||
4 |
≥ 2.0 but < 2.5 | 3.75 | % | 4.75 | % | 4.75 | % | 0.75 | % | |||||||||||
5 |
≥ 2.5 | 4.00 | % | 5.00 | % | 5.00 | % | 1.00 | % |
The Amended and Restated Credit Agreement contains customary representations, default
provisions, and affirmative and negative covenants, including among others prohibitions of
dividends, sales of certain assets and mergers, and restrictions related to acquisitions,
indebtedness, liens, investments, share repurchases and capital expenditures. Among others, the
Company may freely transfer assets and incur obligations among its domestic subsidiaries, but
limitations apply to transfers of assets and loans to foreign subsidiaries.
At March 31, 2011, the Company was in compliance with all of the covenants under the Amended
and Restated Credit Agreement.
12
Table of Contents
At March 31, 2011, the required principal repayments of the term loan under the Amended
and Restated Credit Agreement (the New Term Loan) for the remaining three months of the fiscal
year ending June 30, 2011 and the three succeeding fiscal years are as follows:
Total | ||||
2011 |
$ | 1,199 | ||
2012 |
4,794 | |||
2013 |
4,794 | |||
2014 |
1,198 | |||
$ | 11,985 | |||
At March 31, 2011, the Company had no outstanding borrowings under its revolving line of
credit and $354 in outstanding letters of credit. The letters of credit reduce the remaining
undrawn portion of the revolving line of credit that is available for future borrowings.
Interest Rate Swap
Effective September 21, 2007, the Company entered into an interest rate swap agreement with
JPMC, which effectively fixed the floating LIBOR interest portion of the rates on the term loans
outstanding under the Original Credit Agreement at 5.08% through September 21, 2012. The
three-month LIBOR rate received on the swap matched the LIBOR base rate paid on the term loans
since both used three-month LIBOR. The swap had an initial notional value of $34,625, which
declined as payments were made on the term loans so that the amount outstanding under those term
loans and the notional amount of the swap were always equal.
As a result of the Amended and Restated Credit Agreement, the Company modified the terms of
its interest rate swap to ensure that the notional amount of the swap matches the outstanding
amount of the New Term Loan and the three-month LIBOR rate received on the swap matches the LIBOR
base rate on the New Term Loan. The term of the interest rate swap was extended through September
30, 2013 to be consistent with the maturity date of the New Term Loan. As a result of these
modifications, the Company re-designated its interest rate swap as a cash flow hedge and determined
it to be highly effective at that time.
The interest rate swap had a notional amount of $11,985 at March 31, 2011, which was the same
as the outstanding amount of the New Term Loan. The applicable spread referenced in the Pricing
Grid is added to the 4.32% rate fixed by the interest rate swap.
At March 31, 2011, the Company had a liability of $581 in the Other liabilities line item of
its unaudited consolidated balance sheet to reflect the fair value of the interest rate swap. As
the interest rate swap was effective at March 31, 2011, changes in the fair value of the interest
rate swap continue to be recorded through other comprehensive income, with any ineffectiveness
recorded through interest expense.
9. Stock-Based Compensation
The following table illustrates the stock-based compensation expense for stock options and
restricted stock issued under the Companys Long-Term Incentive Plans (the Incentive Plans),
stock options issued to new employees outside the Incentive Plans and shares issued under the
Companys Employee Stock Purchase Plans (ESPPs) included in the Companys unaudited consolidated
statements of operations for the three and nine months ended March 31:
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cost of services |
$ | 4 | $ | 5 | $ | 14 | $ | 12 | ||||||||
Selling, general and administrative |
169 | 198 | 509 | 511 | ||||||||||||
$ | 173 | $ | 203 | $ | 523 | $ | 523 | |||||||||
The Company did not capitalize stock-based compensation expense as part of the cost of an asset for
any periods presented.
13
Table of Contents
The following table provides a summary of the status of the Companys employee and director
stock options (including options issued under the Incentive Plans and options issued outside the
Incentive Plans to new employees) for the nine months ended March 31, 2011:
Weighted- | ||||||||
Average | ||||||||
Exercise | ||||||||
Shares | Price | |||||||
Options outstanding at July 1 |
3,873,452 | $ | 2.38 | |||||
Granted |
1,257,500 | 0.88 | ||||||
Forfeited |
(714,235 | ) | 2.13 | |||||
Exercised |
(39,583 | ) | 0.45 | |||||
Options outstanding at March 31 |
4,377,134 | 2.00 | ||||||
The following table provides a summary of the status of the Companys employee and director
restricted stock awards for the nine months ended March 31, 2011:
Weighted- | ||||||||
Average | ||||||||
Fair Value at | ||||||||
Shares | Date of Grant | |||||||
Restricted shares outstanding at July 1 |
73,751 | $ | 2.09 | |||||
Granted |
117,274 | 0.90 | ||||||
Forfeited |
(3,351 | ) | 2.63 | |||||
Vested |
(97,807 | ) | 1.38 | |||||
Restricted shares outstanding at March 31 |
89,867 | 1.47 | ||||||
At March 31, 2011, there was $1,215 of total unrecognized stock-based compensation expense
related to non-vested stock-based compensation arrangements granted under the Incentive Plans,
outside the Incentive Plans and under the ESPPs. That expense is expected to be recognized over a
weighted-average period of 3.2 years.
10. Income Taxes
For the three months ended March 31, 2011, the Company recorded an income tax provision of
$177, compared with an income tax provision of $121 for the same prior year period. The tax
provision for the three months ended March 31, 2011 and 2010 was comprised primarily of tax expense
related to income in certain of the Companys foreign jurisdictions.
For the nine months ended March 31, 2011, the Company recorded an income tax provision of $12,
compared with an income tax benefit of $1,354 for the same prior year period. The tax provision
for the nine months ended March 31, 2011 was comprised primarily of tax expense related to income
in certain of the Companys foreign jurisdictions. The tax benefit for the nine months ended March
31, 2010 was principally impacted by the tax benefits related to operating losses in certain of the
Companys foreign jurisdictions and a tax law change, which resulted in an additional tax benefit
of $1,103.
