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Harris Interactive 10-K 2008 Documents found in this filing:
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
COMMISSION FILE NUMBER:
000-27577
HARRIS INTERACTIVE
INC.
Registrant’s telephone number, including area code:
(585) 272-8400
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
NONE
INDICATE BY CHECK MARK IF THE REGISTRANT IS A WELL-KNOWN
SEASONED ISSUER, as defined in Rule 405 of the Securities
Act. Yes o No þ
INDICATE BY CHECK MARK IF THE REGISTRANT IS NOT REQUIRED TO FILE
REPORTS pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
INDICATE BY CHECK MARK WHETHER THE
REGISTRANT: (1) HAS FILED ALL REPORTS required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS
PURSUANT to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE
ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED
FILER, OR A SMALLER REPORTING COMPANY. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
INDICATE BY CHECK MARK WHETHER REGISTRANT IS A SHELL COMPANY (as
defined in
Rule 12b-2
of the
Act). Yes o No þ
As of December 31, 2007, the aggregate market value of
voting and non-voting common equity securities held by
non-affiliates of the registrant was $214,644,671.
On September 12, 2008, 53,783,509 shares of the
Registrant’s Common Stock, $.001 par value, were
outstanding.
The information required by Part III of this Report, to the
extent not set forth herein, is incorporated by reference from
the Registrant’s definitive proxy statement relating to the
annual meeting of stockholders to be held on October 28,
2008, which definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after
the end of the fiscal year to which this Report relates.
HARRIS
INTERACTIVE INC.
FOR THE FISCAL YEAR ENDED JUNE 30, 2008
INDEX
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PART I
The discussion in this
Form 10-K
contains forward-looking statements that involve risks and
uncertainties. The statements contained in this
Form 10-K
that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933 (the “Securities Act”), as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), including statements
regarding expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in
this document are based on the information available to Harris
Interactive on the date hereof, and Harris Interactive assumes
no obligation to update any such forward-looking statement.
Actual results could differ materially from the results
discussed herein. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in
the Risk Factors section of this
Form 10-K.
The Risk Factors set forth in other reports or documents Harris
Interactive files from time to time with the Securities and
Exchange Commission (the “SEC”) should also be
reviewed.
References herein to “we,” “our”,
“us”, “its”, the “Company” or
“Harris Interactive” refer to Harris Interactive Inc.
and its subsidiaries, unless the context specifically requires
otherwise. Harris
Interactive®
and The Harris
Poll®
are U.S. registered trademarks of Harris Interactive Inc.
This
Form 10-K
may also include other trademarks, trade names and service marks
of Harris Interactive and of other parties.
Harris Interactive was founded in 1975 in upstate New York as
the Gordon S. Black Corporation, however, its roots date back to
the founding of Louis Harris and Associates in New York City in
1956. Today, Harris Interactive is an international,
full-service, consultative market research firm widely known for
The Harris Poll (one of the world’s longest-running,
independent opinion polls) and for pioneering online market
research methods. Harris Interactive serves clients worldwide
through its offices in North America, Europe and Asia and
through a global network of independent market research firms.
In June 2008, the market research industry analysts at Inside
Research named Harris Interactive the 13th largest
U.S. market research organization (down from 12th in
2007), and in July 2008, we were named the world’s
13th largest market research firm for the second
consecutive year.
Our corporate headquarters are located in Rochester, New York,
and our fiscal year ends June 30th.
The Gordon S. Black Corporation was founded in 1975 as a New
York corporation. It formed and became part of the Delaware
corporation now known as Harris Interactive in 1997. Since that
time, our acquisitions have included:
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In May 2005, we completed the sale of our Japanese subsidiaries,
M&A Create Limited, Adams Communications Limited and Harris
Interactive Japan, K.K., in a management buy-out. In
August 2007, we sold our “Rent and Recruit”
business, which was engaged primarily in providing facilities
for and conducting focus group interviews.
Harris Interactive is a professional services firm that serves
clients in many industries and many countries. We provide
Internet-based and traditional market research and polling
services which include ad-hoc or customized qualitative and
quantitative research, service bureau research (conducted for
other market research firms) and long-term tracking studies.
We serve clients in numerous vertical markets including:
In addition, we maintain a number of horizontally-focused
strategic research groups that collaborate with our sales and
vertical practice teams to deliver solutions in the following
areas:
We also conduct computer-assisted telephone interviewing in
telephone data collection centers in the United Kingdom, Canada,
Hong Kong and Singapore. In addition to these dedicated
facilities, we
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outsource telephone data collection and survey programming to
contracted sources in a number of countries including Canada,
India and Costa Rica.
We deliver custom research using both traditional and
Internet-based data collection methods. The majority of our
tracking and service bureau research is conducted via the
Internet. We continue to work aggressively to transition
traditional custom research to Internet-based research.
During fiscal 2008, 63.1% of our total revenue was derived from
Internet-based research, up from 60.5% and 59.1% in fiscal 2007
and 2006, respectively. We treat all of the revenue from a
project as Internet-based whenever more than 50% of the data
collection for that project was completed online.
Our Internet panel currently consists of millions of
individuals, all of whom have double opted-in to participate by
affirmatively reconfirming their intent to join the panel after
initial registration.
The online research market is already significant and continues
to grow. Industry analysts at Inside Research estimate
that the current potential worldwide opportunity for online
survey research is approximately $11 billion. In its March
2008 edition, Inside Research estimated that over
$4.3 billion will be spent to conduct online research in
calendar 2008, up 21% from the estimated $3.5 billion spent
in calendar 2007, with a $7 billion market opportunity
remaining.
We believe that Internet-based market research has a number of
inherent advantages:
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We conduct many types of custom research including customer
satisfaction surveys, market share studies, new product
introduction studies, brand recognition studies, reputation
studies, ad concept testing and more. A custom research project
has three distinct phases:
Our sample design and questionnaire development techniques help
ensure that complete and accurate information is collected, and
that these data will satisfy the specific inquiries of our
clients. We have developed in-depth data collection techniques
to enhance the integrity and reliability of our sample database.
Our survey methodology is intended to ensure that responses are
derived from the appropriate decision-makers in each category.
As a result, we have a solid foundation for delivering the data
that meets our clients’ needs.
We apply extensive expertise to the design, execution and
maintenance of custom, online tracking studies for clients in a
broad range of industries and around the globe. Considered by
many to be a vital part of any comprehensive research program,
tracking studies regularly ask identical questions to similar
demographic groups within a constant interval (once a month,
once a quarter, etc.) to feed business decision-makers with
dynamic data and intelligence that enables them to:
The Harris Interactive Service Bureau (“HISB”)
conducts Internet-based data collection for other market
research firms that do not have Internet-based market research
capabilities.
We have not incurred expenditures for the three fiscal years
ended June 30, 2008 that would be classified as research
and development as defined by accounting principles generally
accepted in the
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United States of America under Statement of Financial Accounting
Standards (“SFAS”) No. 2, Accounting for
Research and Development Costs.
We believe that the Harris brand and its associated intellectual
property provide us with many competitive advantages. The
awareness and attributes of the Harris brand —
trusted, accurate, non-biased, innovative, collaborative,
thoughtful and results-focused — are essential to
maintain for our continued success. To protect our brand and our
intellectual property, we rely on a combination of patent,
copyright, trademark and trade-secret laws, as well as
confidentiality, non-disclosure, non-compete and license
agreements, and clearly defined standard terms and conditions in
our sales contracts.
We currently have patents and patent applications pending for:
Additionally, we have registered trademarks for many of our
products and services in North America, Europe and Asia,
and will continue to protect our intellectual property through
those means.
We have licensed in the past, and expect to license in the
future, certain proprietary rights, such as trademarks or
copyrighted material, to third parties. While we attempt to
ensure that the quality of our brand is maintained by these
licenses, licensees may take actions that might harm the value
of our proprietary rights or reputation.
Being project-based, our business has historically exhibited
moderate seasonality. Revenue generally tends to ramp upward
during the fiscal year, with Q1 (ending September
30) generating the lowest revenue. Fiscal Q2 (ending
December 31) generally yields a sequential increase in
revenue. Fiscal Q3 (ending March 31) is approximately flat
with or slightly less than Q2. Fiscal Q4 (ending
June 30) revenue typically yields the highest revenue
of the year. As a result of the seasonality noted, we manage our
business based on our annual business cycle. Total consolidated
revenue from continuing operations, by quarter, for the fiscal
years ended June 30, 2006 through 2008, is as follows:
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The moderate historical seasonality described above is not
necessarily indicative of quarterly revenue trends which may
occur in the future.
At June 30, 2008, we had approximately 1,900 clients,
compared with approximately 1,800 at June 30, 2007. In
fiscal 2008 and 2007, no single client accounted for more than
10% of our consolidated revenue.
We compete with numerous market research firms, as well as
corporations and individuals that perform market research
studies on an isolated basis, many of whom have market shares or
financing and marketing resources larger than our own. Our
competitors include, but are not limited to, Aegis Group plc,
Arbitron Inc., GfK AG, Greenfield Online Inc., IMS Health, Inc.,
Intage Inc., Ipsos SA, National Research Corp., Taylor Nelson
Sofres plc, WPP Group plc and YouGov plc.
In June 2008, Inside Research ranked Harris Interactive
as the 13th largest U.S. market research firm, down
from
12th in
2007. In July 2008, Inside Research ranked Harris
Interactive as the world’s
13th largest
market research firm for the second consecutive year.
Although we believe that barriers to creating a large online
panel and acquiring the technology and the knowledge necessary
to conduct accurate Internet-based market research remain high,
we have seen intensified competition from existing market
research firms as they continue to build their online research
capabilities. We also believe that the number of dedicated
online data collection and sample-only firms which enable
traditional market research firms to execute online research has
added to the competitive environment.
In fiscal 2008, we deployed
GlobalSynchsm,
our global synchronized research platform that integrates data
collected via multiple modes into one database. This web-based
system provides increased speed, greater accuracy and easy
real-time client access to research data collected anywhere in
the world regardless of collection mode. We believe that no
other market research firm currently has a similar system in
place. This ability to more fully synchronize our survey design,
data collection, analysis and reporting functions gives us an
advantage over some of our competitors who do not offer the same
broad range of services.
We believe we also have other competitive advantages, including:
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We continue to review and modify our infrastructure, including
as new technologies become available, with a view toward
continuing to meet the needs of our clients in an efficient and
cost-effective manner.
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Financial
Information about Geographic Areas
We are comprised principally of operations in North America,
Europe and Asia.
Non-U.S. market
research operations are located in the United Kingdom, Canada,
France, Germany, Hong Kong, Singapore and to a more limited
extent, China. We operate these
non-U.S. businesses
on a basis consistent with our U.S. operations. We perform
custom and service-bureau Internet-based market research in the
United Kingdom, Canada, France and Germany using our global
database.
Our business model for offering custom market research is
consistent across the geographic regions in which we operate.
Geographic management facilitates local execution of our global
strategies. However, we maintain global leaders for the majority
of our critical business processes, and the most significant
performance evaluations and resources allocations made by our
chief operating decision-maker are made on a global basis.
Accordingly, we have concluded that we have one reportable
segment.
We have prepared the financial results for geographic
information on a basis that is consistent with the manner in
which management internally disaggregates information to assist
in making internal operating decisions. We have allocated common
expenses among these geographic regions differently than we
would for stand-alone information prepared in accordance with
accounting principles generally accepted in the United States of
America. All intercompany sales and transactions have been
eliminated upon consolidation. Geographic operating income
(loss) may not be consistent with measures used by other
companies.
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Geographic information from continuing operations for the fiscal
years ended June 30 was as follows (amounts in thousands):
During fiscal 2008, 2007 and 2006, 64.0%, 75.5% and 78.3%,
respectively, of our total consolidated revenue was derived from
our U.S. operations. 36.0%, 24.5% and 21.7%, respectively,
of our total consolidated revenue was derived from our
non-U.S. operations,
primarily in the U.K. and France during fiscal 2007 and 2006 and
additionally in Canada, Germany, Hong Kong and Singapore during
fiscal 2008.
At June 30, 2008, we had a revenue backlog from continuing
operations of approximately $66.8 million, as compared to a
backlog of approximately $64.9 million from continuing
operations at
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June 30, 2007. We estimate that substantially all of the
backlog at June 30, 2008 will be recognized as revenue from
services during the fiscal year ending June 30, 2009, based
on our experience from prior years.
At June 30, 2008, we employed a total of
1,108 full-time individuals on a worldwide basis, 677 of
which were employed in the United States. In addition, we
employed 242 part-time and hourly individuals on a
worldwide basis for data gathering and processing activities, 17
of which were employed in the United States. Casual employees of
our operations outside of the United States are not included in
the headcount numbers provided herein.
None of our employees are represented by a collective bargaining
agreement. We have not experienced any work stoppages. We
consider our relationship with our employees to be good.
The following table sets forth the name, age and position of
each of the persons who were serving as our executive officers
as of September 12, 2008. These individuals have been
appointed by and are serving at the pleasure of our board of
directors. The table also includes information about James E.
Fredrickson and Stephen Wallace, each of whom we consider to be
significant employees.
