NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended June 30, 2013, 2012 and 2011
(In thousands, except share and per
share amounts)
1. Description of Business
Harris Interactive Inc. (the Company) is a leading global market research firm that uses online, telephone and other
research methodologies to provide clients with information about the views, behaviors and attitudes of people worldwide.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the assets, liabilities and results of operations of the Company and its wholly-owned subsidiaries. There are no unconsolidated entities or off-balance
sheet arrangements. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, if any, at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid instruments with a remaining maturity of three months or less at date of purchase.
Marketable Securities
The Company accounts for its investments in accordance with the
Financial Accounting Standards Board (FASB) guidance for debt and equity securities. Investments for all periods presented have been classified as available-for-sale securities. Available-for-sale securities are stated at fair value,
with the unrealized gains and losses reported in accumulated other comprehensive income. Realized gains and losses, as well as interest and dividends on available-for-sale securities, are included in interest and other income. The cost of securities
sold is based on the specific identification method.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The collectibility of outstanding client invoices is continually
assessed. The Company maintains an allowance for estimated losses resulting from the inability of clients to make required payments. In estimating the allowance, the Company considers factors such as historical collections, a clients current
creditworthiness, age of the receivable balance both individually and in the aggregate, and general economic conditions that may affect a clients ability to pay.
Concentration of Credit Risk
Financial instruments which potentially expose the Company
to concentrations of credit risk consist principally of accounts receivable and unbilled receivables. An allowance for doubtful accounts is provided for in the accompanying consolidated financial statements and is monitored by
45
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
2. Summary of Significant Accounting Policies (Continued)
management to ensure that it is consistent with managements expectations. Credit risk is limited with respect to accounts receivable by the Companys large client base. For fiscal
2013, 2012 and 2011, no single client accounted for more than 10% of the Companys consolidated revenue.
Property, Plant and
Equipment
Property, plant and equipment, including improvements that significantly add to productive capacity or extend useful
life, are recorded at cost. Maintenance and repairs are expensed as incurred. Upon sale or other disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount, less proceeds from
disposal, is charged or credited to income.
Depreciation is calculated using the straight-line method over the estimated useful lives of
the assets. Estimated useful lives are as follows:
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Computer equipment
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3 years
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Non-computer equipment
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5 years
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Furniture and fixtures
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7 years
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In accordance with the FASB guidance for leases, leasehold improvements are amortized using the straight-line method
over the lesser of the estimated useful life of the assets or the term of the underlying lease arrangements.
Business
Combinations
Acquisitions are accounted for under the purchase method of accounting pursuant to the FASB guidance for business
combinations. Accordingly, the purchase price is allocated to the tangible assets and liabilities and intangible assets acquired, based on their estimated fair values. The excess purchase price over the fair value is recorded as goodwill and
identifiable intangible assets are valued separately and amortized over their expected useful life.
Goodwill
The FASB guidance on goodwill requires the Company to test its goodwill for impairment on an annual basis and between annual tests in certain
circumstances, and to write down goodwill and non-amortizable intangible assets when impaired. These assessments require the Company to estimate the fair market value of its single reporting unit. If the Company determines that the fair value of its
reporting unit is less than its carrying amount, absent other facts to the contrary, an impairment charge must be recognized for the associated goodwill of the reporting unit against earnings in its consolidated financial statements. As the Company
has one reportable segment, it utilizes the entity-wide approach for assessing goodwill.
Since 2002, the Company has evaluated goodwill
for impairment using the two-step process as prescribed in the FASB guidance. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit. If the carrying amount exceeds the fair value, a second
step must be followed to calculate impairment. Otherwise, if the fair value of the reporting unit exceeds the carrying amount, the goodwill is not considered to be impaired as of the measurement date. To determine fair value for its reporting unit,
the Company uses the fair value of the cash flows that its reporting unit can be expected to generate in the future. This valuation method requires management
46
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
2. Summary of Significant Accounting Policies (Continued)
to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine the weighted average cost
of capital to be used as a discount rate.