During the three months ended March 31, 2011, the Company concluded that the undistributed
earnings of its foreign subsidiaries would no longer be considered permanently reinvested. After
assessing the assets of the subsidiaries relative to the specific opportunities for reinvestment,
as well as the forecasted uses of cash for both its domestic and foreign operations, the Company
concluded that it was prudent to change its indefinite reinvestment assertion to allow for greater
flexibility in its cash management. As a result of this change, the Company recorded a deferred tax
liability of $2,732 during the three months ended March 31, 2011. However, this change in assertion
had no net impact on tax expense for the period, as the deferred tax liability was fully offset by
a corresponding decrease to the Companys U.S. valuation allowance.
A full valuation allowance continues to be recorded at March 31, 2011 against the Companys
deferred tax assets in the U.S., U.K., and Asia. The Company will continue to assess the
realizability of its deferred tax assets in accordance
14
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with the FASB guidance for income taxes and
will adjust the valuation allowances should all or a portion of the deferred tax assets become
realizable in the future.
11. Comprehensive Loss
The following table sets forth the components of the Companys total comprehensive loss for
the three and nine months ended March 31:
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss, as reported |
$ | (2,335 | ) | $ | (1,558 | ) | $ | (3,330 | ) | $ | (859 | ) | ||||
Foreign currency translation adjustments |
724 | (916 | ) | 2,599 | 362 | |||||||||||
Change in fair value of interest rate swap |
76 | | 237 | (27 | ) | |||||||||||
Change in postretirement obligation |
(51 | ) | | (153 | ) | | ||||||||||
Unrealized loss on marketable securities |
| (3 | ) | (1 | ) | (12 | ) | |||||||||
Total comprehensive loss |
$ | (1,586 | ) | $ | (2,477 | ) | $ | (648 | ) | $ | (536 | ) | ||||
12. Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of
shares outstanding for the period. When the impact of stock options or other stock-based
compensation is anti-dilutive, as they are when there is a net loss, they are excluded from the
calculation.
The following table sets forth the reconciliation of the basic and diluted net loss per share
computations for the three and nine months ended March 31:
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Net loss used for calculating basic and diluted net loss
per share of stock |
$ | (2,335 | ) | $ | (1,558 | ) | $ | (3,330 | ) | $ | (859 | ) | ||||
Denominator: |
||||||||||||||||
Weighted average number of shares used in the calculation
of basic net loss per share |
54,658,105 | 54,247,286 | 54,516,793 | 54,027,408 | ||||||||||||
Dilutive effect of outstanding stock options and restricted
stock |
| | | | ||||||||||||
Shares used in the calculation of diluted net loss per share |
54,658,105 | 54,247,286 | 54,516,793 | 54,027,408 | ||||||||||||
Net loss per share: |
||||||||||||||||
Basic and diluted |
$ | (0.04 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.02 | ) | ||||
Unexercised stock options to purchase 4,467,001 and 3,905,366 shares of the Companys stock
for the three and nine months ended March 31, 2011 and 2010, respectively, at weighted-average
prices per share of $2.12 and $2.60, respectively, were not included in the computations of diluted
net loss per share because their impact was anti-dilutive during the respective periods.
13. Enterprise-Wide Disclosures
The Company is comprised principally of operations in North America, Europe, and Asia.
Non-U.S. market research is comprised of operations in United Kingdom, Canada, France, Germany,
Hong Kong, and Singapore. The Company also maintains a representative office in mainland China.
There were no intercompany transactions that materially affected the financial statements, and all
intercompany sales have been eliminated upon consolidation.
15
Table of Contents
The Companys business model for offering custom market research is consistent across the
geographic regions in which it operates. Geographic management facilitates local execution of the
Companys global strategies. The Company
maintains global leaders with responsibility across all geographic regions for the majority of
its critical business processes, and the most significant performance evaluations and resource
allocations made by the Companys chief operating decision-maker are made on a global basis.
Accordingly, the Company has concluded that it has one reportable segment.
The Company has prepared the financial results for geographic information on a basis that is
consistent with the manner in which management internally disaggregates information to assist in
making internal operating decisions. The Company has allocated common expenses among these
geographic regions differently than it would for stand-alone information prepared in accordance
with GAAP. Geographic operating income (loss) may not be consistent with measures used by other
companies.
Geographic information for the periods presented herein is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue
from services
|
||||||||||||||||
United States |
$ | 21,557 | $ | 22,568 | $ | 68,137 | $ | 72,199 | ||||||||
United Kingdom |
4,231 | 6,927 | 17,072 | 20,283 | ||||||||||||
Canada |
6,067 | 5,578 | 16,752 | 15,247 | ||||||||||||
Other European countries |
5,134 | 4,634 | 14,524 | 13,516 | ||||||||||||
Asia |
1,098 | 1,496 | 3,556 | 3,522 | ||||||||||||
Total revenue from services |
$ | 38,087 | $ | 41,203 | $ | 120,041 | $ | 124,767 | ||||||||
Operating
income (loss)
|
||||||||||||||||
United States |
$ | (1,167 | ) | $ | (1,065 | ) | $ | 251 | $ | 1,471 | ||||||
United Kingdom |
(1,453 | ) | (99 | ) | (2,583 | ) | (403 | ) | ||||||||
Canada |
268 | (331 | ) | (1,126 | ) | (1,848 | ) | |||||||||
Other European countries |
533 | 478 | 1,211 | 962 | ||||||||||||
Asia |
(67 | ) | 74 | (36 | ) | (892 | ) | |||||||||
Total operating loss |
$ | (1,886 | ) | $ | (943 | ) | $ | (2,283 | ) | $ | (710 | ) | ||||
At March 31, | At June 30, | |||||||
2011 | 2010 | |||||||
Long-lived
assets |
||||||||
United States |
$ | 1,809 | $ | 2,964 | ||||
United Kingdom |
1,149 | 1,300 | ||||||
Canada |
610 | 1,093 | ||||||
Other European countries |
230 | 210 | ||||||
Asia |
166 | 59 | ||||||
Total long-lived assets |
$ | 3,964 | $ | 5,626 | ||||
Deferred
tax assets (liabilities) |
||||||||
United States |
$ | | $ | | ||||
United Kingdom |
| | ||||||
Canada |
(1,597 | ) | (1,709 | ) | ||||
Other European countries |
(219 | ) | (307 | ) | ||||
Asia |
| | ||||||
Total
deferred tax assets (liabilities) |
$ | (1,816 | ) | $ | (2,016 | ) | ||
16
Table of Contents
14. Commitments and Contingencies
The Company has several non-cancelable operating leases for office space and equipment. There
were no material changes to the financial obligations for such leases during the nine months ended
March 31, 2011 from those disclosed in Note 19, Commitments and Contingencies, to the audited
consolidated financial statements included in the Companys Annual Report on Form 10-K for the
fiscal year ended June 30, 2010.