Gregory T. Novak is our President and Chief Executive
Officer, positions he has held since April 2004 and
September 2005, respectively. He has been a director of the
Company since September 2005. From May 2005 to September 2005,
Mr. Novak served as our acting Chief Executive Officer and
from April 2004 to September 2005, he served as our Chief
Operating Officer. From July 2003 to March 2004,
Mr. Novak served as our President, U.S. Operations and
from July 2001 to June 2003, served as our Group President,
Strategic Marketing Solutions and Business and Consulting. Prior
to July 2001 and since joining us in June 1999, Mr. Novak
served in progressively senior positions. Prior to joining us,
Mr. Novak worked for Lightnin, a chemical process engineering
and manufacturing company, most recently as Vice President,
General Manager of Lightnin Americas.
Bruce A. Anderson is President, Harris/Decima, our
Canadian subsidiary, a position he has held since our
acquisition of Decima Research in August 2007. From October 2004
to August 2007, Mr. Anderson
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served as Chairman and Chief Executive Officer of Decima. Prior
to joining Decima, Mr. Anderson was a Partner with the
Earnscliffe Strategy Group, a consulting firm he co-founded in
1990.
David G. Bakken, Ph.D. is our Executive Vice
President and Chief Scientist, a position he has held since
March 2008. From March 2000 to March 2008, Dr. Bakken
served as Senior Vice President, Marketing Science and Advanced
Analytics. Prior to joining us in March 2000, Dr. Bakken
served as a Vice President for Stratford Associates, providing
consulting on market research for clients, and served our
predecessor company, the Gordon S. Black Corporation.
Dr. Bakken also held positions at Information Resources,
Inc. and AT&T Inc.
Dennis K. Bhame is our Executive Vice President, Human
Resources, a position he has held since joining us in April
2000. Prior to joining us, Mr. Bhame spent 16 years at
Bausch & Lomb Inc. working in progressively senior
positions, most recently as Vice President, Global Human
Resources, Eyeware Division.
James E. Fredrickson is our Executive Vice President,
Global Research Operations and Information Technology, a
position he has held since February 2006. From May 2002 to
February 2006, Mr. Fredrickson served as Senior Vice
President, Research Operations. Prior to May 2002 and since
joining us in 1987, Mr. Fredrickson has served in
progressively senior positions.
Richard W. Millard, Ph.D. is our President,
U.S. Industry Research Groups, a position he has held since
April 2007. In this role, he oversees our Healthcare and Public
Affairs and Policy research practices. From May 2007 to April
2008, he served as President of the Consumer Goods, Financial
Services and Public Affairs and Policy research practices. From
May 2006 to April 2007, Dr. Millard served as Senior Vice
President in our Public Affairs and Policy research practice,
and from June 2003 to May 2006, he served in this role in
our Healthcare research practice. Prior to June 2003 and since
joining us in January 2000, Dr. Millard served in
progressively senior positions. Prior to joining us,
Dr. Millard spent two years at Patient Infosystems, Inc. as
Vice President of Clinical Affairs.
Eric W. Narowski is our Principal Accounting Officer and
Senior Vice President, Global Controller, positions he has held
since February 2006 and October 2007, respectively. From January
2000 to October 2007, he served as our Vice President, Corporate
Controller. Mr. Narowski joined us in July 1997 as our
Controller.
Michelle F. O’Neill is our President,
U.S. Industry Research Groups, a position she has held
since July 2006. In this role, she oversees our
Emerging and General Markets research practice, as well as
the Automotive and Transportation, Technology and
Telecommunications and since April 2007, the Consumer Goods
industry solutions groups. Prior to that, Ms. O’Neill
served as Group President of our Emerging and General Markets
research practice. From July 2001 to June 2004,
Ms. O’Neill served as Senior Vice President and
Business Leader of our Strategic Consulting research practice,
the result of the integration of our 2001 acquisition of
Yankelovich Partners, where she had served as a Partner.
Ronald E. Salluzzo is our Executive Vice President, Chief
Financial Officer, Treasurer and Secretary, positions he has
held since March 2006. Prior to joining us, from February 2005
to December 2005, Mr. Salluzzo served as the Chief Risk
Officer for BearingPoint Inc., a provider of strategic
consulting, application services, technology solutions and
managed services to companies and government organizations. From
January 1999 to February 2005, Mr. Salluzzo was the
Executive Vice President in charge of BearingPoint’s State
and Local Government and Education practice. Prior to joining
BearingPoint, Mr. Salluzzo spent 27 years at KPMG LLP
working in progressively senior positions, most recently as an
Audit Partner and National Industry Leader for Higher Education.
Stephan B. Sigaud is our President, U.S. Solutions
Research Groups, a position he has held since May 2008. In this
role, he oversees our Brand and Communications Consulting,
Loyalty, Product Solutions, and Qualitative Research practices.
From March 2005 to May 2008, Mr. Sigaud served as President
of our Customer Loyalty Management practice. Prior to joining us
in March 2005, Mr. Sigaud was the Executive Vice President
of Client Services at Find/SVP, a publicly-traded knowledge
services
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company (now Guideline, Inc.), where he led all business
research and consulting operations. Prior to Find/SVP,
Mr. Sigaud was owner and President of IDSI, Inc., a
consulting firm that specialized in customer satisfaction
measurement services for large manufacturing companies.
George H. Terhanian, Ph.D is our President, Harris
Interactive Europe and Global Internet Research, positions he
has held since July 2003 and June 2002, respectively. He has
also directed our online research activities since they began in
1997. Prior to joining us in 1996, Dr. Terhanian taught in
elementary and secondary schools in the United States. He has
also served an appointment as an American Educational Research
Association Fellow at the National Center for Educational
Statistics.
David B. Vaden is our President, North America and Global
Operations, a position he has held since April 2007. From
February 2006 to April 2007, Mr. Vaden served as our
Executive Vice President, Chief Operations Officer. From January
2005 to February 2006, Mr. Vaden served as our Executive
Vice President, Operations and Chief Strategy Officer. From
January 2002 to January 2005, Mr. Vaden served as our
Senior Vice President, Business Development and Internet
Services. Mr. Vaden joined us in January 2000 as our Vice
President, Finance. Prior to joining us, Mr. Vaden served
as a Manager in the Audit and Business Advisory Services
division at PricewaterhouseCoopers LLP.
Stephen Wallace is our Chief Information Officer, a
position he has held since March 2008. Mr. Wallace joined
us in October 2007 as Vice President, IT Operations. Prior to
joining us, Mr. Wallace was an independent consultant from
November 2006 to October 2007 working on, among other things, a
Health Information Exchange, where he helped implement the
technology necessary to securely exchange confidential patient
health information between hospitals, labs and physician
offices. From March 2000 to November 2006, Mr. Wallace
served as Chief Information Officer at Constellation Brands, a
Fortune 500 firm and a leading international producer and
marketer of beverages. Prior to joining Constellation Brands,
Mr. Wallace previously spent approximately 3 years at
Xerox Corporation as their Vice President of Information
Technology and Customer Administration.
Information about our products and services, shareholder
information, press releases and SEC filings can be found on our
website at www.harrisinteractive.com. Through our website, we
make available free of charge the documents and reports we file
with the SEC, including our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports, as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC. Information on our website (or the
websites of our subsidiaries) does not constitute part of this
Report on
Form 10-K.
The public may also read and copy any materials that we file
with the SEC at the SEC’s Public Reference Room at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC
at
1-800-SEC-0330.
The SEC also maintains an Internet site at www.sec.gov, which
contains reports, proxy and information statements and other
information regarding issuers that file electronically with the
SEC.
Risks Related to
Our Business
We believe that maintaining our good brand reputation and
recognition is critical to attracting and expanding our current
client base as well as attracting and retaining qualified
employees. If our reputation and name are damaged through our
participation in surveys involving controversial topics or if
the results of our surveys are inaccurate or are misused or used
out of context by one of our clients, we may become less
competitive or lose market share.
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We have registered a number of our trademarks, including Harris
Interactive and The Harris Poll. If we were prevented
from using the Harris name, our brand recognition and business
would likely suffer. We would have to make substantial financial
expenditures to promote and rebuild our brand identity.
Our success is highly dependent on our ability to maintain
sufficient capacity of our Internet panel and its specialty
sub-panels. Our ability to do this may be harmed if we lose
panel capacity or are unable to attract and maintain an adequate
number of replacement panelists and specialty sub-panel members.
There are currently no industry or other benchmarks for
determining the optimal size and composition of an Internet
panel. Among other factors, panelist response rates vary with
differing survey content, and the frequency with which panelists
are willing to respond to survey invitations is variable. We
constantly reassess our panel size and demographics as survey
requests are made and, based upon availability of existing
panelists to fulfill project requests, determine our need to
recruit additional panelists. We are not always able to
accommodate client requests to survey low-incidence, limited
populations with specific demographic characteristics. If our
need to recruit panelists or specialty sub-panel members
increases significantly, our operating costs will rise.
In general, if the number of our active survey respondents
significantly decreases, or the demographic composition of our
Internet panel narrows, our ability to provide our clients with
accurate and statistically projectable information would likely
suffer. This risk is likely to increase as our business expands.
Our business will be unable to grow and will suffer if we have
an insufficient number of panelists to respond to our surveys,
if our panel becomes unreliable due to reduced size or if it is
no longer representative of the general population.
We use our
HIpointstm,
HIstakestm
and instant results programs to provide incentives to encourage
participation in our surveys and to maintain the capacity of our
Internet panel. If these programs lose their effectiveness in
the future, a reduction in capacity or responsiveness of the
panel could result.
A failure in our security measures could result in the
misappropriation of private data. As a result, we may be
required to expend capital and other resources to protect
against the threat of such security breaches or to alleviate
problems caused by such breaches, which could have a material
adverse effect on our business, financial condition and results
of operations.
Internet security concerns could cause some online panelists to
reduce their participation levels, provide inaccurate responses
or end their membership in our Internet panel. This could harm
our credibility with our current clients. If our clients become
dissatisfied, they may stop using our products and services. In
addition, dissatisfied and lost clients could damage our
reputation. A loss of online panelists or a loss of clients
would hurt our efforts to generate increased revenues and impair
our ability to attract potential clients.
We could be subject to liability claims by our online panelists
for any misuse of the demographic personal information. These
claims could result in costly litigation. We could also incur
additional costs
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and expenses if new regulations regarding the use of personal
information are introduced or if our privacy practices are
investigated by a governmental body.
We may be subject to claims relating to content that is
published on or downloaded from our websites. We also could be
subject to liability for content that is accessible from our
website through links to other websites. For example, as part of
our surveys panelists sometimes access, through our websites or
linkages to client websites, content provided by our clients,
such as advertising copy, that may be incomplete or contain
inaccuracies. We also recruit panelists to participate in
research sponsored and hosted by our clients on the
client’s website, and we cannot completely control breaches
of privacy policies, warranties, or other claims that may be
made by those third parties. We may be accused of sending bulk
unsolicited email and have our email blocked by one or more
Internet service providers (“ISP’s”) and,
therefore, be unable to conduct online data collection.
Although we carry general and professional liability insurance,
our insurance may not cover potential liability claims for
publishing or distributing content over the Internet, or may not
be adequate to cover all costs incurred in defense of potential
claims or to indemnify us for all liability that may be imposed.
In addition, any claims of this type, with or without merit,
would result in the diversion of our financial resources and
management personnel.
Because a greater proportion of our business than those of many
of our competitors involves Internet-based data collection, our
business may suffer a greater impact due to any Internet-related
system failure. Any Internet-related system delays or failures,
including network, software or hardware failures, that cause an
interruption in our ability to communicate with our Internet
panel, collect research data, or protect visual materials
included in our surveys, could result in reduced revenue, could
impair our reputation, and have a material adverse effect on our
business, financial condition and results of operations.
Our systems and operations are vulnerable to damage or
interruption from fire, earthquake, flooding, power loss,
telecommunications failure, break-ins and similar events. The
redundancy of our systems may not be adequate, as we depend upon
third-party suppliers to protect our systems and operations from
the events described above. We have experienced technical
difficulties and downtime of individual components of our
systems in the past, and we believe that technical difficulties
and downtime may occur from time to time in the future. The
impact of technical difficulties and downtime may be severe. We
have developed, however have not fully implemented, a formal
disaster recovery plan, and our business interruption insurance
may not adequately compensate us for any losses that may occur
due to failures in our systems.
Our servers and software must be able to accommodate a high
volume of traffic. Any increase in demands on our servers beyond
that which we currently anticipate will require us to fund the
expansion and modification of our network infrastructure. If we
were unable to add additional software and hardware to
accommodate increased demand, unanticipated system disruptions
and slower data collection would likely result.
Our Internet panel members communicate with us using various
ISP’s. These providers have experienced significant outages
in the past, from time to time may block certain communications,
and in the future could experience outages, delays and other
difficulties unrelated to our systems.
Major components of the Internet backbone itself could fail due
to terrorist attack, war or natural disaster. Our business is
particularly vulnerable to such failure because not only would
we suffer the effects experienced by businesses in general, we
would be unable to perform Internet surveys, which
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are the core of much of our business. Thus, we would have to
find alternative means to conduct surveys or would be unable to
effectively service the needs of many of our clients.
Our success and ability to compete depends substantially on our
internally-developed methodologies, technologies and trademarks,
which we protect through a combination of patent, copyright,
trade-secret and trademark laws. From time to time, we file
trademark applications for certain of our products and services.