In September 2011, the FASB issued updated guidance that now allows an entity to first assess
qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value as the basis for determining whether it is then necessary to apply the two-step goodwill impairment test as
prescribed by current guidelines. The Company adopted the updated guidance on January 1, 2012.
Other Intangible Assets
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to the estimated
residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger a review for impairment include the
following:
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Significant under-performance relative to historical or projected future operating results;
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Significant changes in the manner of the Companys use of acquired assets or the strategy for its overall business;
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Significant negative industry or economic trends;
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Significant decline in the Companys stock price for a sustained period; and
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Significant decline in the Companys market capitalization relative to net book value.
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The Companys intangible assets are stated at cost less accumulated amortization and are amortized over estimated useful lives that range as
follows:
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Contract-based intangibles
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2 to 4 years
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Internet respondent database
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2 to 9 years
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Customer relationships
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3 to 10 years
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Trade names
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0.5 to 20 years
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The Company has no indefinite-lived intangible assets.
Computer Software Developed or Obtained for Internal Use
The Company follows the provisions of the FASB guidance for internally developed software, which addresses the accounting for the costs of computer software developed or obtained for internal use and identifies the
characteristics of internal use software. Costs that satisfy the capitalization criteria prescribed in the FASB guidance are included in other assets in the Companys consolidated balance sheet and amounted to $602 and $986 at June 30,
2013 and 2012, respectively. Amortization expense related to these costs amounted to $576, $948 and $1,411 for the fiscal years ended June 30, 2013, 2012 and 2011, respectively.
Long-Lived Assets
In
accordance with the FASB guidance for property, plant, and equipment, the Company evaluates the recoverability of the carrying value of its long-lived assets, excluding goodwill, based on
47
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
2. Summary of Significant Accounting Policies (Continued)
undiscounted cash flows to be generated from each asset group compared to the original estimates used in measuring the assets.
Events that trigger a test for recoverability include material adverse changes in the projected revenues and expenses, significant underperformance
relative to historical or projected future operating results, and significant negative industry or economic trends. A test for recoverability also is performed when the Company has committed to a plan to sell or otherwise dispose of an asset group
and the plan is expected to be completed within a year. Recoverability of an asset group is evaluated by comparing its carrying value to the future net undiscounted cash flows expected to be generated by the asset group. If the comparison indicates
that the carrying value of an asset group is not recoverable, an impairment loss is recognized. The impairment loss is measured by the amount by which the carrying amount of the asset group exceeds the estimated fair value. When an impairment loss
is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over its remaining useful life. Restoration of a previously-recognized long-lived asset impairment loss is not allowed.
The Company estimates the fair value of an asset group based on market prices (i.e., the amount for which the asset could be bought by or sold to a
third party), when available. When market prices are not available, the Company estimates the fair value of the asset group using the income approach and/or the market approach. The income approach uses cash flow projections. Inherent in the
Companys development of cash flow projections are assumptions and estimates derived from a review of its operating results, approved business plans, expected growth rates and cost of capital, among others. The Company also makes certain
assumptions about future economic conditions, interest rates, and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods.
Changes in assumptions or estimates could materially affect the determination of fair value of an asset group, and therefore could
affect the amount of potential impairment of the asset. The following assumptions are key to the Companys income approach:
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Business Projections
The Company makes assumptions about the level of demand for its services in the marketplace. These assumptions drive the
Companys planning assumptions for revenue growth. The Company also makes assumptions about its cost levels. These assumptions are key inputs for developing the Companys cash flow projections. These projections are derived using the
Companys internal business plans.
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Growth Rate
The growth rate is the expected rate at which an asset groups earnings stream is projected to grow beyond the planning
period.
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Economic Projections
Assumptions regarding general economic conditions are included in and affect the Companys assumptions regarding
revenue from services. These macroeconomic assumptions include inflation, interest rates, and foreign currency exchange rates.