15. Legal Proceedings
In the normal course of business, the Company is at times subject to pending and threatened
legal actions and proceedings. After reviewing any pending and threatened actions and proceedings
with legal counsel, management does not expect the outcome of such actions or proceedings to have a
material adverse effect on the Companys business, financial condition or results of operations.
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q
that are not purely historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, including statements regarding expectations, beliefs, 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 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 set forth
in reports or documents the Company files from time to time with the Securities and Exchange
Commission (SEC), such as its Annual Report on Form 10-K for the fiscal year ended June 30, 2010,
filed by the Company with the SEC on August 31, 2010. Risks and uncertainties also include the
Companys ability to sustain and grow its revenue base, the Companys ability to maintain and
improve cost efficient operations, quarterly variations in financial results, actions of
competitors, the Companys ability to develop and maintain products and services attractive to the
market, and uncertainties surrounding continued compliance with certain Nasdaq listing
requirements.
Note: Amounts shown below are in thousands of U.S. Dollars, unless otherwise noted. Also,
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.
Overview
Harris Interactive Inc. is a leading global custom market research firm that uses web-based,
telephone and other research methodologies to provide clients with information about the views,
behaviors and attitudes of people worldwide.
For the three months ended March 31, 2011:
| Revenue from services was $38,087, down 7.6% from the same prior year period. Excluding foreign currency exchange rate differences, revenue was down 9.2% from last fiscal years third quarter. The decrease was primarily due to revenue declines in the U.K. and U.S. | ||
| Bookings were down 13.1% compared with the same prior year period, excluding foreign exchange rate differences. This decrease was driven by bookings declines in Canada, U.S., U.K. and Asia. | ||
| Our operating loss was $1,886, compared with an operating loss of $943 for the same prior year period. Operating loss for the three months ended March 31, 2011 included $448 in restructuring and other charges, |
17
Table of Contents
compared with $92 for the same prior year period. The increase in our operating loss was caused mainly by the revenue decline for the quarter. | |||
| We had $12,500 in cash at March 31, 2011, down from $14,158 at June 30, 2010. | ||
| Our outstanding debt at March 31, 2011 was $11,985, down from $15,581 at June 30, 2010 as a result of quarterly principal payments made during fiscal 2011. |
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make estimates and assumptions
that affect amounts reported therein. The most significant of these areas involving difficult or
complex judgments made by management with respect to the preparation of our consolidated financial
statements in fiscal 2011 include:
| Revenue recognition, | ||
| Impairment of other intangible assets, | ||
| Income taxes, | ||
| Stock-based compensation, | ||
| HIpoints loyalty program, and | ||
| Contingencies and other accruals. |
In each situation, management is required to make estimates about the effects of events that
are inherently uncertain.
During the nine months ended March 31, 2011, there were no changes to the items that we
disclosed as our critical accounting policies and estimates in managements discussion and analysis
of financial condition and results of operations included in our Annual Report on Form 10-K for the
fiscal year ended June 30, 2010, filed by us with the SEC on August 31, 2010.
18
Table of Contents
Results of Operations
Three Months Ended March 31, 2011 Versus Three Months Ended March 31, 2010
The following table sets forth the results of our operations, expressed both as a dollar
amount and as a percentage of revenue from services, for the three months ended March 31, 2011 and
2010, respectively:
2011 | % | 2010 | % | |||||||||||||
Revenue from services |
$ | 38,087 | 100.0 | % | $ | 41,203 | 100.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Cost of services |
25,138 | 66.0 | 26,569 | 64.5 | ||||||||||||
Selling, general and administrative |
12,870 | 33.8 | 13,829 | 33.6 | ||||||||||||
Depreciation and amortization |
1,517 | 4.0 | 1,656 | 4.0 | ||||||||||||
Restructuring and other charges |
448 | 1.2 | 92 | 0.2 | ||||||||||||
Operating loss |
(1,886 | ) | (5.0 | ) | (943 | ) | (2.3 | ) | ||||||||
Interest and other income |
(13 | ) | (0.0 | ) | (30 | ) | (0.1 | ) | ||||||||
Interest expense |
285 | 0.7 | 524 | 1.3 | ||||||||||||
Loss from operations before taxes |
(2,158 | ) | (5.7 | ) | (1,437 | ) | (3.5 | ) | ||||||||
Provision for income taxes |
177 | 0.5 | 121 | 0.3 | ||||||||||||
Net loss |
$ | (2,335 | ) | (6.1 | ) | $ | (1,558 | ) | (3.8 | ) | ||||||
Revenue from services. Revenue from services decreased by $3,116, or 7.6%, to $38,087 for the
three months ended March 31, 2011 compared with the same prior year period. Excluding foreign
currency exchange rate differences, revenue from services for the three months ended March 31, 2011
decreased by 9.2% compared with the same prior year period. As more fully described below, revenue
from services was impacted by several factors.