Currently, we also have patents and patent applications pending
for our method for conducting product configuration research
over a computer-based network and our shelf impact process, and
may apply for additional patents in the future. Our patent or
trademark applications may not be approved, or if approved, our
patents or trademarks may be successfully challenged by others
or invalidated. We cannot guarantee that infringement or other
claims will not be asserted or prosecuted against us in the
future, whether resulting from our internally-developed
intellectual property or licenses or content from third parties.
Any future assertions or prosecutions could be time-consuming,
result in costly litigation and diversion of technical and
management personnel or require us to pay money damages,
introduce new trademarks, develop non-infringing technology, or
enter into royalty or licensing agreements. Any of those events
could substantially increase our operating expenses and
potentially reduce our expected revenues. Moreover, there can be
no assurance that third parties will not independently develop
functionally equivalent or superior methodologies and
technologies.
We generally enter into confidentiality or license agreements
with parties with whom we do business, and generally control
access to, and distribution of, our technologies, documentation
and other proprietary information. Despite our efforts to
protect our proprietary rights from unauthorized use or
disclosure, parties may attempt to disclose, obtain or use our
technologies. The steps we have taken may not prevent
misappropriation of our technologies, particularly in foreign
countries where laws or law enforcement practices may not
protect our proprietary rights as fully as in the
United States.
We may seek to license technology to enhance our current
technology infrastructure. We cannot be certain that any such
licenses will be available on commercially reasonable terms or
at all. The loss or lack of availability of any of these
technology licenses could result in delays in providing our
products and services until equivalent technology, if available,
is identified, licensed and integrated.
Components of our strategy are the extension of our
Internet-based market research products and services to clients
internationally, expansion of our Internet panel to include
global online panelists and acquisitive expansion of our global
footprint to provide us with a physical presence in markets
where we currently do not have one. If worldwide Internet usage
does not continue to grow, we may be unable to attract
international online panelists to our Internet panel or
international clients for our Internet-based market research and
polling products and services. Our inability to attract panel
members in key regions, such as Western Europe and Asia, would
necessitate the use of more costly traditional market research
methodologies to serve the needs of our clients who do business
internationally. Our ability to grow internationally will be
adversely affected to the extent that our international panel
does not grow commensurately with demand of our international
clients. The optimal size of our panel in specific countries is
subject to the same uncertainty as is applicable to our existing
panel in the United States. Additionally, our ability to grow
internationally will also be adversely affected if we are unable
to successfully complete acquisitions of market research
companies in high-potential geographic markets where we
currently do not have a physical presence.
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Although Internet-based research has achieved general acceptance
in the United States, the success of our international business
will depend in large part on our ability to continually develop
and market Internet-based products and services that achieve
broad market acceptance internationally. Our clients in the
international markets we serve must continue to accept the
Internet as an attractive replacement for traditional market
research methodologies, such as direct mail, telephone-based
surveys, mall intercepts, focus groups and in-person interviews.
If our current and potential clients do not continue to accept
our Internet-based methodologies as reliable and unbiased, our
revenues may not meet expectations or may decline, and our
business, financial condition and results of operations would
likely suffer.
We rely on off-shore providers in countries such as Canada,
India and Costa Rica, to provide certain of our programming
services, as well as telephone and Internet data collection.
Political or economic instability in countries from which such
support services are provided, or a significant increase in the
costs of such services, could adversely affect our business.
From time to time, laws and regulations are proposed in the
United States that would restrict or limit the benefits of
off-shore operations, and enactment of any such legal
restrictions could harm our results of operations.
Because many of our larger competitors have global operations,
we may be disadvantaged to the extent that we do not expand
globally. Our international operations have either lost money or
not added significantly to our net income in recent years. Our
operational, technical, and financial systems and controls will
have to continue to adapt to a more diversified geographic base
of operations. Managing and sustaining our international growth,
and ensuring its profitability, will place significant demands
on management. If we are unable to manage our growth
effectively, we may not be able to successfully implement our
business plan at projected levels.
The following additional risks are inherent in doing business on
a global level:
We have little or no control over these risks. For example, we
have encountered more restrictive privacy laws in connection
with our business operations in Europe, which have inhibited our
ability to develop our European Internet panel. As we increase
our global operations in the future, we may experience some or
all of these risks, which may have a material adverse effect on
our business, financial condition and results of operations.
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Our future success will depend, in part, on our ability to
continue to attract, retain and motivate highly skilled
technical, managerial, marketing, sales and client support
personnel. Project managers with industry expertise are
important to our ability to retain and expand our business.
Intense competition for these personnel exists, and we may be
unable to attract, integrate or retain the proper numbers of
sufficiently qualified personnel that our business plan assumes.
In the past, we have from time to time experienced difficulty
hiring and retaining qualified employees. There are few, if any,
educational institutions that provide specialized training
related to market research. Therefore, employees must be
recruited in competition with other industries and few of those
who are recruited have direct or substantial experience with
Internet-based research. In the past, competition for highly
skilled employees has resulted in additional costs for
recruitment, training, compensation and relocation or the
provision of remote access to our facilities. We may continue in
the future to experience difficulty in hiring and retaining
employees with appropriate qualifications. To the extent that we
are unable to hire and retain skilled employees in the future,
our business, financial condition and results of operations
would likely suffer.
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.
Factors that are outside of our control, and that have caused
our results to fluctuate in the past or that may affect us in
the future, include:
Factors that are partially within our control, and that have
caused our results to fluctuate in the past or that may affect
us in the future, include:
The factors listed above may affect both our quarter-to-quarter
operating results as well as our long-term success.
Quarter-to-quarter comparisons of our results of operations or
any other trend in our performance may not be reliable
indicators of future results.
Our restated certificate of incorporation provides for the
division of our board of directors into three classes,
eliminates the right of stockholders to act by written consent
without a meeting, and
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provides our board of directors with the power to issue shares
of preferred stock without stockholder approval. The preferred
stock could have voting, dividend, liquidation, and other rights
established by the board of directors that are superior to those
of our common stock.
Our board of directors also adopted a stockholder rights plan,
pursuant to which we declared and paid a dividend of one right
for each share of common stock outstanding as of March 29,
2005, and one right attaches to each share issued thereafter
until a specified date. Unless redeemed by us prior to the time
the rights are exercised, upon the occurrence of certain events,
the rights will entitle the holders to receive upon exercise of
each right shares of our preferred stock, or shares of an
acquiring entity, having a value equal to the exercise price of
the right divided by 50% of the then market price of our common
stock. The issuance of the rights could have the effect of
delaying or preventing a change in control of our company.
In addition, Section 203 of the Delaware General
Corporation Law contains provisions that impose restrictions on
stockholder action to acquire our company. The effect of these
provisions of our certificate of incorporation and Delaware law
could discourage or prevent third parties from seeking to obtain
control of us, including transactions in which the holders of
common stock might receive a premium for their shares over
prevailing market prices.
We have in the past and may in the future acquire or make
investments in complementary businesses, services, products or
technologies. If we choose not to pursue acquisitions, are
unable to identify suitable acquisition candidates or are unable
to acquire them at reasonable prices
and/or on
reasonable terms, our rate of growth may slow.
If we choose to pursue acquisitions, some material risks we may
face include:
Acquisitions may require the use of significant amounts of cash,
resulting in the inability to use those funds for other business
purposes. Acquisitions using our capital stock could have a
dilutive effect, and could adversely affect the market price of
our common stock. Amortization of intangible assets would reduce
our earnings, which in turn could negatively influence the price
of our common stock. These difficulties could disrupt our
ongoing business, distract our management and employees and
increase our expenses.
The market research industry is highly competitive, and product
and service offerings are susceptible to changes in the overall
marketplace, such as changes in the ways individuals gather and
use information, products, and services. Our profitability may
be adversely impacted by significant investments we may choose
to make in the development of new products and services to meet
a changing marketplace.
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The market research industry tends to be adversely affected by
slow or depressed business conditions in the market as a whole.
Many of our clients treat all or a portion of their market
research expenditures as discretionary. As general economic
conditions decline and our clients seek to control variable
costs, projects to be performed by us may be delayed or
cancelled, and new bookings may slow. As a result, our growth
and earnings may be adversely impacted.
The market research and polling industry includes many
competitors, some of whom are much larger than we are or have
specialized products and services we do not offer.
Consolidation within the industry has resulted and may continue
to result in some of our competitors acquiring Internet data
collection capabilities through mergers and acquisitions. Many
other companies have, or are developing, large databases of
individuals with whom they can communicate via the Internet.
Such companies may themselves, or in arrangements with other
market research firms, choose to provide competitive data
collection services. As others increase their ability to offer
Internet-based data collection services, and as our competitors
develop alternative products, we may come under increasing
pressures in selling and pricing our products and services.
No one client accounts for more than 10% of our revenues and
most of our revenues are derived on a project by project basis.
We must continuously replace completed work with new projects
from both existing and new clients, and these competitive
pressures may make it more difficult for us to do so and to
sustain and grow our revenues.
Any future legislation or regulations or the application of
existing laws and regulations to the Internet could limit our
effectiveness in conducting Internet-based market research and
polling, and increase our operating expenses. For example:
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In addition, the application of existing laws to the Internet
could expose us to substantial liability for which we might not
be indemnified by content providers or other third parties.
Existing laws and regulations currently address, and new laws
and regulations and industry self- regulatory initiatives are
likely to address, a variety of issues, including, among others,
the following:
Those laws that do reference the Internet have limited
interpretation by the courts and their applicability and scope
are not well defined, particularly on an international basis.
Any new laws or regulations relating to the Internet could
adversely affect our business.
Industry standards related to the Internet are still evolving.
Moreover, some private entities have proposed their own
standards for communications with, and use of information
related to, individuals who use the Internet. ISP’s also
have the ability to disrupt our communications with our panel.
Although we believe that we maintain high standards for the
recruitment of members into our database, communications with
our panelists and use of information provided by our
respondents, some ISP’s
and/or
self-appointed industry regulators may not agree. As a result,
our communications with our panelists may be disrupted from time
to time. In such instances, our ability to collect data using
traditional market research methodologies may be adversely
impacted by the continued decline in response rates to surveys
conducted over the telephone.
The markets for our products and services are highly
competitive. Our competitors continue to improve their
technology and methodologies as they gain more experience with
the Internet. Our
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business may suffer over time if we fail to have, create or
acquire equal or superior technologies and methodologies. Our
ongoing success will depend on our continued ability to improve
the performance features and reliability of our products and
services. We may experience difficulties that could delay or
prevent the successful development, introduction or marketing of
new products and services. We could also incur substantial costs
if we need to modify our services or infrastructure to adapt to
these changes.
Item 1B. Unresolved
Staff Comments
None.
Our corporate headquarters and principal United States operating
facility is located at 60 Corporate Woods, Rochester, New
York, 14623, under an operating lease that expires in July 2015.
In addition, we lease data collection centers to house our
telephone interviewing centers in both Canada and the United
Kingdom. We also lease service offices to house our project,
administrative and processing staff in the following locations:
We lease all of our facilities and believe our current
facilities are adequate to meet our needs for the foreseeable
future. We believe additional or alternative facilities can be
leased to meet our future needs on commercially reasonable terms.
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Information concerning each of our material properties is as
follows (amounts in thousands):
In the normal course of business, we are at times subject to
pending and threatened legal actions and proceedings. After
reviewing with counsel pending and threatened actions and
proceedings, management believes that the outcome of such
actions or proceedings is not expected to have a material
adverse effect on our business, financial condition or results
of operations.
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal 2008.
Our common stock is traded on the Global Select Market
(previously named the National Market System) of Nasdaq under
the symbol “HPOL”. The following table shows,
beginning on August 1, 2006, the high and low sales prices
per share of our common stock on the Nasdaq exchange. For
periods prior to August 1, 2006, the prices per share of
our common stock reflect the high and low bid prices on the
National Market System.
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At September 2, 2008, our common stock was held by
approximately 7,000 stockholders, reflecting stockholders of
record or persons holding stock through nominee or street name
accounts with brokers.
We have never declared nor paid any cash dividends on our common
stock. We currently anticipate that we will retain any future
earnings for internal purposes, such as the maintenance and
expansion of our operations, acquisitions and for repurchases of
our common stock. Accordingly, we do not anticipate paying any
cash dividends on our common stock in the foreseeable future.
The following table shows our repurchases of our equity
securities for the three months ended June 30, 2008 (in
thousands, except share and per share amounts):
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The graph below matches the cumulative
5-year total
return of holders of Harris Interactive Inc.’s common stock
with the cumulative total returns of the NASDAQ Composite index,
the S&P Smallcap 600 index and two customized peer groups
of nine companies each, whose individual companies are listed in
footnotes 1 and 2 below. During fiscal 2008, the Company changed
its peer group because certain companies included are no-longer
publicly traded companies and can no longer be included in the
graph. In addition, the Company also reassesses the
appropriateness of its peer group annually may add or delete
companies accordingly. The graph assumes that the value of the
investment in our common stock, in each index, and in each of
the peer groups (including reinvestment of dividends) was $100
on June 30, 2003 and tracks it through June 30, 2008.
* $100 invested on 6/30/03 in stock &
index-including reinvestment of dividends.Fiscal year ending
June 30.
Copyright©
2008 S&P, a division of The McGraw -Hill Companies Inc. All
rights reserved. Copyright
©
2008 Dow Jones & Co. All rights reserved.
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The stock price performance included in this graph is not
necessarily indicative of future stock price performance.