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Fair Value of Financial Instruments
On July 1, 2008, the Company adopted the FASB
guidance for fair value measurements, which defines fair value, establishes a fair value hierarchy and requires expanded disclosures about fair value measurements. On this same date, the Company adopted additional FASB guidance for fair value
measurements which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. The Company did not elect the fair value option for
48
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
2. Summary of Significant Accounting Policies (Continued)
any financial assets and liabilities existing at July 1, 2008 which had not previously been carried at fair value. Any future transacted financial assets or liabilities will be evaluated for
the fair value election as prescribed by this guidance.
The fair value of the Companys cash equivalents is derived from quoted
market prices for similar instruments, with all significant inputs derived from or corroborated by observable market data. The fair value of the Companys interest rate swap was based on quotes from the respective counterparty, which are
corroborated by the Company using discounted cash flow calculations based upon forward interest-rate yield curves obtained from independent pricing services. The carrying value of the Companys accounts receivable, accounts payable and accrued
expenses approximate their fair value. The Company previously had outstanding debt under its credit facilities, which was considered a financial instrument. The carrying amount of this debt approximated its fair value as the rate of interest on the
Companys term loans that were outstanding under its credit facilities reflected current market rates of interest for similar instruments with comparable maturities.
Derivative Financial Instruments
The Company used an interest rate swap to manage the
economic effect of the variable interest obligation on the outstanding debt under its credit agreement prior to its termination on June 28, 2013, so that the interest payable on the outstanding debt effectively became fixed at a certain rate,
thereby reducing the impact of future interest rate changes on the Companys future interest expense. On June 28, 2013, the Company terminated the interest rate swap for a nominal amount in connection with the payment of all remaining
amounts due on its outstanding debt.
The Company accounted for its interest rate swap in accordance with the FASB guidance for
derivatives and hedging. The Company recorded the interest rate swaps fair value in other assets or liabilities in its consolidated balance sheet. The effective portion of the change in the interest rate swaps fair value was recorded as
a component of accumulated other comprehensive income and was recorded as interest expense when the hedged debt affects interest expense. The ineffective portion of the change in fair value was recognized in interest expense in the period of the
change.
The interest rate swap was not an effective cash flow hedge at June 30, 2011 as a result of the covenant violations as
discussed below in Note 11, Borrowings, and the Company opted not to re-designate the interest rate swap as a cash flow hedge at September 30, 2011. As such, changes in the fair value of the interest rate swap were recorded through
interest expense for the fiscal year ended June 30, 2012 and throughout fiscal 2013 until the interest rate swap was terminated on June 28, 2013.
Post-Employment Payments
The Company has entered into employment and letter agreements
with certain of its executives and other employees that obligate the Company to make post-employment payments for varying periods of time and under terms and circumstances set forth in these agreements. In part, the payments are in consideration for
obligations of the individuals not to engage in certain competitive activities after termination of their employment, and in part, the payments relate to other relationships between the parties. The Company accounts for its obligations under these
agreements in accordance with the FASB guidance for non-retirement post-employment benefits.
49
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
2. Summary of Significant Accounting Policies (Continued)
Revenue Recognition
The Company recognizes revenue from services on a proportional performance basis. In assessing contract performance, both input and output criteria
are reviewed. Costs incurred are used as an objective input measure of performance. The primary input of all work performed under these arrangements is labor. As a result of the relationship between labor and cost, there is normally a direct
relationship between the costs incurred and the proportion of the contract performed to date. Costs incurred as an initial proportion of expected total costs is used as an initial proportional performance measure. This indicative proportional
performance measure is always subsequently validated against 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. Invoices to clients in the ordinary course are generated based upon the achievement of specific events, as defined by each contract, including deliverables, timetables, and incurrence
of certain costs. Such events may not be directly related to the performance of services. Revenues earned on contracts in progress in excess of billings are classified as unbilled receivables. Amounts billed in excess of revenues earned are
classified as deferred revenue.
In accordance with the FASB guidance for revenue recognition, revenue includes amounts billed to clients
for subcontractor costs incurred in the completion of surveys and reflects reductions offered to clients in the form of rebates and reimbursements of out-of-pocket expenses related to service contracts.