North American revenue decreased by $522 to $27,624 for the three months ended March 31, 2011
compared with the same prior year period, a decrease of 1.9%. By country, North American revenue
for the three months ended March 31, 2011 was comprised of:
| Revenue from U.S. operations of $21,557, down 4.5% compared with $22,568 for the same prior year period. This decline was driven mainly by a 16.4% decline in our Healthcare sector and an 8.1% decline in our Technology, Media & Telecom sector. The decline in our Healthcare sector was due primarily to reduced spending at certain key clients, along with the continued revenue impact of bookings decreases experienced during the first nine months of fiscal 2011. The decline in our Technology, Media and Telecom sector was driven mainly by the loss of a large tracking study. These declines were offset partially by a 15.0% increase in our Business and Industrial sector, due primarily to increased spending on stakeholder and reputation solutions by existing clients in the sector. | ||
| Revenue from Canadian operations of $6,067, up 8.8% compared with $5,578 for the same prior year period. In local currency (Canadian Dollar), Canadian revenue for the three months ended March 31, 2011 increased by 2.1% compared with the same prior year period. The increase was mainly attributable to revenue from work on a large tracking study that was won during the second quarter of fiscal 2011. |
European revenue decreased by $2,195 to $9,365 for the three months ended March 31, 2011
compared with the same prior year period, a decrease of 19.0%. By country, European revenue for the
three months ended March 31, 2011 was comprised of:
| Revenue from U.K. operations of $4,231, down 38.9% compared with $6,927 for the same prior year period. In local currency (British Pound), U.K. revenue for the three months ended March 31, 2011 decreased by 42.4% compared with the same prior year period. The decrease was due primarily to the revenue impact of a large tracking study that was not renewed during the second quarter of fiscal 2011, as well as challenging market conditions across several industry sectors. The loss of this tracking study will have a $7.7 million negative impact on annual U.K. revenue. |
19
Table of Contents
| Revenue from French operations of $3,549, up 14.7% compared with $3,095 for the same prior year period. In local currency (Euro), French revenue for the three months ended March 31, 2011 increased by 13.3% compared with the same prior year period. The increase was due primarily to continued success in selling to new and existing clients across several industry sectors. | ||
| Revenue from German operations of $1,585, up 3.1% compared with $1,538 for the same prior year period. In local currency (Euro), German revenue for the three months ended March 31, 2011 increased by 2.8% compared with the same prior year period. Similar to our French operations, the increase was driven by continued success in selling to new and existing clients across several industry sectors. |
Asian revenue decreased by $398 to $1,098 for the three months ended March 31, 2011, a
decrease of 26.6% compared with the same prior year period. The impact of the foreign exchange
rate on Asian revenue for the three months ended March 31, 2011 was inconsequential compared with
the same prior year period. The decrease in Asian revenue was due primarily to the revenue impact
of bookings declines in Asia during the first nine months of fiscal 2011.
Cost of services. Cost of services was $25,138 or 66.0% of total revenue for the three months
ended March 31, 2011, compared with 26,569 or 64.5% of total revenue for the same prior year
period. The increase in cost of services as a percentage of total revenue for the three months
ended March 31, 2011 was impacted by the differing types of custom research projects performed
during the quarter when compared with the same prior year period.
Selling, general and administrative. Selling, general and administrative expense for the
three months ended March 31, 2011 was $12,870 or 33.8% of total revenue, compared with $13,829 or
33.6% of total revenue for the same prior year period. The decrease in selling, general and
administrative expense was principally impacted by the following:
| a $341 decrease in payroll-related expense, driven primarily by our continued focus on managing headcount relative to the needs of our business; and | ||
| a $135 decrease in facilities-related expense, driven primarily by space reductions taken during fiscal 2010; |
The remainder of the decrease in selling, general and administrative expense was the result of
decreases across a number of other operating expense categories because of our continued efforts to
properly align our cost structure with the needs of our business.
Depreciation and amortization. Depreciation and amortization was $1,517 or 4.0% of total
revenue for the three months ended March 31, 2011, compared with $1,656 or 4.0% of total revenue
for the same prior year period. The decrease in depreciation and amortization expense for the
three months ended March 31, 2011 when compared with the same prior year period was the result of
fixed and intangible assets that became fully depreciated or amortized during fiscal 2010 and the
first nine months of fiscal 2011, combined with decreased capital spending as part of our continued
focus on controlling costs.
Restructuring and other charges. Restructuring and other charges were $448 or 1.2% of total
revenue for the three months ended March 31, 2011, compared with $92 or less than 1% of total
revenue for the same prior year period. Other charges for the three months ended March 31, 2011
consisted of $270 in severance costs incurred in connection with headcount reductions undertaken by
our U.S. operations, as well as costs associated with reorganizing the operational structure of our
U.K. operations. Other charges for the three months ended March 31, 2010 consisted primarily of
costs associated with reorganizing the operational structure of our Asian operations. There were
no restructuring activities during the three months ended March 31, 2011 or 2010.
Interest and other income. Interest and other income was $13 or less than 1% of total revenue
for the three months ended March 31, 2011, compared with $30 or less than 1% of total revenue for
the same prior year period. The decrease in interest and other income was principally the result
of a lower average cash balance during the three months ended March 31, 2011 when compared with the
same prior year period.
Interest expense. Interest expense was $285 or less than 1% of total revenue for the three
months ended March 31, 2011, compared with $524 or 1.3% of total revenue for the same prior year
period. Interest expense for the three months
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ended March 31, 2011 reflects the impact of the
decline in our outstanding debt as we continue to make required principal payments, as well as the
decline in our effective interest rate as a result of amending our credit agreement in June 2010.
Income taxes. We recorded an income tax provision of $177 for the three months ended March
31, 2011, compared with an income tax provision of $121 for the same prior year period. The tax
provision for the three months ended March 31, 2011 and 2010 was comprised primarily of tax expense
related to income in certain of our foreign jurisdictions. Based upon managements assessment of
the realizability of our deferred tax assets in the U.S., U.K., and Asia, a full valuation
allowance continued to be recorded at March 31, 2011.
During the three months ended March 31, 2011, we concluded that the undistributed earnings of
our foreign subsidiaries would no longer be considered permanently reinvested. After assessing the
assets of the subsidiaries relative to the specific opportunities for reinvestment, as well as the
forecasted uses of cash for both our domestic and foreign operations, we concluded that it was
prudent to change our indefinite reinvestment assertion to allow for greater flexibility in our
cash management. As a result of this change, we recorded a deferred tax liability of $2,732 during
the three months ended March 31, 2011. However, this change in assertion had no net impact on tax
expense for the period, as the deferred tax liability was fully offset by a corresponding decrease
to our U.S. valuation allowance.