(1) The nine companies included in the Company’s new
peer group are: Greenfield Online Inc., National Research Corp.,
WPP Group plc, Taylor Nelson Sofres plc, Ipsos SA, GFK AG,
Intage Inc., YouGov plc and Aegis Group plc.
(2) The nine companies included in the Company’s old
peer group are: Arbitron Inc., Greenfield Online Inc., IMS
Health Inc., National Research Corp., Taylor Nelson Sofres plc,
Ipsos SA, GFK AG, Intage Inc. and Yougov plc.
The cumulative total shareholder return graph and accompanying
information shall not be deemed to be “soliciting
material” or to be “filed” with the SEC or
subject to Regulation 14A or 14C promulgated by the SEC or
the liabilities of Section 18 of the Exchange Act, except
to the extent that the Company specifically requests that the
information be treated as soliciting material or specifically
incorporates it by reference into a document filed under the
Securities Act or the Exchange Act. The cumulative total
shareholder return graph and accompanying information shall not
be deemed to be incorporated by reference into any filing under
the Securities Act or the Exchange Act, except to the extent
Harris Interactive specifically incorporates it by reference.
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The following selected consolidated financial data of Harris
Interactive should be read in conjunction with Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the consolidated
financial statements and the notes to those statements and other
financial information appearing elsewhere in this
Form 10-K.
The selected consolidated financial data reported below includes
the financial results of the following entities which we
acquired as of the dates indicated: Decima (August 2007),
Marketshare (August 2007), MediaTransfer (April 2007), Wirthlin
(September 2004) and Novatris (March 2004). In addition,
information reported for fiscal years 2004 through 2008 has been
reclassified to reflect our Japanese and Rent and Recruit
operations as discontinued operations for all periods presented.
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Fiscal 2008 was a challenging year on many fronts. The fiscal
year began with our August 2007 acquisitions of Decima and
Marketshare and positive organic revenue through the first five
months. Subsequently, our performance was adversely impacted by:
In response to the above, we took the following actions:
In addition to the restructuring charges noted above, we
incurred $1.6 million in legal, accounting, banking and
other costs in connection with a decision by our Board of
Directors to investigate strategic alternatives available to the
Company. After retaining an investment bank to assist with this
process and considering the results of the investigations, the
Board determined that it was in the best interest of our
stockholders to discontinue the process and to focus the
Company’s attention on operational improvement and growth.
We have retained a performance improvement consulting firm to
assist us in those efforts.
29
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Fiscal 2008 ended with mixed results, specifically:
While fiscal 2008 had a number of challenges, we believe that
the actions we took during the fiscal year will position us for
revenue and profit growth in fiscal 2009 and beyond.
On August 16, 2007, we, along with 2144798 Ontario Inc., a
corporation incorporated under the laws of the Province of
Ontario, Canada (our wholly-owned, indirect subsidiary,
“Canco”), and all of the stockholders of Decima
Research Inc., a corporation amalgamated under the laws of
Province of Ontario, Canada (“Decima”), entered into a
Share Purchase Agreement dated August 16, 2007 pursuant to
which Canco purchased 100% of the outstanding shares of Decima.
This acquisition has expanded our presence in the global
research market, as according to ESOMAR, the Canadian
market is the seventh largest in the world. Key sectors served
by Decima included financial services, telecommunications,
public affairs and tourism/recreation/gaming.
On August 16, 2007, Harris Interactive International Inc.,
our wholly-owned subsidiary (“HII”), Harris
Interactive Asia Limited (HII’s Hong Kong wholly-owned
subsidiary, “Harris Asia”), and all the stockholders
of (i) Marketshare Limited, a company incorporated under
the laws of Hong Kong (“Marketshare”), and
(ii) Marketshare Pte Ltd, a company incorporated under the
laws of Singapore (“Marketshare Pte”), entered into an
Agreement Relating to the Sale and Purchase of the Entire Issued
Share Capitals of Marketshare Limited and Marketshare Pte Ltd
dated August 16, 2007, pursuant to which Harris Asia
purchased 100% of the issued share capital of Marketshare and
Marketshare Pte.
This acquisition has provided access into the rapidly growing
Asia/Pacific market and can serve as a platform for continued
acquisitive growth in the region. Key sectors served by
Marketshare included retail, financial services, technology and
travel/tourism.
Effective on April 1, 2007, pursuant to a Share Sale and
Purchase Agreement dated March 30, 2007 by and among the
Company, HII, and the stockholders of MediaTransfer, HII
purchased 100% of the outstanding shares of MediaTransfer.
This acquisition has expanded our access into the European
research market and enabled us to better serve our multinational
clients. MediaTransfer had expertise in consumer goods, telecom,
financial services and pharmaceutical research.
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These acquisitions were accounted for under the purchase method
in accordance with SFAS No. 141, Business
Combinations. Further financial information about business
combinations is included in Note 3, “Business
Combinations,” to our consolidated financial statements
contained in this
Form 10-K.
At June 30, 2008, we performed the initial step of our
impairment evaluation by comparing the fair market value of our
single reporting unit, as determined using a discounted cash
flow model, to its carrying value. As the carrying amount
exceeded the fair value, we performed the second step of our
impairment evaluation to calculate impairment and as a result,
recorded a pre-tax goodwill impairment charge of
$86.5 million. The primary reason for the impairment charge
was the sustained decline of our stock price during the second
half of fiscal 2008.
At March 31, 2008, we considered the decline in our stock
price from January 2008 to March 2008. At that time, we
concluded that the decline was short-term in nature and did not
trigger a review for impairment outside of our annual June 30
impairment evaluation date.
At June 30, 2007 and 2006, based upon our annual
evaluations, we determined that the fair value of our reporting
unit exceeded the carrying amount, resulting in no impairment.
Fiscal
2008
During the fourth quarter of fiscal 2008, we took certain
actions designed to align the cost structure of our U.K.
operations with the evolving operational needs of that business.
Specifically, we reduced headcount at our U.K. facilities by
18 full-time employees and incurred $0.5 in one-time
termination benefits, all of which will involve cash payments.
The reduction in staff was communicated to the affected
employees in June 2008. All actions were completed by
July 31, 2008 and we expect that the related cash payments
will be completed by September 2008.
The U.K. restructuring described above follows separate actions
we took at various times during the fourth quarter of fiscal
2008 to strategically reduce headcount at several of our
U.S. facilities by a total of 24 full-time
equivalents, as a result of which we incurred $0.5 million
in one-time termination benefits, all of which involved cash
payments. The reduction in staff was communicated to the
affected employees in April 2008. Additionally, we took steps to
reduce costs associated with our U.S. operations by
reducing leased space at our Cincinnati, Ohio facility. We
incurred $0.1 million in contract termination charges
related to the remaining operating lease obligation, all of
which involved cash payments. All actions associated with these
headcount and leased space reductions were completed in April
and May 2008, respectively, and we expect that the related cash
payments will be completed by October 2008 and April 2009,
respectively.
During the third quarter of fiscal 2008, we recorded
$1.1 million in restructuring charges directly related to
our decisions made at various times during the quarter to close
our telephone center in Orem, Utah by March 2008, strategically
reduce headcount, and reduce leased space at our Grandville,
Michigan and Norwalk, Connecticut offices. Each decision was
designed to better align our cost structure with the evolving
operational needs of the business.
In connection with the Orem closure, we reduced our headcount by
26 full-time equivalents and incurred $0.2 million in
one-time termination benefits. The reduction in staff was
communicated to the affected employees in January 2008.
Additionally, we incurred $0.1 million in contract
termination charges related to the remaining operating lease
obligation. All actions were completed by March 31, 2008
and involved cash payments, which were completed in August 2008.
An additional headcount reduction of 15 full-time
equivalents occurred in February 2008 and resulted in
$0.3 million in one-time termination benefits, all of which
involved cash payments. The
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reduction in staff was communicated to the affected employees in
February 2008. All actions associated with this headcount
reduction were completed in February 2008, and cash payments in
connection with the one-time termination benefits will be
completed by September 2008.
In connection with the leased space reductions in Grandville and
Norwalk, we incurred $0.5 million in contract termination
charges related to the remaining operating lease obligations,
all of which involved cash payments. All actions associated with
the space reductions were completed in March 2008. Cash
payments in connection with the remaining lease obligations will
be completed by April 2015.
As a result of the actions described above, we realized
approximately $1.8 million in cash savings during fiscal
2008 and expect to realize approximately $5.8 million in
cash savings during fiscal 2009.
Fiscal
2007
During the fourth quarter of fiscal 2007, we recorded
$0.3 million in restructuring charges directly related to a
facilities consolidation and headcount reduction, both designed
to ensure the alignment of our cost structure with the
operational needs of the business. We negotiated an amendment to
the lease agreement for our Reston, Virginia office, terminating
our lease with respect to a portion of our space in exchange for
a payment of $0.2 million to the landlord, subject to
conditions which have since been met. As a result of the
amendment, our lease obligation over the remaining term of the
lease was reduced by approximately $0.5 million from the
initial lease, which when offset against the payment to the
landlord for the space reduction noted above, will result in
anticipated net savings of approximately $0.3 million over
the remaining lease term.
We also reduced the staff of our U.S. operations by
6 full-time equivalents and incurred $0.1 million in
severance charges, all of which involved cash payments. The
reduction in staff was communicated to the affected employees
during the fourth quarter of fiscal 2007. All actions in the
plan were completed by June 30, 2007. Cash payments in
connection with the plan were completed in December 2007.
As a result of the actions described above, we realized cash
savings of approximately $0.8 million in fiscal 2008,
consistent with our savings expectation at the time that these
actions were taken.
Fiscal
2006
During the fourth quarter of fiscal 2006, we recorded
$0.3 million in restructuring charges directly related to
certain actions designed to align the cost structure of our U.K.
operations with the operational needs of that business.
Management developed a formal plan that included closing two
facilities in Macclesfield and Stockport and consolidating those
operations into our Hazel Grove location. This consolidation was
completed by June 30, 2006 at a cost of less than
$0.1 million, the majority of which represented future cash
payments on the remaining lease commitment for the Macclesfield
facility. Additionally, we classified the Stockport facility and
the related property, plant and equipment as assets held for
sale in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. On
December 29, 2006, we completed the sale of the Stockport
facility and the related property, plant and equipment for total
cash consideration of $1.3 million, which resulted in a
gain of $0.4 million. The gain was recorded under
“Gain on sale of assets” in our consolidated statement
of operations for the fiscal year ended June 30, 2007.
In connection with the facilities consolidation discussed above,
we also reduced the staff of the affected operations by
15 full-time equivalents and incurred $0.2 million in
severance charges, all of which will involve cash payments. The
reduction in staff was communicated to the affected employees
during the fourth quarter of fiscal 2006. All actions in the
plan were completed by June 30, 2006. Cash payments in
connection with the plan were completed in August 2007.
As a result of the actions described above, we realized cash
savings of approximately $0.4 million in fiscal 2007.
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The following table summarizes activity with respect to the
reserves for the restructuring plans and activities described
above (amounts in thousands):
Further financial information about our restructuring plans and
activities is included in Note 4, “Restructuring
Charges,” to our consolidated financial statements
contained in this
Form 10-K.
Discontinued
Operations
During the fourth quarter of fiscal 2007, we committed to a plan
to sell our Rent and Recruit business. Based upon our review and
assessment of Rent and Recruit’s net assets, the book
values of its remaining net assets approximated their estimated
fair value.
We classified Rent and Recruit as a discontinued operation,
consistent with the provisions of SFAS No. 144. At
June 30, 2007, we were in the process of identifying
potential buyers or other interested parties and discussing a
possible transaction with them. On August 23, 2007, the
sale of Rent and Recruit was completed.
The results of operations, net of taxes, and the carrying value
of the assets and liabilities of Rent and Recruit are reflected
in the accompanying consolidated financial statements as
discontinued operations, assets held for sale and liabilities
held for sale, respectively. All prior periods presented were
reclassified to conform to this presentation. These
reclassifications of the prior period consolidated financial
statements did not impact total assets, liabilities,
stockholders’ equity, net income or cash flows.
Further financial information regarding discontinued operations
is included in Note 5, “Discontinued Operations,”
to our consolidated financial statements contained in this
Form 10-K.
Critical
Accounting Policies and Estimates
The preparation of financial statements requires management to
make estimates and assumptions that affect amounts reported
therein. The most significant of these areas involving difficult
or complex judgments made by management with respect to the
preparation of our financial statements in fiscal 2008 include:
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In each situation, management is required to make estimates
about the effects of matters or future events that are
inherently uncertain.
We recognize revenue from services on a proportional performance
basis. In assessing contract performance, both input and output
criteria are reviewed. Costs incurred are used as an objective
input measure of performance. The primary input of all work
performed under these arrangements is labor. As a result of the
relationship between labor and cost, there is normally a direct
relationship between the costs incurred and the proportion of
the contract performed to date. Costs incurred as an initial
proportion of expected total costs is used as an initial
proportional performance measure. This indicative proportional
performance measure is always subsequently validated against
more subjective criteria (i.e. relevant output measures) such as
the percentage of interviews completed, percentage of reports
delivered to a client and the achievement of any project
milestones stipulated in the contract. In the event of
divergence between the objective and more subjective measures,
the more subjective measures take precedence since these are
output measures.