Cost of Services
The
Companys direct costs of providing services principally consist of project personnel, which relate to the labor costs directly associated with a project, panelist incentives, which represent cash and non-cash incentives awarded to individuals
who complete surveys, data processing, which represents both the internal and outsourced processing of survey data, and other direct costs related to survey production, including the amortization of software developed for internal use.
Panelist Incentives
The Companys HIpoints loyalty program is designed to reward respondents who register for its panel, complete online surveys, and refer others
to join its online panel. The earned points are non-transferable and may be redeemed for gifts from a specific product portfolio at any time prior to expiration. Points awarded under the HIpoints program expire after twelve months of account
inactivity, if a panelist cancels his or her registration or opts out of the program, or if the e-mail address used by a panelist for the program is no longer valid. The Company maintains a reserve for obligations with respect to future redemption
of outstanding points based on the expected redemption rate of the points. This expected redemption rate is based on the Companys actual redemption rates since the inception of the program. An actual redemption rate that differs from the
expected redemption rate could have a material effect on the Companys results of operations.
50
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
2. Summary of Significant Accounting Policies (Continued)
In addition, certain of the Companys panelists receive cash incentives for participating in
surveys from the Company, which are earned by the panelist when the Company receives a timely survey response. The Company accrues these incentives in the period in which they are earned.
Marketing and Advertising Expenses
Marketing and advertising costs are expensed as incurred and are included in selling, general and administrative expense in the accompanying consolidated statements of operations. Such expenses amounted to $878,
$592 and $732 for the fiscal years ended June 30, 2013, 2012 and 2011, respectively.
Stock-Based Compensation
The FASB guidance for stock-based compensation requires that all share-based payments to employees after July 1, 2005,
including employee stock options and shares issued to employees under the Companys 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. In determining the fair value of stock options, the Company uses the Black-Scholes option pricing model, which employs the following assumptions:
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Expected volatility
based on historical volatilities from daily share price observations for the Companys stock covering a period
commensurate with the expected term of the options granted.
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Expected life of the option
based on the vesting terms of the respective option and a contractual life of ten years, calculated using the
simplified method as allowed by ASC 718-10 and corroborated through review of the expected life assumptions of publicly-traded market research companies.
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Risk-free rate
based on the implied yield available at the time the options were granted on U.S. Treasury zero coupon issues with a
remaining term equal to the expected life of the option when granted.
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Dividend yield
based on the Companys historical practice of electing not to pay dividends to its stockholders.
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Expected volatility and the expected life of the options granted, both of which impact the fair value of the options
calculated under the Black-Scholes option pricing model, involve managements best estimates at that time. The weighted-average assumptions used to value options during the fiscal years ended June 30, 2013, 2012 and 2011, respectively, are
set forth in Note 13, Stock-Based Compensation.
The fair value of restricted stock awards is based on the price per
share of the Companys common stock on the date of grant. The Company grants options to purchase its stock at fair value as of the date of grant, and recognizes compensation expense for only the portion of options or restricted shares that are
expected to vest. Therefore, the Company applies estimated forfeiture rates that are derived from historical employee termination behavior and the vesting period of the respective stock options or restricted shares. Changes in estimated forfeitures
are recognized through a cumulative catch-up adjustment, which is recognized in the period of change, and also impact the amount of unamortized stock-based compensation expense to be recognized in future periods.
51
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
2. Summary of Significant Accounting Policies (Continued)
A deferred tax asset is recorded on the stock-based compensation expense required to be accrued
under the FASB guidance. A current income tax deduction arises at the time of vesting (restricted stock) or exercise (stock options). In the event the current income tax deduction is greater or less than the associated deferred tax asset, the
difference is required to be charged first to the windfall tax benefit pool. In the event that there is not an adequate pool of windfall tax benefits, the shortfall is charged to expense. The Company elected to adopt the alternative method of
calculating the historical pool of windfall benefits as permitted by the FASB guidance.
Debt Issuance Costs
Debt issuance costs are amortized and recognized as interest expense under the effective interest method over the expected term of the related debt.