Nine Months Ended March 31, 2011 Versus Nine Months Ended March 31, 2010
The following table sets forth the results of our operations, expressed both as a dollar
amount and as a percentage of revenue from services, for the nine months ended March 31, 2011 and
2010, respectively:
2011 | % | 2010 | % | |||||||||||||
Revenue from services |
$ | 120,041 | 100.0 | % | $ | 124,767 | 100.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Cost of services |
78,892 | 65.7 | 79,083 | 63.4 | ||||||||||||
Selling, general and administrative |
37,745 | 31.4 | 40,641 | 32.6 | ||||||||||||
Depreciation and amortization |
4,560 | 3.8 | 5,130 | 4.1 | ||||||||||||
Restructuring and other charges |
1,127 | 0.9 | 623 | 0.5 | ||||||||||||
Operating loss |
(2,283 | ) | (1.9 | ) | (710 | ) | (0.6 | ) | ||||||||
Interest and other income |
(35 | ) | (0.0 | ) | (57 | ) | (0.0 | ) | ||||||||
Interest expense |
1,070 | 0.9 | 1,560 | 1.3 | ||||||||||||
Loss from operations before taxes |
(3,318 | ) | (2.8 | ) | (2,213 | ) | (1.8 | ) | ||||||||
Provision (benefit) for income taxes |
12 | 0.0 | (1,354 | ) | (1.1 | ) | ||||||||||
Net loss |
$ | (3,330 | ) | (2.8 | ) | $ | (859 | ) | (0.7 | ) | ||||||
Revenue from services. Revenue from services decreased by $4,726, or 3.8%, to $120,041 for
the nine months ended March 31, 2011 compared with the same prior year. Excluding foreign currency
exchange rate differences, revenue from services for the nine months ended March 31, 2011 decreased
by 3.5% compared with the same prior year period. As more fully described below, revenue from
services was impacted by several factors.
North American revenue decreased by $2,556 to $84,889 for the nine months ended March 31, 2011
compared with the same prior year period, a decrease of 2.9%. By country, North American revenue
for the nine months ended March 31, 2011 was comprised of:
| Revenue from U.S. operations of $68,137, down 5.6% compared with $72,199 for the same prior year period. This revenue decline was driven mainly by a 14.7% decline in our Healthcare sector, an 8.8% decline in our Financial Services sector, and an 8.2% decline in our Public Affairs and Policy sector. The decline in our Healthcare sector was due primarily to reduced spending at certain key clients, along with the continued revenue impact of bookings decreases experienced during the first nine months of fiscal 2011. The decline in our Financial Services sector was due primarily to the loss of a large tracking study in the prior year, while the decline in our Public Affairs and Policy sector was due primarily to lower spending by association, non-profit, and government clients. These declines were offset partially by a 5.6% increase in our Technology, Media & Telecom sector, a 9.5% increase in our Service Bureau Research business, and a 3.8% increase in our Business and Industrial sector. |
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| Revenue from Canadian operations of $16,752, up 9.9% compared with $15,247 for the same prior year period. On a local currency basis (Canadian Dollar), Canadian revenue for the nine months ended March 31, 2011 increased by 4.4% compared with the same prior year period. The increase was mainly attributable to revenue from work on a large tracking study that was won during the second quarter of fiscal 2011. |
European revenue decreased by $2,203 to $31,596 for the nine months ended March 31, 2011
compared with the same prior year period, a decrease of 6.5%. By country, European revenue for the
nine months ended March 31, 2011 was comprised of:
| Revenue from U.K. operations of $17,072, down 15.8% compared with $20,283 for the same prior year period. In local currency (British Pound), U.K. revenue for the nine months ended March 31, 2011 was down 14.8% compared with the same prior year period. The decrease was due primarily to the revenue impact of a large tracking study that was not renewed during the second quarter of fiscal 2011, as well as challenging market conditions across several industry sectors. The loss of this tracking study will have a $7.7 million negative impact on annual U.K. revenue. | ||
| Revenue from French operations of $9,126, up 2.5% compared with $8,901 for the same prior year period. In local currency (Euro), French revenue for the nine months ended March 31, 2011 increased by 8.3% compared with the same prior year period. The increase was due primarily to continued success in selling to new and existing clients across several industry sectors. | ||
| Revenue from German operations of $5,398, up 17.0% compared with $4,615 for the same prior year period. In local currency (Euro), German revenue for the nine months ended March 31, 2011 increased by 24.3% compared with the same prior year period. Similar to our French operations, the increase was driven by continued success in selling to new and existing clients across several industry sectors. |
Asian revenue increased by $34 to $3,556 for the nine months ended March 31, 2011, an increase
of 0.9% compared with the same prior year period. The impact of the foreign exchange rate on Asian
revenue for the nine months ended March 31, 2011 was inconsequential compared with the same prior
year period.
Cost of services. Cost of services was $78,892 or 65.7% of total revenue for the nine months
ended March 31, 2011, compared with $79,083 or 63.4% of total revenue for the same prior year
period. The increase in cost of services as a percentage of total revenue for the nine months
ended March 31, 2011 was impacted by the differing types of custom research projects performed
during such period when compared with the same prior year period.
Selling, general and administrative. Selling, general and administrative expense for the nine
months ended March 31, 2011 was $37,745 or 31.4% of total revenue, compared with $40,641 or 32.6%
of total revenue for the same prior year period. The decrease in selling, general and
administrative expense was principally impacted by the following:
| a $635 decrease in payroll-related expense, driven primarily by our continued focus on managing headcount relative to the needs of our business; | ||
| a $607 decrease in facilities-related expense, driven primarily by space reductions taken during fiscal 2010; | ||
| a $238 decrease in travel expense, driven primarily by our continued monitoring of travel activity; and | ||
| a $217 decrease in legal expenses, driven primarily by improved operational efficiency of our legal function. |
The remainder of the decrease in selling, general and administrative expense was the result of
decreases across a number of other operating expense categories because of our continued efforts to
properly align our cost structure with the needs of our business.