Clients are obligated to pay based upon services performed, and
in the event that a client cancels the contract, the client is
responsible for payment for services performed through the date
of cancellation. Losses expected to be incurred, if any, on jobs
in progress are charged to income as soon as it becomes probable
that such losses will occur. Invoices to clients in the ordinary
course are generated based upon the achievement of specific
events, as defined by each contract, including deliverables,
timetables, and incurrence of certain costs. Such events may not
be directly related to the performance of services. Revenues
earned on contracts in progress in excess of billings are
classified as unbilled receivables. Amounts billed in excess of
revenues earned are classified as deferred revenue.
Revisions to estimated costs and differences between actual
contract losses and estimated contract losses would affect both
the timing of revenue allocated and the results of our
operations.
SFAS No. 142, Goodwill and Other Intangible
Assets, requires us to test goodwill for impairment on an
annual basis and between annual tests in certain circumstances,
and to write down goodwill and
non-amortizable
intangible assets when impaired. The evaluation of other
intangible assets is performed on a periodic basis. These
assessments require us to estimate the fair market value of our
reporting unit. If we determine that the fair value of our
reporting unit is less than its carrying amount, absent other
facts to the contrary, we must recognize an impairment charge
for the associated goodwill of the reporting unit against
earnings in our consolidated financial statements. As we have
one reportable segment, we utilize the entity-wide approach for
assessing goodwill.
Goodwill is evaluated for impairment at least annually, or
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider
important that could trigger a review for impairment include the
following:
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Due to the numerous variables associated with our judgments and
assumptions relating to the valuation of the reporting unit and
the effects of changes in circumstances affecting this
valuation, both the precision and reliability of the resulting
estimates are subject to uncertainty, and as additional
information becomes known, we may change our estimates.
Goodwill is evaluated for impairment using the two-step process
as prescribed in SFAS No. 142. The first step is to
compare the fair value of the reporting unit to its carrying
amount. If the carrying amount exceeds the fair value, a second
step must be followed to calculate impairment. Otherwise, if the
fair value of the reporting unit exceeds the carrying amount,
the goodwill is not considered to be impaired as of the
measurement date. To determine fair value for our reporting
unit, we use the fair value of the cash flows that the reporting
unit can be expected to generate in the future. This valuation
method requires management to project revenues, operating
expenses, working capital investment, capital spending and cash
flows for the reporting unit over a multiyear period, as well as
determine the weighted average cost of capital to be used as a
discount rate. Significant management judgment is involved in
preparing these estimates. Changes in projections or estimates
could significantly change the estimated fair value of the
reporting unit and affect the recorded balance of goodwill. In
addition, if management uses different assumptions or estimates
in the future or if conditions exist in future periods that are
different than those anticipated, future operating results and
the balance of goodwill in the future could be affected by
impairment charges.
We account for income taxes using the asset and liability method
in accordance with SFAS No. 109, Accounting for
Income Taxes. Under SFAS No. 109, deferred tax
assets and liabilities are recognized for future tax
consequences attributable to operating loss carryforwards and
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective income tax
bases for operating profit and tax liability carryforward.
SFAS No. 109 requires the establishment of a valuation
allowance to reflect the likelihood of the realization of
deferred tax assets. Significant management judgment is required
in determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. We evaluate the weight of
the available evidence to determine whether it is more likely
than not that some portion or all of the deferred income tax
assets will not be realized. The decision to record a valuation
allowance requires varying degrees of judgment based upon the
nature of the item giving rise to the deferred tax asset. The
amount of the deferred tax asset considered realizable is based
on significant estimates, and it is at least reasonably possible
that changes in these estimates in the near term could
materially affect our financial condition and results of
operations.
On July 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, which
contains a two-step approach to recognizing and measuring
uncertain tax positions taken or expected to be taken in a tax
return by determining if the weight of available evidence
indicates that it is more likely than not that the tax position
will be sustained on audit, including resolution of any related
appeals or litigation processes. The second step is to measure
the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. Although we
believe we have adequately provided for our uncertain tax
positions, no assurance can be given with respect to the final
outcome of these matters. We adjust reserves for our uncertain
tax positions due to changing facts and circumstances, such as
the closing of a tax audit or the refinement of an estimate. To
the extent that the final outcome of these matters is different
than the amounts recorded, such differences will impact our
provision for
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income taxes in the period in which such a determination is
made. Our provisions for income taxes include the impact of
reserve provisions and changes to reserves that are considered
appropriate and also include the related interest and penalties.
On July 1, 2005, we adopted SFAS No. 123(R),
Share-Based Payment, which requires the recognition of
compensation expense for all share-based payments made to
employees based on the fair value of the share-based payment on
the date of grant. We elected to use the modified prospective
approach for adoption, which requires that compensation expense
be recorded for the unvested portion of previously issued awards
that remain outstanding at July 1, 2005 using the same
estimate of the grant date fair value and the same attribution
method used to determine the pro forma disclosure under
SFAS No. 123, Accounting for Stock-Based
Compensation.
For share-based payments granted subsequent to July 1,
2005, compensation expense based on the grant date fair value is
recognized in the Consolidated Statements of Operations over the
requisite service period. In determining the fair value of stock
options, we use the Black-Scholes option pricing model, which
employs the following assumptions:
Expected volatility and the expected life of the options
granted, both of which impact the fair value of the option
calculated under the Black-Scholes option pricing model, involve
management’s best estimates at that time. The
weighted-average assumptions used to value options during the
fiscal years ended June 30, 2006, 2007 and 2008,
respectively, are set forth in Note 13, “Stock-Based
Compensation,” to our consolidated financial statements
contained in this
Form 10-K.
The fair value of our restricted stock awards is based on the
price per share of our common stock on the date of grant. We
grant options to purchase our stock at fair value as of the date
of grant.
SFAS No. 123(R) also requires that we recognize
compensation expense for only the portion of options or
restricted shares that are expected to vest. Therefore, we apply
estimated forfeiture rates that are derived from historical
employee termination behavior and the vesting period of the
respective stock options or restricted shares. If the actual
number of forfeitures differs from those estimated by
management, additional adjustments to compensation expense may
be required in future periods.
In July 2001, we initiated HIpoints, a loyalty program designed
to reward respondents who register for our online panel,
complete online surveys and refer others to join our online
panel. The earned points are non-transferable and may be
redeemed for gifts from a specific product folio at any time
prior to expiration. We maintain a reserve for our obligations
with respect to future redemption of outstanding points based on
the expected redemption rate of the points. This expected
redemption rate is based on our actual redemption rates since
the inception of the program. An actual redemption rate that
differs from the expected redemption rate could have a material
impact on our results of operations.
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Prior to December 2007, points under the HIpoints program
expired after one year of account inactivity. In December 2007,
we modified the expiration parameters of the program such that
points now expire after nine months of account inactivity and
tightened the rules around expirations to more accurately
account for panelists that are not truly engaged in the program.
These changes resulted in an approximately $0.8 million
reduction in our reserve for obligations with respect to future
redemption of outstanding points during the three months ended
December 31, 2007, which was recorded in the “Cost of
services” line item of our consolidated statement of
operations.
From time to time, we record accruals for severance costs both
in connection with formal restructuring programs and in the
normal course, lease costs associated with excess facilities,
contract terminations and asset impairments as a result of
actions we undertake to streamline our organization, reposition
certain businesses and reduce ongoing costs. Estimates of costs
to be incurred to complete these actions, such as future lease
payments, sublease income, the fair value of assets, and
severance and related benefits, are based on assumptions at the
time the actions are initiated. To the extent actual costs
differ from those estimates, reserve levels may need to be
adjusted. In addition, these actions may be revised due to
changes in business conditions that we did not foresee at the
time such plans were approved. Additionally, we record accruals
for estimated incentive compensation costs during each year.
Amounts accrued at the end of each reporting period are based on
our estimates and may require adjustment as the ultimate amount
paid for these incentives are sometimes not finally determinable
until the completion of our fiscal year end closing process.
We recognize revenue from services on a proportional performance
basis. In assessing contract performance, both input and output
criteria are reviewed. Costs incurred are used as an objective
input measure of performance. The primary input of all work
performed under these arrangements is labor. As a result of the
relationship between labor and cost, there is normally a direct
relationship between the costs incurred and the proportion of
the contract performed to date. Costs incurred as an initial
proportion of expected total costs is used as an initial
proportional performance measure. This indicative proportional
performance measure is always subsequently validated against
more subjective criteria (i.e. relevant output measures) such as
the percentage of interviews completed, percentage of reports
delivered to a client and the achievement of any project
milestones stipulated in the contract. In the event of
divergence between the objective and more subjective measures,
the more subjective measures take precedence since these are
output measures.
Our revenue from services is derived principally from the
following:
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Our direct costs associated with generating revenues principally
consist of the following items:
We employ sales and marketing professionals to support the sales
and marketing of our traditional and Internet-based market
research services. Our sales professionals are compensated based
upon the delivery of projects and recognition of revenue on
those projects. Commissions are accrued based upon the delivery
of completed projects to our clients. Additionally, our sales
professionals are supported by a staff of marketing
professionals who design product pricing and promotional
strategies. Furthermore, labor costs for project personnel
during periods when they are not working on specific
revenue-generating projects but instead, are participating in
our selling efforts, are also included in sales and marketing
expenses.
We employ staff in the areas of finance, human resources,
information technology and executive management. Additionally,
general and administrative expenses include the labor costs for
project personnel when they are not working on specific
revenue-generating projects or are not participating in our
selling efforts.
The provision for income taxes includes current and deferred
income taxes. Furthermore, deferred tax assets are recognized
for the expected realization of available net operating loss
carryforwards. A valuation allowance is recorded when it is
necessary to reduce a deferred tax asset to an amount that we
expect to realize in the future. We continually review the
adequacy of our valuation allowance and adjust it based on
whether or not our assessment indicates that it is more likely
than not that these benefits will be realized.
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Results of
Operations
The following table sets forth the results of our continuing
operations, expressed both as a dollar amount and as a
percentage of revenue from services, for the fiscal years ended
June 30:
The results of continuing operations as presented and discussed
herein do not include the results of our discontinued Rent and
Recruit business.
Revenue from services. Revenue from
services increased by $26.9 million to $238.7 million
for fiscal 2008, an increase of 12.7% over fiscal 2007. Revenue
from services was impacted by several factors, as more fully
described below.
North American revenue increased by $17.7 million to
$177.5 million for fiscal 2008, an increase of 11.1% over
fiscal 2007. For fiscal 2008, North American revenue was
comprised of:
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European revenue increased by $6.7 million to
$58.7 million for fiscal 2008, an increase of 12.9% over
fiscal 2007. For fiscal 2008, European revenue was comprised of:
European revenue for fiscal 2008 included a favorable impact of
$2.5 million as a result of foreign exchange rate
differences and the depreciation of the U.S. Dollar against
the British Pound and the Euro.
Revenue from Internet-based services was $150.8 million or
63.1% of total revenue for fiscal 2008, compared with
$128.2 million or 60.5% of total revenue for fiscal 2007.
On a geographic basis:
Cost of services. Cost of services was
$120.2 million or 50.3% of total revenue for fiscal 2008,
compared with $104.8 million or 49.5% of total revenue for
fiscal 2007. Cost of services was principally impacted by the
mix of projects during fiscal 2008 when compared with fiscal
2007, as well as the increase in revenue from services discussed
above. Additionally, cost of services was favorably impacted by
the $0.8 million reduction in our reserve for obligations
with respect to future redemption of outstanding points under
our HIpoints program discussed above. We expect that the changes
made to the program will provide additional ongoing savings.
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Sales and marketing. Sales and
marketing expense was $24.0 million or 10.0% of total
revenue for fiscal 2008, compared with $21.2 million or
10.0% of total revenue for fiscal 2007. The increase in sales
and marketing expense was principally due to:
Sales and marketing expense includes labor costs for project
personnel during periods when they are not working on specific
revenue-generating projects but instead are participating in our
selling efforts.
General and administrative. General and
administrative expense increased to $80.3 million or 33.6%
of total revenue for fiscal 2008, compared with
$68.7 million or 32.4% of total revenue for fiscal 2007.
General and administrative expense was principally impacted by
the following:
General and administrative expense includes the labor costs for
project personnel when they are neither working on specific
revenue-generating projects nor participating in our selling
efforts.
Depreciation and
amortization. Depreciation and amortization
was $8.5 million or 3.6% of total revenue for fiscal 2008,
compared with $5.3 million or 2.5% of total revenue for
fiscal 2007. The increase in depreciation and amortization was
principally the result of $3.0 million in incremental
depreciation and amortization expense attributable to our
MediaTransfer, Decima and Marketshare acquisitions.
Gain on sale of assets. There were no
gains on the sale of assets for fiscal 2008. Gain on sale of
assets during fiscal 2007 consisted of a $0.4 million gain
realized on the December 2006 sale of our Stockport facility,
along with $0.4 million in net proceeds from the June 2007
sale of two internally developed patents.
Cost of reviewing strategic
alternatives. See above under
“Overview” for further discussion of costs incurred to
review strategic alternatives during fiscal 2008.
Restructuring charges. See above under
“Restructuring” for further discussion of
restructuring charges incurred during fiscal 2008 and 2007.
Goodwill impairment charge. See above
under “Goodwill Impairment Charge” for further
discussion of the goodwill impairment charge incurred during
fiscal 2008.