Unamortized debt issuance costs related to extinguished debt are expensed at the time the debt is extinguished and recorded as a component of the gain or loss recognized upon extinguishment. Unamortized debt issuance costs are recorded in other
assets in the consolidated balance sheet.
Income Taxes
The realizability of deferred income tax assets is based on a more likely than not standard. If it is determined that it is more likely than
not that deferred income tax assets will not be realized, a valuation allowance must be established against the deferred income tax assets.
Realization of the Companys deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance, the Company considers its historical,
as well as, future projected taxable income along with other positive and negative evidence in assessing the realizability of its deferred tax assets.
During the fiscal years ended June 30, 2013, 2012, and 2011, management evaluated the need to maintain previously established full valuation allowances of $20,896, $24,794, and $21,767, respectively,
against the Companys net U.S. and U.K. deferred tax assets and concluded that full valuation allowance against these deferred tax assets continued to be appropriate due to, among other reasons, the realized cumulative accounting losses
sustained in both jurisdictions.
During the fiscal year ending June 30, 2014, the Company may realize a three year cumulative
accounting profit in the U.S. If this occurs, the Company will also consider other positive and negative evidence such as reviewing its current financial performance, financial and taxable income projections, its market environment and other
factors, in evaluating the continued need for a full, or partial, valuation allowance. Any reversal of our valuation allowance will favorably impact the Companys results of operations in the period of the reversal.
The Company follows the asset and liability approach to account for income taxes in accordance with the FASB guidance for income taxes, which
requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of operating loss carryforwards and temporary differences between the carrying amounts and the tax bases of assets and liabilities. Through
December 31, 2010, the Company did not provide U.S. deferred income taxes applicable to the unremitted earnings of its foreign subsidiaries, as these amounts were considered to be indefinitely reinvested outside the U.S. During the
third quarter of fiscal 2011, the Company began to provide U.S. deferred income taxes applicable to the unremitted earnings of certain of its foreign subsidiaries, as more fully described below in Note 16, Income Taxes.
52
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
2. Summary of Significant Accounting Policies (Continued)
During the fiscal years ended June 30, 2011 and 2012, the Company recorded $132 and $154,
respectively, in French business taxes and presented the related expense within the selling, general and administrative line of its consolidated statement of operations. During the fiscal year ended June 30, 2013, the Company recorded $151 in
such expense and presented it in the provision for income taxes line of its consolidated statement of operations based on the profit-related nature of this tax. The prior year amounts have been corrected to conform to current year presentation.
Based on the Companys assessment, this adjustment did not have a material impact on its fiscal 2011 or fiscal 2012 results of operations.
During the fiscal year ended June 30, 2011, the Company recorded $338 in French research and development credits and presented those credits within the provision for income taxes line of its consolidated
statement of operations. During the fiscal year ended June 30, 2012, the Company recorded $124 in such credits and presented them in the selling, general and administrative line of its consolidated statement of operations based on the
determined refundable nature of these credits. At that time, the prior year amount was corrected to conform to current year presentation. Based on the Companys assessment, this adjustment did not have a material impact on its fiscal 2011
results of operations.
On July 1, 2007, the Company adopted the FASB guidance for uncertain tax positions, which contains a
two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return and which is now incorporated into the FASB guidance for income taxes. Applying the two-step approach, the Company first determines
if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is that the Company measures the tax
benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes line of its consolidated
statements of operations.
Net Income (Loss) Per Share
In accordance with the FASB guidance on earnings per share, basic net income (loss) per share amounts are computed by dividing net income (loss) by
the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the assumed exercise and conversion of employee stock options that have an exercise price that is below the average market price of
the common shares for the respective periods. The treasury stock method is used in calculating diluted shares outstanding whereby assumed proceeds from the exercise of stock options, net of average unrecognized stock-based compensation expense for
stock options and restricted stock, and the related tax benefit are assumed to be used to repurchase common stock at the average market price during the period. When the impact of stock options or other stock-based compensation is anti-dilutive,
they are excluded from the calculation.