Depreciation and amortization. Depreciation and amortization was $4,560 or 3.8% of total
revenue for the nine months ended March 31, 2011, compared with $5,130 or 4.1% of total revenue for
the same prior year period. The
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decrease in depreciation and amortization expense for the nine
months ended March 31, 2011 when compared with the same prior year period was the result of fixed
and intangible assets that became fully depreciated or amortized during
fiscal 2010 and the first nine months of fiscal 2011 combined with decreased capital spending
as part of our overall focus on controlling costs.
Restructuring and other charges. Restructuring and other charges were $1,127 or less than 1%
of total revenue for the nine months ended March 31, 2011, compared with $623 or less than 1% of
total revenue for the same prior year period. Other charges for the nine months ended March 31,
2011 consisted of $270 in severance costs incurred in connection with headcount reductions
undertaken by our U.S. operations and $347 in statutorily mandated severance costs incurred in
connection with headcount reductions undertaken by our U.K. operations. It also included costs
associated with reorganizing the operational structure of our Canadian and U.K. operations. Other
charges for the nine months ended March 31, 2010 included additional legal fees associated with the
amendment of our credit agreement during fiscal 2009, costs incurred to close our telephone-based
data collection center in Brentford, United Kingdom, and costs associated with reorganizing the
operational structure of our Asian operations. There were no restructuring activities during the
nine months ended March 31, 2011 or 2010.
Interest and other income. Interest and other income was $35 or less than 1% of total revenue
for the nine months ended March 31, 2011, compared with $57 or less than 1% of total revenue for
the same prior year period. The decrease in interest and other income was principally the result
of a lower average cash balance during the nine months ended March 31, 2011 when compared with the
same prior year period.
Interest expense. Interest expense was $1,070 or 0.9% of total revenue for the nine months
ended March 31, 2011, compared with $1,560 or 1.3% of total revenue for the same prior year period.
Interest expense for the nine months ended March 31, 2011 reflects the impact of the decline in our
outstanding debt as we continue to make required principal payments, as well as the decline in our
effective interest rate as a result of amending our credit agreement in June 2010.
Income taxes. We recorded an income tax provision of $12 for the nine months ended March 31,
2011, compared with an income tax benefit of $1,354 for the same prior year period. The tax
provision for the nine months ended March 31, 2011 was comprised primarily of tax expense related
to income in certain of our foreign jurisdictions. The tax benefit for the nine months ended March
31, 2010 was principally impacted by the tax benefits related to operating losses in certain of our
foreign jurisdictions and a tax law change which resulted in an additional tax benefit of $1,103.
Based upon managements assessment of the realizability of our deferred tax assets in the U.S.,
U.K., and Asia, a full valuation allowance continued to be recorded at March 31, 2011.
During the three months ended March 31, 2011, we concluded that the undistributed earnings of
our foreign subsidiaries would no longer be considered permanently reinvested. After assessing the
assets of the subsidiaries relative to the specific opportunities for reinvestment, as well as the
forecasted uses of cash for both our domestic and foreign operations, we concluded that it was
prudent to change our indefinite reinvestment assertion to allow for greater flexibility in our
cash management. As a result of this change, we recorded a deferred tax liability of $2,732 during
the three months ended March 31, 2011. However, this change in assertion had no net impact on tax
expense for the period, as the deferred tax liability was fully offset by a corresponding decrease
to our U.S. valuation allowance.
Significant Factors Affecting our Performance
Key Operating Metrics
We closely track certain key operating metrics, specifically bookings and secured revenue.
These key operating metrics enable us to measure the current and forecasted performance of our
business relative to historical trends.
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Key operating metrics for the three months ended March 31, 2011 and the four preceding fiscal
quarters were as follows (U.S. Dollar amounts in millions):
Q3 | Q4 | Q1 | Q2 | Q3 | ||||||||||||||||
FY2010 | FY2010 | FY2011 | FY2011 | FY2011 | ||||||||||||||||
Bookings |
$ | 44.9 | $ | 35.7 | $ | 35.4 | $ | 55.3 | $ | 40.9 | ||||||||||
Secured revenue |
$ | 52.9 | $ | 46.6 | $ | 45.0 | $ | 55.4 | $ | 56.5 |
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 March 31, 2011 were $40.9 million, a decrease of 8.9%
compared with $44.9 million for the same prior year period. Excluding foreign currency exchange
rate differences, bookings were down 13.1% compared with the same prior year period. Bookings in
local currency for the three months ended March 31, 2011 compared with the same prior year period
were principally impacted by the following:
| U.S. bookings decreased 6.2%, driven mainly by declines in our Technology, Media and Telecom, Financial Services, and Healthcare sectors. | ||
| U.K. bookings decreased 29.2%, driven primarily by challenging market conditions encountered across all industry sectors. | ||
| French bookings increased 16.9%, due primarily to continued success in maintaining and growing tracking studies with existing clients while also selling increased levels of ad-hoc work to both new and existing clients. | ||
| German bookings increased 78.5%, due primarily to increased sales to both new and existing clients. | ||
| Canadian bookings were down 37.0%, driven primarily by the early booking of two large tracking studies during the second quarter of fiscal 2011. These same tracking studies booked during the third quarter of fiscal 2010. | ||
| Asian bookings decreased 23.5%, driven primarily by our need to rebuild the Asian sales team. |
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, suspensions and other matters may affect the
amount of bookings previously reported.
Secured Revenue (formerly referred to as ending sales backlog) is defined as prior period
secured revenue plus current period bookings, less revenue recognized on outstanding projects as of
the end of the period.
Secured revenue helps us manage our future staffing levels more accurately and is also an
indicator of the effectiveness of our marketing and sales initiatives. Based on our experience from
prior years, projects included in secured revenue at the end of a fiscal period generally convert
to revenue from services during the following twelve months, based on our experience from prior
years.
Secured revenue for the three months ended March 31, 2011 was $56.5 million, an increase of
6.9% compared with $52.9 million for the same prior year period. Excluding foreign currency
exchange rate differences, secured revenue was up 4.8% compared with the same prior year period.