Interest and other income. Interest and
other income was $1.1 million or 0.5% of total revenue for
fiscal 2008, compared with $2.2 million or 1.1% of total
revenue for fiscal 2007. The decrease in interest and other
income was due to a decrease in the average balance of cash and
marketable securities for fiscal 2008 when compared with fiscal
2007.
Interest expense. Interest expense was
$2.0 million or 0.9% of total revenue for fiscal 2008,
compared with $0.3 million or 0.1% of total revenue for
fiscal 2007. The increase in interest expense was the result of
our outstanding debt in fiscal 2008 compared with fiscal 2007,
during which we did not have any outstanding debt for the first
nine months of the fiscal year. The debt incurred was used to
fund a portion of the consideration for our MediaTransfer
acquisition in fiscal 2007, and our Decima and Marketshare
acquisitions in fiscal 2008.
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Income taxes. We recorded an income tax
benefit for continuing operations of $0.7 million for
fiscal 2008, compared with an income tax provision of
$5.3 million for fiscal 2007. This was principally impacted
by a $2.4 million tax charge which resulted from the
goodwill impairment charge discussed above, which was largely
non deductible for tax purposes. For further explanation of our
actual tax rate for fiscal 2008 compared with our
U.S. statutory rate, see Note 15, “Income
Taxes,” to our consolidated financial statements contained
in this
Form 10-K.
In the future, our effective tax rate may be impacted by several
factors including, but not limited to, changes in our legal
entity structure, expansion of our global footprint and the
nature of future investment decisions.
Revenue from services. Total revenue
decreased by $0.4 million to $211.8 million for fiscal
2007, a decrease of 0.2% over fiscal 2006. This decrease in
total revenue was due to the factors described below.
U.S. revenue decreased by $6.4 million to
$159.8 million for fiscal 2007, a decrease of 3.8% over
fiscal 2006. This decrease in U.S. revenue was principally
driven by revenue declines in the following research groups:
Offsetting the decrease in U.S. revenue as noted above were
revenue increases in the following research groups:
European revenue increased by $6.0 million to
$52.0 million for fiscal 2007, an increase of 13.1% over
fiscal 2006. European revenue increased primarily due to:
Revenue from Internet-based services was $128.2 million or
60.5% of total revenue for fiscal 2007, compared with
$125.4 million or 59.1% of total revenue for fiscal 2006.
On a geographic basis:
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While U.S. Internet-based revenue increased as a percentage
of total U.S. revenue for fiscal 2007, it declined in
total, consistent with the decline in total U.S. revenue
noted above. The growth in European Internet-based revenue for
fiscal 2007 was the result of our focus on training our European
sales force on promoting the benefits of Internet-based data
collection to their clients, and our April 2007 acquisition of
MediaTransfer, which contributed $1.3 million in
Internet-based revenue during the fourth quarter of fiscal 2007.
Cost of services. Cost of services
increased to $104.8 million or 49.5% of total revenue for
fiscal 2007, compared with $103.4 million or 48.7% of total
revenue for fiscal 2006. Cost of services was principally
impacted by increased utilization rates for professional staff
during fiscal 2007 when compared with fiscal 2006.
Sales and marketing. Sales and
marketing expense increased to $21.2 million or 10.0% of
total revenue for fiscal 2007, compared with $20.5 million
or 9.7% of total revenue for fiscal 2006. The increase in sales
and marketing expense was principally the result of our
investments to expand our U.S. sales force and to hire and
train a dedicated European sales force during fiscal 2007.
General and administrative. General and
administrative expense increased to $68.7 million or 32.4%
of total revenue for fiscal 2007, compared with
$68.2 million or 32.1% of total revenue for fiscal 2006.
General and administrative expense was principally impacted by
several factors, including the following:
Depreciation and
amortization. Depreciation and amortization
was $5.3 million or 2.5% of total revenue for fiscal 2007,
compared with $6.0 million or 2.8% of total revenue for
fiscal 2006. The decrease in depreciation and amortization
expense was the result of fixed and intangible assets that
became fully depreciated or amortized during fiscal 2007.
Restructuring charges. See above under
“Restructuring” for further discussion of
restructuring charges incurred during fiscal 2007 and 2006.
Gain on sale of assets. Gain on sale of
assets during fiscal 2007 consisted of a $0.4 million gain
realized on the December 2006 sale of our Stockport facility,
along with $0.4 million in net proceeds from the June 2007
sale of two internally developed patents. No similar gains were
realized during fiscal 2006.
Interest and other income. Interest and
other income was $2.2 million or 1.1% of total revenue for
fiscal 2007, compared with $1.5 million or 0.7% of total
revenue for fiscal 2006. The increase in interest and other
income was primarily due to favorable rates of return compared
with those for fiscal 2006.
Interest expense. Interest expense was
$0.3 million or 0.1% of total revenue for fiscal 2007,
compared with $0.0 million for fiscal 2006. The increase in
interest expense was the result of
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$19.6 million in short-term borrowings during the fourth
quarter of fiscal 2007 to fund the acquisition of MediaTransfer
and repurchases of our common stock through the Repurchase
Program.
Income taxes. We recorded an income tax
provision for continuing operations of $5.3 million for
fiscal 2007, compared with $6.2 million for fiscal 2006.
Our effective tax rate for fiscal 2007 was 37.3%, compared with
40.3% for fiscal 2006. The decrease in our effective tax rate
was principally due to valuation allowance reversals, as more
fully described in Note 15, “Income Taxes,” to
our consolidated financial statements contained in this
Form 10-K.
We treat all of the revenue from a project as Internet-based
whenever more than 50% of the data collection for that project
was completed online. Regardless of data collection mode, most
full-service market research projects contain three specific
phases: survey design, data collection, and data reporting and
analysis. Generally, the costs of a project are spread evenly
across those three phases.
Internet-based data collection has certain fixed costs relating
to data collection, panel incentives and database development
and maintenance. When the volume of Internet-based work reaches
the point where fixed costs are absorbed, increases in
Internet-based revenue tend to increase profitability, assuming
that project professional service components and pricing are
comparable and operating expenses are properly controlled.
Projects designated as Internet-based may have traditional data
collection components, particularly in multi-country studies
where Internet databases are not fully developed. That
traditional data collection component tends to decrease the
profitability of the project. Profitability is also decreased by
direct costs of outsourcing (programming and telephone data
collection) and incentive pass-through costs.
For further information regarding Internet-based revenue, by
quarter, for the fiscal years ended June 30, 2007 and 2008,
please see the table in “Our Ability to Measure Our
Performance” below.
We closely track certain key operating metrics, specifically
bookings, ending sales backlog, average billable full time
equivalents, days of sales outstanding, utilization and bookings
to revenue ratio. Each of these key operating metrics enables us
to measure the current and forecasted performance of our
business relative to historical trends and promote a management
culture that focuses on accountability. We believe that this
ultimately leads to increased productivity and more effective
and efficient use of our human and capital resources.
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Key operating metrics for continuing operations, by quarter, for
the fiscal years ended June 30, 2007 and 2008, were as
follows (U.S. Dollar amounts in millions):
Since our business has moderate seasonality, we encourage our
investors to measure our progress over longer time frames. To
help that process, we provide trailing twelve-month key
operating metrics. Trailing twelve-month data for certain of our
key operating metrics for continuing operations at June 30,
2008, and at the last eight fiscal quarter end dates, were as
follows (U.S. Dollar amounts in millions):
Additional information regarding each of the key operating
metrics noted above is as follows:
Bookings are defined as the contract value of
revenue-generating projects that are anticipated to take place
during the next four fiscal quarters for which a firm client
commitment was received during the current period, less any
adjustments to prior period bookings due to contract value
adjustments or project cancellations during the current period.
Bookings for the three months ended June 30, 2008 were
$53.3 million, compared with $50.9 million for the
same prior year period. The increase is primarily due to
incremental bookings as a result of our Decima and Marketshare
acquisitions, combined with growth from an existing client
tracking study within our Financial Services group.
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Monitoring bookings enhances our ability to forecast long-term
revenue and to measure the effectiveness of our marketing and
sales initiatives. However, we also are mindful that bookings
often vary significantly from quarter to quarter. Information
concerning our new bookings is not comparable to, nor should it
be substituted for, an analysis of our revenue over time. There
are no third-party standards or requirements governing the
calculation of bookings. New bookings involve estimates and
judgments regarding new contracts as well as renewals,
extensions and additions to existing contracts. Subsequent
cancellations, extensions and other matters may affect the
amount of bookings previously reported.
Ending Sales Backlog is defined as prior period
ending sales backlog plus current period bookings, less revenue
recognized on outstanding projects as of the end of the period.
Ending sales backlog helps us to manage our future staffing
levels more accurately and is also an indicator of the
effectiveness of our marketing and sales initiatives. Generally,
projects included in ending sales backlog at the end of a fiscal
period convert to revenue from services during the following
twelve months, based on our experience from prior years.
Ending sales backlog of $66.8 million for the three months
ended June 30, 2008, compared with $64.9 million for
the same prior year period. The increase is primarily due to
incremental backlog as a result of our Decima and Marketshare
acquisitions.
Average Billable Full-Time Equivalents (FTE’s)
are defined as the hours of available billable capacity
in a given period divided by total standard hours for a
full-time employee and represent an average for the periods
reported. Average billable FTE’s excludes the impact of
work performed by third-party, offshore labor.
Measuring FTE’s enables us to determine proper staffing
levels, minimize unbillable time and improve utilization and
profitability.
Average billable FTE’s of 817 for the three months ended
June 30, 2008, compared with 712 average billable
FTE’s reported for the same prior year period. The 14.7%
increase in average billable FTEs when compared with the same
prior year period is primarily due to the 12.7% increase over
the same prior year period in revenue from services. The impact
of the cost reduction actions described above had minimal impact
on average billable FTE’s during the fourth fiscal quarter,
as those actions were taken during the last half of the quarter.
Days of Sales Outstanding (DSO) is calculated as
accounts receivable as of the end of the applicable period
(including unbilled receivables less deferred revenue) divided
by our daily revenue (total revenue for the period divided by
the number of calendar days in the period).
Measuring DSO allows us to minimize our investment in working
capital, measure the effectiveness of our collection efforts and
helps forecast cash flow.
DSO of 43 days for the three months ended June 30,
2008, consistent with DSO for the same prior year period.
Utilization is defined as hours billed by project
personnel in connection with specific revenue-generating
projects divided by total hours of available capacity. Hours
billed do not include marketing, selling or proposal generation
time.
Tracking utilization enables efficient management of overall
staffing levels and promotes greater accountability for the
management of resources on individual projects.
Utilization for the three months ended June 30, 2008 was
66%, essentially flat when compared with 68% for the same prior
year period.
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Liquidity and
Capital Resources
The following table sets forth net cash provided by operating
activities, net cash (used in) provided by investing activities
and net cash provided by (used in) financing activities, for the
fiscal years ended June 30:
Net cash provided by operating
activities. Net cash provided by operating
activities increased to $18.0 million for fiscal 2008,
compared with $16.6 million for fiscal 2007. The increase
in net cash provided by operating activities is primarily the
result of the cash contributed from the operations of
MediaTransfer, Decima and Marketshare.
Net cash provided by operating activities decreased to
$16.6 million for fiscal 2007, compared with
$27.9 million for fiscal 2006. The decrease in net cash
provided by operating activities was principally attributable to
timing differences compared with the prior fiscal year in
payment of outstanding accounts payable, accrued expenses and
other liabilities, which were offset by an improvement in the
timeliness of collecting amounts due on outstanding invoices, as
noted by a $1.1 million decrease in accounts receivable and
a $0.6 million increase in cash collected on amounts billed
in excess of costs (deferred revenue).
Net cash (used in) provided by investing
activities. Net cash used in investing
activities was $20.8 million for fiscal 2008, compared with
$28.8 million in net cash provided by investing activities
for fiscal 2007. This change is principally the result of
$21.0 million in net cash paid in connection with our
Decima and Marketshare acquisitions, offset by $4.4 million
in net cash generated from maturities and sales of marketable
securities during fiscal 2008.
Net cash provided by investing activities was $28.8 million
for fiscal 2007, compared with $24.3 million used in
investing activities for fiscal 2006. The change from fiscal
2006 was principally due to our liquidation of marketable
securities to fund repurchases of our common stock under our
Repurchase Program, described in further detail below, offset by
our ongoing investing activities, including our acquisition of
MediaTransfer in April 2007 for $9.8 million (net of cash
acquired).
Net cash (used in) financing
activities. Net cash provided by financing
activities was $6.4 million for fiscal 2008, compared with
$28.3 million used in financing activities for fiscal 2007.
This change is the result of $14.5 million in net proceeds
from borrowings, which were used to fund a portion of the
consideration for our acquisitions of Decima and Marketshare,
offset by $8.6 million in payments on outstanding
borrowings. Comparatively, $50.5 million was used during
fiscal 2007 to fund repurchases of our common stock under our
Share Repurchase Program discussed below.
Net cash used in financing activities was $28.3 million for
fiscal 2007, compared with $5.4 million for fiscal 2006.
The increase in net cash used in financing activities was
principally due to our use of $50.5 million in cash to
repurchase shares of our common stock under our Repurchase
Program during fiscal 2007, offset by $19.6 million in cash
proceeds from short-term borrowings used to fund our acquisition
of MediaTransfer and share repurchases under our Repurchase
Program during the fourth quarter of fiscal 2007.