The increase in secured revenue was due primarily to significant
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sales growth in Canada during the
second quarter of fiscal 2011, as well as strong sales performance throughout the fiscal year in
France and Germany.
Financial Condition, Liquidity and Capital Resources
Liquidity and Capital Resources
At March 31, 2011, we had cash of $12,500, compared with $14,158 at June 30, 2010.
Available sources of cash to support known or reasonably likely cash requirements over the next 12
months include cash on hand, additional cash that may be generated from our operations, and funds
to the extent available through our credit facilities discussed in Note 8, Borrowings, to our
unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q. Under
our credit agreement, we must maintain a minimum cash balance of the greater of $5,000 and 1.2
times the amount of borrowings we make under the revolving line that is part of our credit
facilities (including outstanding letters of credit). While we believe that our available sources
of cash, including funds available through our revolving line and cash from operations, will
support known or reasonably likely cash requirements over the next 12 months, including quarterly
principal payments of $1,199 and interest payments due under our credit agreement, our ability to
generate cash from our operations is dependent upon our ability to profitably generate revenue,
which requires that we continually develop new business, both for growth and to replace completed
projects. Although work for no one client constitutes more than 10% of our revenue, we have had to
find significant amounts of replacement and additional revenue as client relationships and work for
continuing clients change and will likely have to continue to do so in the future. Our ability to
profitably generate revenue depends not only on execution of our business plans, but also on
general market factors outside of our control. As many of our clients treat all or a portion of
their market research expenditures as discretionary, our ability to profitably generate revenue is
adversely impacted whenever there are adverse macroeconomic conditions in the markets we serve.
Our capital requirements depend on numerous factors, including but not limited to, market
acceptance of our products and services, the resources we allocate to the continuing development of
new products and services, our technology infrastructure and online panel, and the marketing and
selling of our products and services. We are able to control or defer certain capital and other
expenditures in order to help preserve cash if necessary. During the fourth quarter of fiscal 2011,
we expect to incur capital expenditures at a rate consistent with the first nine months of fiscal
2011.
The following table sets forth net cash provided by operating activities, net cash
provided by (used in) investing activities, and net cash used in financing activities, for the nine
months ended March 31:
2011 | 2010 | |||||||
Net cash provided by operating activities |
$ | 1,100 | $ | 1,967 | ||||
Net cash provided by (used in) investing activities |
(577 | ) | 20 | |||||
Net cash used in financing activities |
(3,439 | ) | (5,078 | ) |
Net cash provided by operating activities. Net cash provided by operating activities was
$1,100 for the nine months ended March 31, 2011, compared with $1,967 for the same prior year
period. The decrease in cash provided by operating activities for the nine months ended March 31,
2011 compared with the same prior year period was principally the result of an increase in the
current year net loss compared with the same prior year period.
Net cash provided by (used in) investing activities. Net cash used in investing
activities was $577 for the nine months ended March 31, 2011, compared with $20 provided by
investing activities for the same prior year period. Investing activities for the nine months ended
March 31, 2010 included capital expenditures, which were offset by $500 in proceeds from the sale
and maturities of marketable securities. Investing activities for the nine months ended March 31,
2011 consisted solely of capital expenditures.
Net cash used in financing activities. Net cash used in financing activities was $3,439 for
the nine months ended March 31, 2011, compared with $5,078 for the same prior year period. Cash
used during both periods was for required principal payments on our outstanding debt, offset by
cash received from the purchase of shares by employees through our Employee Stock Purchase Plan and
exercise of stock options. The required quarterly principal payments on our outstanding debt
decreased from $1,731 to $1,199 as a result of amending our credit agreement in June 2010.
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Credit Facilities
The principal terms of our credit agreement are described in Note 8, Borrowings, to our
unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.
At March 31, 2011, we were in compliance with all of the covenants under our credit agreement.
For the three months ended March 31, 2011, our financial covenants were:
Covenant | Required | Actual | ||||||
Minimum Consolidated Interest Coverage Ratio |
3.00:1.00 | 4.23:1.00 | ||||||
Maximum Consolidated Leverage Ratio |
2.70:1.00 | 1.98:1.00 |
Interest Rate Swap
The principal terms of our interest rate swap are described in Note 8, Borrowings, to our
unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements and Contractual Obligations
At March 31, 2011, we did not have any transaction, agreement, or other contractual
arrangement constituting an off-balance sheet arrangement as defined in Item 303(a)(4) of
Regulation S-K.
There have been no material changes outside the ordinary course of business during the three
months ended March 31, 2011 to our contractual obligations as disclosed in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2010, filed by us with the SEC on August 31, 2010.
Recent Accounting Pronouncements
See Note 3, Recent Accounting Pronouncements, to our unaudited consolidated financial
statements contained in this Quarterly Report on Form 10-Q for a discussion of the impact of
recently issued accounting pronouncements on our unaudited consolidated financial statements at
March 31, 2011 and for the nine months then ended, as well as the expected impact on our
consolidated financial statements for future periods.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
We have two kinds of market risk exposures, interest rate exposure and foreign currency
exposure. We have no market risk sensitive instruments entered into for trading purposes.
We continuously review any cash equivalents and marketable securities held by us and do not
believe that our holdings have a material liquidity risk under current market conditions.
Interest Rate Exposure
At March 31, 2011, we had outstanding debt under our credit facilities of $11,985. The debt
matures September 30, 2013 and bears interest at the floating adjusted LIBOR plus an applicable
margin. Our interest rate swap fixes the floating adjusted LIBOR portion of the interest rate at
4.32% through September 30, 2013. The additional applicable margin is determined quarterly using a
pricing grid based on our consolidated total leverage ratio. At March 31, 2011, the additional
applicable margin was 4.50%, resulting in an effective interest rate of 8.82% on our outstanding
debt.
Using a sensitivity analysis based on a hypothetical 1% increase in prevailing interest rates
over a 12-month period, each 1% increase from prevailing interest rates at March 31, 2011 would
have increased the fair value of the interest rate swap by $182 and each 1% decrease from
prevailing interest rates at March 31, 2011 would have decreased the fair value of the interest
rate swap by $194.