At June 30, 2008, we had cash and cash equivalents of
$32.9 million, essentially flat when compared with
$33.3 million in cash, cash equivalents and marketable
securities at June 30, 2007, as a result of the reasons
described above. Based on current plans and business conditions,
we believe that our existing cash, cash equivalents and cash
flows from operations will be sufficient to satisfy the
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cash requirements that we anticipate will be necessary to
support our planned operations for the foreseeable future.
However, we cannot be certain that our underlying assumed levels
of revenue and expenses will be accurate. In addition, if we
acquire additional businesses, we likely will be required to
seek additional funding through public or private financing or
other arrangements. Based upon our current relationships with
financial institutions and financial condition, we believe that
adequate funds will be available to support our acquisition
activities on reasonable terms, but if such funds are not
available when needed or on favorable terms, it could have a
material adverse effect on our business and results of
operations.
Our capital requirements depend on numerous factors, including
but not limited to, market acceptance of our services, the
resources we allocate to the continuing development of new
products and services, our Internet infrastructure and Internet
panel, the marketing and selling of our services and our
acquisition activities. For the fiscal year ending June 30,
2009, our capital expenditures are expected to range between
$4.5 and $5.0 million. We believe that cash generated from
our operations and the cash we held at June 30, 2008 will
be sufficient to provide adequate funding for any foreseeable
capital requirements that may arise.
In order to continue to generate revenue, we must continually
develop new business, both for growth and to replace completed
projects. Although work for no one client constitutes more than
10% of our revenue, we have had to find significant amounts of
replacement and additional revenue as client relationships and
work for continuing clients change and will likely have to
continue to do so in the future. Our ability to generate revenue
is dependent not only on execution of our business plan, but
also on general market factors outside of our control. Many of
our clients treat all or a portion of their market research
expenditures as discretionary. As a result, as economic
conditions decline in any of our markets, our ability to
generate revenue is adversely impacted.
Pursuant to the Repurchase Program authorized by our Board on
May 3, 2006, as amended on January 31 and May 2, 2007,
we repurchased 10.3 million shares of our common stock at
an average price per share of $5.52 for an aggregate purchase
price of $57.0 million. All repurchased shares were
subsequently retired. The Repurchase Program expired on
December 31, 2007. We did not repurchase any shares of our
common stock under the Repurchase Program during the fiscal year
ended June 30, 2008.
On September 21, 2007, we entered into a Credit Agreement
(the “Credit Agreement”) with JPMorgan Chase Bank,
N.A. (“JPMorgan”), as Administrative Agent, and the
Lenders party thereto. Pursuant to the Credit Agreement, the
Lenders made available $100.0 million in credit facilities
(the “Credit Facilities”) in the form of a revolving
line of credit (“Revolving Line”), a term loan
(“Term Loan”), and a multiple advance term loan
commitment (“Multiple Advance Commitment”).
The Revolving Line enables us to borrow, repay, and re-borrow up
to $25.0 million principal outstanding at any one time,
with a $10.0 million sub-limit for issuance of letters of
credit. The full amount of the Term Loan (“Term Loan
A”) was made in a single advance of $12.0 million at
the time of closing of the Credit Facilities. The Multiple
Advance Commitment enables us to borrow up to an aggregate of
$63.0 million in one or more advances, and
$19.8 million (“Term Loan B”) and
$2.8 million (“Term Loan C”) were advanced at
closing. Existing letters of credit in the face amount of
$0.2 million also were treated as if issued under the
Revolving Line. In addition, the Credit Agreement permits us to
request increases in the Revolving Line up to an additional
$25.0 million of availability, subject to discretionary
commitments by the then Lenders and, if needed, additional
lenders. The Credit Facilities replaced existing credit
arrangements with JPMorgan.
Outstanding amounts under the Credit Facilities accrue interest,
as elected by us, at either (a) the greater of the
Administrative Agent’s Prime Rate or the Federal Funds Rate
plus 0.5%, or (b) the
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Adjusted LIBOR interest rate plus a spread of between 0.625% and
1.00% depending upon our leverage ratio as measured quarterly.
In addition, the Lenders receive a commitment fee ranging from
0.10% to 0.175%, depending upon our leverage ratio, quarterly in
arrears based on average unused portions of the full committed
amount of the Credit Facilities. Accrued interest is payable
quarterly in arrears, or at the end of each applicable LIBOR
interest rate period, but at least every three months, with
respect to borrowings for which the Adjusted LIBOR interest rate
applies.
All outstanding amounts under the Credit Facilities are due and
payable in full on September 21, 2012 (the “Maturity
Date”). On the last day of each quarter, principal payments
of $0.6 million each are due and payable with respect to
the Term Loan, and principal payments equal to 5% of each
borrowing made under the Multiple Advance Commitment also are
due and payable. Borrowings are freely prepayable, subject to
break funding payments for prepayments during Adjusted LIBOR
interest periods. The required principal repayments of Term
Loans A, B and C for each of the five succeeding fiscal years
are set forth in Note 11, “Borrowings,” to our
consolidated financial statements contained in this
Form 10-K.
We have elected the LIBOR interest rate on amounts outstanding
under Term Loans A, B and C. At June 30, 2008, the
applicable LIBOR interest rate was 2.80%. Effective
September 21, 2007, we entered into an interest rate swap
agreement with JPMorgan, which effectively fixed the floating
LIBOR interest rates on the amounts outstanding under Term Loans
A, B and C at 5.08% through September 21, 2012. The
additional spread applicable to the interest rates based on the
our leverage ratio at June 30, 2008 was 0.875%, resulting
in an aggregate interest rate based on that leverage ratio of
5.955%. We anticipate that the interest rate swap will be
settled upon maturity and it is being accounted for as a cash
flow hedge. The interest rate swap is recorded at fair value
each reporting period with the changes in the fair value of the
hedge that take place through the date of maturity recorded in
accumulated other comprehensive income. At June 30, 2008,
we recorded a liability of $0.9 million in the “Other
liabilities” line item of our consolidated balance sheet.
There was no ineffectiveness associated with the interest rate
swap for the fiscal year ended June 30, 2008.
The Credit Agreement contains customary representations, default
provisions, and affirmative and negative covenants, including
among others prohibitions of dividends, sales of certain assets
and mergers, and restrictions related to acquisitions,
indebtedness, liens, investments, share repurchases and capital
expenditures. The Credit Agreement requires us to maintain a
consolidated interest coverage ratio of at least 3.0 to 1.0, and
a consolidated leverage ratio of 2.5 to 1.0 or less. At
June 30, 2008, we were in compliance with all covenants
under the Credit Agreement.
We may freely transfer assets and incur obligations among our
domestic subsidiaries that are guarantors of our obligations
related to the Credit Facilities, and our first tier foreign
subsidiaries with respect to which we have delivered pledges of
66% of the outstanding stock and membership interests, as
applicable, in favor of the Lenders. Our domestic subsidiaries,
Louis Harris & Associates, Inc., Wirthlin Worldwide,
LLC, Harris Interactive International Inc., Harris International
Asia, LLC, and The Wirthlin Group International, L.L.C., have
guaranteed our obligations under the Credit Facilities.
At June 30, 2008 and 2007, we did not have any
transactions, agreements or other contractual arrangements
constituting an “off-balance sheet arrangement” as
defined in Item 303(a)(4) of
Regulation S-K.
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Our consolidated contractual obligations and other commercial
commitments at June 30, 2008 are as follows (amounts in
thousands):
See “Recently Adopted Accounting Pronouncements and
Accounting Pronouncements Not Yet Adopted” in Note 2,
“Summary of Significant Accounting Policies,” to our
consolidated financial statements contained in this
Form 10-K
for a discussion of the impact of recently issued accounting
pronouncements on our consolidated financial statements at
June 30, 2008, for the fiscal year then ended, as well as
the expected impact on our consolidated financial statements for
future periods.
We have two kinds of market risk exposures, interest rate
exposure and foreign currency exposure. We have no market risk
sensitive instruments entered into for trading purposes.
As we continue to increase our debt and expand globally, the
risk of interest rate and foreign currency exchange rate
fluctuation may increase. We will continue to assess the need
to, and will as appropriate, utilize interest rate swaps and
financial instruments to hedge interest rate and foreign
currency exposures on an ongoing basis to mitigate such risks.
At June 30, 2008, we had outstanding debt under our Credit
Facilities of $29.4 million. The debt matures
September 21, 2012 and bears interest at the floating
adjusted LIBOR plus an applicable margin. On September 21,
2007, we entered into an interest rate swap agreement, which
fixed the floating adjusted LIBOR portion of the interest rate
at 5.08% through September 21, 2012. The additional
applicable margin is adjusted quarterly based upon our leverage
ratio.
Using a sensitivity analysis based on a hypothetical 1% increase
in prevailing interest rates over a
12-month
period, each 1% increase from prevailing interest rates at
June 30, 2008 would have increased the fair value of the
interest rate swap by $0.5 million and each 1% decrease
from prevailing
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interest rates at June 30, 2008 would have decreased the
fair value of the interest rate swap by $0.6 million.
As a result of operating in foreign markets, our financial
results could be affected by factors such as changes in foreign
currency exchange rates. We have international sales and
operations in Europe, North America, and Asia. Therefore, we are
subject to foreign currency rate exposure.
Non-U.S. transactions
are denominated in the functional currencies of the respective
countries in which our foreign subsidiaries reside. Our
consolidated assets and liabilities are translated into
U.S. Dollars at the exchange rates in effect as of the
balance sheet date. Consolidated income and expense items are
translated into U.S. Dollars at the average exchange rates
for each period presented. Accumulated net translation
adjustments are recorded in the accumulated other comprehensive
income component of stockholders’ equity. We measure our
risk related to foreign currency rate exposure on two levels,
the first being the impact of operating results on the
consolidation of foreign subsidiaries that are denominated in
the functional currency of their home country, and the second
being the extent to which we have instruments denominated in a
foreign currency.
Foreign exchange transaction gains and losses are included in
our results of operations as a result of consolidating the
results of our international operations, which are denominated
in each country’s functional currency, with our
U.S. results. The impact of transaction gains or losses on
net income from consolidating foreign subsidiaries was not
material for the periods presented. We have historically had low
exposure to changes in foreign currency exchange rates upon
consolidating the results of our foreign subsidiaries with our
U.S. results, due to the size and profitability of our
foreign operations in comparison to our consolidated operations.
However, if the size and operating profits of our international
operations increase and we continue to expand globally, our
exposure to the appreciation or depreciation in the
U.S. Dollar could have a more significant impact on our net
income and cash flows. Thus, we evaluate our exposure to foreign
currency fluctuation risk on an ongoing basis.
Since our foreign operations are conducted using a foreign
currency, we bear additional risk of fluctuations in exchange
rates because of instruments denominated in a foreign currency.
We have historically had low exposure to changes in foreign
currency exchange rates with regard to instruments denominated
in a foreign currency, given the amount and short-term nature of
the maturity of these instruments. The carrying values of
financial instruments denominated in a foreign currency,
including cash, cash equivalents, accounts receivable and
accounts payable, approximate fair value because of the
short-term nature of the maturity of these instruments.
We performed a sensitivity analysis at June 30, 2008.
Holding all other variables constant, we have determined that
the impact of a near-term 10% appreciation or depreciation of
the U.S. Dollar would have an insignificant effect on our
financial condition, results of operations and cash flows.
All other schedules for which provision is made in the
applicable accounting regulations of the SEC are not required
under the related instructions or are inapplicable and have
therefore been omitted.
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To the Board of Directors and Stockholders of Harris
Interactive Inc.
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Harris Interactive Inc. and its
subsidiaries at June 30, 2008 and 2007, and the results of
their operations and their cash flows for each of the three
years in the period ended June 30, 2008 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index present fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of June 30, 2008, based on criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Management’s Report on
Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Company’s internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial
statements, the Company changed its method of accounting for
uncertain tax positions in 2008 and its method of accounting for
share-based payments in 2006.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control
over Financial Reporting appearing under Item 9A,
management has excluded Decima Research Inc. from its assessment
of internal control over financial reporting as of June 30,
2008 because it was acquired by the Company in a purchase
business combination during fiscal 2008. We have also excluded
Decima Research Inc. from our audit of internal control over
financial reporting. Decima Research Inc. is a wholly-owned
subsidiary whose total assets and total revenues represent 2%
and 10%, respectively, of the related consolidated financial
statement amounts as of and for the year ended June 30,
2008.
PricewaterhouseCoopers LLP
Rochester, New York
September 15, 2008
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HARRIS
INTERACTIVE INC.
CONSOLIDATED
BALANCE SHEETS
(in thousands,
except share and per share amounts)
The accompanying notes are an integral part of these
consolidated financial statements.
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HARRIS
INTERACTIVE INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands,
except share and per share amounts)
The accompanying notes are an integral part of these
consolidated financial statements.
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HARRIS
INTERACTIVE INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
The accompanying notes are an integral part of these
consolidated financial statements.
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HARRIS
INTERACTIVE INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In
thousands)
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HARRIS
INTERACTIVE INC.
Years Ended June 30, 2008, 2007 and 2006
(In thousands, except share and per share amounts)
Harris Interactive Inc. (the “Company”) is a leading
global market research, polling and consulting firm, using
Internet-based and traditional methodologies to provide clients
with information about the views, behaviors and attitudes of
people worldwide. Known for The Harris Poll, the Company
is one of the world’s largest full service market research
and consulting firms, and one of the world leaders in conducting
Internet-based survey research.
The accompanying consolidated financial statements include the
assets, liabilities and results of operations of the Company and
its wholly-owned subsidiaries. There are no unconsolidated
entities or off-balance sheet arrangements. All intercompany
accounts and transactions have been eliminated.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities, if any, at the
date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
It is the Company’s policy to reclassify amounts in prior
years’ consolidated financial statements to conform to the
current year’s presentation. For the fiscal years ended
June 30, 2007 and 2006, cost of services did not include
amortization of internally developed software, as such amounts
were included in depreciation and amortization. Such amounts are
included in cost of services in the accompanying consolidated
statements of operations for the fiscal year ended June 30,
2008, and previously reported amounts for the fiscal years ended
June 30, 2007 and 2006 have been reclassified in the
accompanying consolidated statements of operations to conform to
the current presentation with the following effect:
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HARRIS
INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Years Ended June 30, 2008, 2007 and 2006
Cash and cash equivalents include all highly liquid instruments
with a remaining maturity of three months or less at date of
purchase.
The Company accounts for its investments in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 115, Accounting for Certain Investments in Debt and
Equity Securities. All investments have been classified as
available-for-sale securities at June 30, 2008 and 2007.
Available-for-sale securities are stated at fair value, with the
unrealized gains and losses reported in accumulated other
comprehensive income (loss). Realized gains and losses, as well
as interest and dividends on available-for-sale securities, are
included in interest and other income. The cost of securities
sold is based on the specific identification method.
Accounts receivable are recorded at the invoiced amount and do
not bear interest. The collectibility of outstanding client
invoices is continually assessed. The Company maintains an
allowance for estimated losses resulting from the inability of
clients to make required payments. In estimating the allowance,
the Company considers factors such as historical collections, a
client’s current creditworthiness, age of the receivable
balance both individually and in the aggregate and general
economic conditions that may affect a client’s ability to
pay.
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of accounts
receivable and unbilled receivables. An allowance for doubtful
accounts is provided for in the consolidated financial
statements and is monitored by management to ensure that it is
consistent with management’s expectations. Credit risk is
limited with respect to accounts receivable by the
Company’s large client base. For fiscal years 2008, 2007
and 2006, no single client accounted for more than 10% of the
Company’s consolidated revenue.
Property, plant and equipment, including improvements that
significantly add to productive capacity or extend useful life,
are recorded at cost. Maintenance and repairs are expensed as
incurred. Upon sale or other disposition, the applicable amounts
of asset cost and accumulated depreciation are removed from the
accounts and the net amount, less proceeds from disposal, is
charged or credited to income.
Depreciation is calculated using the straight-line or
accelerated methods over the estimated useful lives of the
assets. Estimated useful lives are as follows:
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HARRIS
INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Years Ended June 30, 2008, 2007 and 2006
In accordance with SFAS No. 13, Accounting for
Leases, leasehold improvements are amortized using the
straight-line method over the lesser of estimated useful life of
the assets or term of the underlying lease arrangements.
Acquisitions are accounted for under the purchase method of
accounting pursuant to SFAS No. 141, Business
Combinations. Accordingly, the purchase price is allocated
to the tangible assets and liabilities and intangible assets
acquired, based on their estimated fair values. The excess
purchase price over the fair value is recorded as goodwill.
Identifiable intangible assets are valued separately and are
amortized over their expected useful life.
SFAS No. 142, Goodwill and Other Intangible Assets
requires the Company to test goodwill for impairment on an
annual basis and between annual tests in certain circumstances,
and to write down goodwill and
non-amortizable
intangible assets when impaired. These assessments require the
Company to estimate the fair market value of its reporting unit.
If the Company determines that the fair value of its reporting
unit is less than its carrying amount, absent other facts to the
contrary, an impairment charge must be recognized for the
associated goodwill of the reporting unit against earnings in
its consolidated financial statements. As the Company has one
reportable segment, it utilizes the entity-wide approach for
assessing goodwill.
Goodwill is evaluated for impairment at least annually, or
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors the Company
considers important that could trigger a review for impairment
include the following:
Goodwill is evaluated for impairment using the two-step process
as prescribed in SFAS No. 142. The first step is to
compare the fair value of the reporting unit to the carrying
amount of the reporting unit. If the carrying amount exceeds the
fair value, a second step must be followed to calculate
impairment. Otherwise, if the fair value of the reporting unit
exceeds the carrying amount, the goodwill is not considered to
be impaired as of the measurement date. To determine fair value
for its reporting unit, the Company uses the fair value of the
cash flows that the reporting unit can be expected to generate
in the future. This valuation method requires management to
project revenues, operating expenses, working capital
investment, capital spending and cash flows for the reporting
unit over a multiyear period, as well as determine the weighted
average cost of capital to be used as a discount rate.
At June 30, 2008, the Company performed the initial step of
its impairment evaluation by comparing the fair market value of
its reporting unit, as determined using a discounted cash flow
model, to its carrying value. As the carrying amount exceeded
the fair value, the Company performed the second step of its
impairment evaluation to calculate impairment and as a result,
recorded a pre-
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HARRIS
INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Years Ended June 30, 2008, 2007 and 2006
tax goodwill impairment charge of $86,497. The primary reason
for the impairment charge was the sustained decline of the
Company’s stock price during the second half of fiscal 2008.
At March 31, 2008, the Company considered the decline in
its stock price from January 2008 to March 2008. At that time,
the Company concluded that the decline was short-term in nature
and did not trigger a review for impairment outside of its
annual June 30 impairment evaluation date.
Based upon its annual evaluations, the Company determined that
the fair value of its reporting unit exceeded the carrying
amount at June 30, 2007 and 2006, resulting in no
impairment.
The Company’s intangible assets are stated at cost less
accumulated amortization and are amortized over estimated useful
lives that range as follows:
The Company has no indefinite-lived intangible assets.
The Company follows the provisions of Statement of Position
(“SOP”)
98-1,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use, issued by the American Institute
of Certified Public Accountants, which addresses the accounting
for the costs of computer software developed or obtained for
internal use and identifies the characteristics of internal use
software. Costs that satisfy the capitalization criteria
prescribed in
SOP 98-1
are included in other assets in the consolidated balance sheet
and amounted to $2,612 and $2,598 at June 30, 2008 and
2007, respectively. Amortization expense related to these costs
amounted to $1,515, $1,488 and $1,251 for the fiscal years ended
June 30, 2008, 2007 and 2006, respectively.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
evaluates the recoverability of the carrying value of its
long-lived assets, excluding goodwill, based on estimated
undiscounted cash flows to be generated from each of such assets
compared to the original estimates used in measuring the assets.
To the extent impairment is identified, the Company reduces the
carrying value of such impaired assets to fair value based on
estimated discounted future cash flows.
In accordance with SFAS No. 107, Disclosures about
Fair Value of Financial Instruments, the Company calculates
the fair value of its financial instruments using quoted market
prices wherever possible. The Company’s financial
instruments include cash and cash equivalents, marketable
securities, accounts receivable, accounts payable, accrued
expenses and interest rate swaps. The carrying
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HARRIS
INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Years Ended June 30, 2008, 2007 and 2006
amounts of cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate their fair value.
The Company had $29,431 of outstanding debt at June 30,
2008, which is considered a financial instrument. The carrying
amount of this debt approximates its fair value as the rate of
interest on the term loans that are outstanding under the Credit
Facilities reflect current market rates of interest for similar
instruments with comparable maturities. The Company has an
interest rate swap agreement to hedge its exposure on the
floating base interest rate on the term loan. The interest rate
swap had a negative fair value of $855 at June 30, 2008,
which was recorded in the “Other liabilities” line
item of the Company’s consolidated balance sheet.
The Company has entered into employment agreements with certain
of its executives which obligate the Company to make payments
for varying periods of time and under terms and circumstances
set forth in the agreements. In part, the payments are in
consideration for obligations of the executives not to compete
with the Company after termination of their employment, and in
part, the payments relate to other relationships between the
parties. The Company accounts for its obligations under these
agreements in accordance with SFAS No. 112,
Employers’ Accounting for Postemployment Benefits, an
Amendment of FASB Statements No. 5 and 43.
The Company recognizes revenue from services on a proportional
performance basis. In assessing contract performance, both input
and output criteria are reviewed. Costs incurred are used as an
objective input measure of performance. The primary input of all
work performed under these arrangements is labor. As a result of
the relationship between labor and cost, there is normally a
direct relationship between the costs incurred and the
proportion of the contract performed to date. Costs incurred as
an initial proportion of expected total costs is used as an
initial proportional performance measure. This indicative
proportional performance measure is always subsequently
validated against more subjective criteria (i.e. relevant output
measures) such as the percentage of interviews completed,
percentage of reports delivered to a client and the achievement
of any project milestones stipulated in the contract. In the
event of divergence between the objective and more subjective
measures, the more subjective measures take precedence since
these are output measures.
Clients are obligated to pay based upon services performed, and
in the event that a client cancels the contract, the client is
responsible for payment for services performed through the date
of cancellation. Losses expected to be incurred, if any, on jobs
in progress are charged to income as soon as it becomes probable
that such losses will occur. Invoices to clients in the ordinary
course are generated based upon the achievement of specific
events, as defined by each contract, including deliverables,
timetables, and incurrence of certain costs. Such events may not
be directly related to the performance of services. Revenues
earned on contracts in progress in excess of billings are
classified as unbilled receivables. Amounts billed in excess of
revenues earned are classified as deferred revenue.
In accordance with Emerging Issues Task Force (“EITF”)
Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent, revenue includes amounts billed to clients for
Table of Contents
HARRIS
INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Years Ended June 30, 2008, 2007 and 2006
subcontractor costs incurred in the completion of surveys.
Furthermore, reimbursements of out-of-pocket expenses related to
service contracts are also included in revenue in accordance
with EITF Issue
No. 01-14,
Income Statement Characterization of Reimbursements Received
for “Out-of-Pocket” Expenses Incurred.
In consideration of EITF Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, which
addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple
revenue-generating activities to determine if separate units of
accounting exist in such projects, the Company reviewed the
provisions of Issue
No. 00-21
and determined that those provisions are consistent with the
Company’s existing policies. Therefore, the application of
Issue
No. 00-21
had no effect on the Company’s consolidated statements of
operations for the fiscal years ended June 30, 2008, 2007
or 2006.
The Company’s direct costs of providing services
principally consist of project personnel, which relate to the
labor costs directly associated with a project, panelist
incentives, which represent cash and non-cash incentives awarded
to individuals who complete surveys, data processing, which
represents both the internal and outsourced processing of survey
data, and other direct costs related to survey production,
including the amortization of software developed for internal
use.
In July 2001, the Company initiated HIpoints, a loyalty program
designed to reward respondents who register for its panel,
complete online surveys and refer others to join its online
panel. The earned points are non-transferable and may be
redeemed for gifts from a specific product portfolio at any time
prior to expiration. The Company maintains a reserve for
obligations with respect to future redemption of outstanding
points based on the expected redemption rate of the points. This
expected redemption rate is based on the Company’s actual
redemption rates since the inception of the program.
Prior to December 2007, points under the HIpoints program
expired after one year of account inactivity. In December 2007,
the Company modified the expiration parameters of the program
such that points now expire after nine months of account
inactivity and tightened the rules around expirations to more
accurately account for panelists that are not truly engaged in
the program. These changes resulted in an approximately $800
reduction in the Company’s reserve for obligations with
respect to future redemption of outstanding points during the
three months ended December 31, 2007, which was recorded in
the “Cost of services” line item of the Company’s
consolidated statement of operations.
In addition, the Company’s panelists receive cash
incentives for participating in surveys from the Company, which
are earned by the panelist when the Company receives a timely
survey response. The Company accrues these incentives as they
are earned.
Advertising costs are expensed as incurred and are included in
sales and marketing expense in the accompanying consolidated
statements of operations. Such expenses amounted to $2,179,
$1,496 and $1,476 for the fiscal years ended June 30, 2008,
2007 and 2006, respectively.
Table of Contents
HARRIS
INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Years Ended June 30, 2008, 2007 and 2006
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 123 (revised 2004)
(“SFAS No. 123(R)”), Share-Based Payment.
SFAS No. 123(R) replaced SFAS No. 123,
Accounting for Stock-Based Compensation and superseded
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. The Company adopted
SFAS No. 123(R) on July 1, 2005 using the
modified prospective approach. Under the modified prospective
approach, stock-based compensation expense has been and will be
recorded for the unvested portion of previously issued awards
that remain outstanding at July 1, 2005 using the same
estimate of the grant date fair value and the same attribution
method used to determine the pro forma disclosure under
SFAS No. 123. SFAS No. 123(R) also requires
that all share-based payments to employees after July 1,
2005, including employee stock options and shares issued to
employees under the Company’s Employee Stock Purchase Plans
be recognized in the financial statements as stock-based
compensation expense based on their fair value on the date of
grant using an option-pricing model, such as the Black-Scholes
model. Accordingly, prior period amounts were not revised.
SFAS No. 123(R) requires that the Company estimate
forfeitures when recognizing stock-b | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||