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Foreign Currency Exposure
As a result of operating in foreign markets, our financial results could be affected by
significant changes in foreign currency exchange rates. We have international sales and operations
in North America, Europe, and Asia. Therefore, we are subject to foreign currency rate exposure.
Non-U.S. transactions are denominated in the functional currencies of the respective countries in
which our foreign subsidiaries reside. Our consolidated assets and liabilities are translated into
U.S. Dollars at the applicable exchange rates in effect as of the balance sheet date. Consolidated
income and expense items are translated into U.S. Dollars at the average exchange rates for each
period presented. Accumulated net translation adjustments are recorded in the accumulated other
comprehensive income component of stockholders equity. We measure our risk related to foreign
currency rate exposure on two levels, the first being the impact of operating results on the
consolidation of foreign subsidiaries that are denominated in the functional currencies of their
home countries, and the second being the extent to which we have instruments denominated in foreign
currencies.
Foreign exchange translation gains and losses are included in our results of operations since
we consolidate the results of our international operations, which are denominated in each countrys
functional currency, with our U.S. results. The impact of translation gains or losses on net income
from consolidating foreign subsidiaries was not material for the periods presented. We have
historically had low exposure to changes in foreign currency exchange rates upon consolidating the
results of our foreign subsidiaries with our U.S. results due to the size of our foreign operations
in comparison to our consolidated operations. However, if the operating profits of our
international operations increase as a percentage of our consolidated operations, our exposure to
the appreciation or depreciation in the U.S. Dollar could have a more significant impact on our net
income and cash flows. Thus, we evaluate our exposure to foreign currency fluctuation risk on an
ongoing basis.
Since our foreign operations are conducted using foreign currencies, we bear additional risk
of fluctuations in exchange rates because of instruments denominated in foreign currencies. We have
historically had low exposure to changes in foreign currency exchange rates with regard to
instruments denominated in foreign currencies, given the amount and short-term nature of the
maturity of these instruments. The carrying values of financial instruments denominated in foreign
currencies, including cash, cash equivalents, accounts receivable and accounts payable, approximate
fair value because of the short-term nature of the maturity of these instruments.
We performed a sensitivity analysis at March 31, 2011. Holding all other variables constant,
we have determined that the impact of a near-term 10% appreciation or depreciation of the U.S.
Dollar would have an insignificant effect on our financial condition, results of operations and
cash flows.
Item 4 Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal
Financial Officer, evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as
amended. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures as of March 31, 2011 (the end of the period
covered by this Quarterly Report on Form 10-Q) were effective. Further, there have been no changes
in our internal control over financial reporting identified in connection with managements
evaluation thereof during the quarter ended March 31, 2011 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
PART II: Other Information
Item 1 Legal Proceedings
In the normal course of business, we are at times subject to pending and threatened legal
actions and proceedings. After reviewing with legal counsel any pending and threatened actions and
proceedings, management does not expect the outcome of such actions or proceedings to have a
material adverse effect on our business, financial condition or results of operations.
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Item 1A Risk Factors
In addition to the risk factors related to our business as disclosed in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2010, filed by us with the SEC on August 31, 2010, our
business has the additional risk described below.
Our business may be harmed if we cannot maintain our listing on the Nasdaq Global Select Stock
Market.
Variations in our operating results may cause our stock price to fluctuate. Our quarterly
operating results have in the past, and may in the future, fluctuate significantly and we may incur
losses in any given quarter. Our future results of operations may fall below the expectations of
public market analysts and investors. If this happens, the price of our common stock would likely
decline. Other factors, such as general market conditions and investors perceptions of our longer
term prospects, also may cause fluctuations in the price of our common stock.
To maintain our listing on the Nasdaq Global Select Market we must satisfy certain minimum
financial and other continued listing standards, including, among other requirements:
| minimum $10,000,000 stockholders equity, | ||
| minimum 750,000 publicly traded shares, | ||
| minimum $5,000,000 market value of publicly held shares, | ||
| $1.00 per share minimum bid price, and | ||
| two registered and active market makers. |
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 Nasdaqs 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.
On April 5, 2011, we received a letter from Nasdaq (the Notice) notifying us that for 30
consecutive trading days preceding the date of the Notice, the bid price of our common stock had
closed below the $1.00 per share minimum required for continued trading on the Nasdaq Global Select
Market. On April 25, 2011, we received a separate letter stating that we had regained compliance
with Nasdaqs minimum bid price requirement and that this matter is now closed with Nasdaq.
If our common stock loses its status on the Nasdaq Global Select Market in the future and we
are not successful in obtaining a listing on the Nasdaq Capital Market, shares of our common stock
would likely trade in the over-the-counter market bulletin board, commonly referred to as the pink
sheets. If our stock were to trade on the over-the-counter market, selling our common stock could
be more difficult because smaller quantities of 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.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None.
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Item 3 Defaults Upon Senior Securities
None.
Item 5 Other Information
None.
Item 6 Exhibits
10.1* | Provisions of Separation Agreement between Harris Interactive UK Limited and Robert Salvoni, dated February 4, 2011 (filed herewith) | |
10.2* | Modification to Compensation Arrangement for Executive Officer by and between the Company and Patti B. Hoffman (filed herewith). | |
31.1 | Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002). | |
32.2 | Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002). |
* Denotes management contract or arrangement
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 5, 2011 | Harris Interactive Inc. |
|||
By: | /s/ Eric W. Narowski | |||
Eric W. Narowski | ||||
Principal Accounting Officer and Senior Vice President, Global Controller (On Behalf of the Registrant and as Principal Accounting Officer) |
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Exhibit Index
10.1* | Provisions of Separation Agreement between Harris Interactive UK Limited and Robert Salvoni, dated February 4, 2011 (filed herewith) | |
10.2* | Modification to Compensation Arrangement for Executive Officer by and between the Company and Patti B. Hoffman (filed herewith). | |
31.1 | Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002). | |
32.2 | Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002). |
* Denotes management contract or arrangement
31