Foreign Currency Translation
For the Companys subsidiaries located outside of the United States, the local currency is the functional currency. In accordance with FASB
guidance on foreign currency matters, the financial statements of those subsidiaries are translated into U.S. Dollars as follows. Consolidated assets and liabilities are translated at the exchange rates in effect at the balance sheet date.
Consolidated income, expenses and cash flows are translated at the average exchange rates for each period and
53
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
2. Summary of Significant Accounting Policies (Continued)
stockholders equity is translated using historical exchange rates. The resulting translation adjustment is recorded as a component of accumulated other comprehensive income (loss) in the
accompanying consolidated balance sheets.
Comprehensive Income (Loss)
The Company accounts for comprehensive income (loss) in accordance with the FASB guidance on comprehensive income. Comprehensive income (loss)
consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that, under generally accepted accounting principles, are recorded as an element of
stockholders equity but are excluded from net income. The Companys other comprehensive income (loss) is comprised of changes in the fair value of the Companys interest rate swap, any unrealized holding gain (loss) on
available-for-sale marketable securities, and the foreign currency translation adjustments from those subsidiaries not using the U.S. Dollar as their functional currency.
Segment Reporting
The Company reports segment information in accordance with the FASB
guidance on segment reporting. The Company operates a globally consistent business model, offering custom market research to its customers in the geographic regions in which it operates. Geographic management facilitates local execution of the
Companys global strategies. However, the Company maintains global leaders for the majority of its critical business processes, and the most significant performance evaluations and resource allocations made on a global basis by the
Companys chief operating decision-maker. Accordingly, the Company has concluded that it has one reportable segment.
3. Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted
Fair Value Measurements
Effective July 1, 2012, the Company adopted the FASB amended guidance to achieve common fair value measurement and disclosure requirements under GAAP. This amended guidance provided clarification about the
application of existing fair value measurement and disclosure requirements, and expands certain other disclosure requirements. The adoption of this amended guidance did not have a material impact on the Companys consolidated financial
statements.
Presentation of Comprehensive Income
Effective July 1, 2012, the Company adopted the FASB amended guidance requiring an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This amended guidance eliminated the option to present the components of other comprehensive income as part of the statement of
stockholders equity. The adoption of this amended guidance required changes in presentation only and did not have an impact on the Companys consolidated financial statements.
54
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
4. Restructuring and Other Charges
Restructuring
Fiscal 2013
During the fourth quarter of fiscal 2013, the Company reduced its occupancy of
leased office space at its Brentford, United Kingdom, Ottawa, Canada, and Paris, France facilities. The Company incurred $1,302 in lease exit costs associated with the remaining lease obligations, all of which involve cash payments. All actions
associated with the leased office space reductions were completed in June 2013, and all cash payments will be completed in June 2015.
Fiscal 2012
During fiscal
2012, the Company continued to take actions designed to re-align the cost structure of its U.S. and U.K. operations.
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The Company reduced headcount at its U.S. facilities throughout fiscal 2012, as follows:
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During the first quarter of fiscal 2012, the Company reduced headcount by a total of 23 full-time employees and incurred $389 in one-time termination
benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in July and August 2011 and all actions were completed at those respective times. Related cash payments were completed by February
2012.
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During the second quarter of fiscal 2012, the Company reduced headcount by a total of 10 full-time employees and incurred $260 in one-time termination
benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in October and December 2011 and all actions were completed at those respective times. Related cash payments were completed by March
2012.
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During the fourth quarter of fiscal 2012, the Company reduced headcount by a total of 20 full-time employees and incurred $644 in one-time termination benefits,
all of which involved cash payments. The reductions in staff were communicated to the affected employees in June 2012 and all actions were completed at that time. Related cash payments were completed by December 2012.
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During the first quarter of fiscal 2012, the Company reduced headcount at its U.K. facilities by a total of 56 full-time employees and incurred $1,008 in
one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in July 2011 and all actions were completed at that time. Related cash payments were completed by January 2012.
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Throughout fiscal 2012, the Company reduced its occupancy of leased office space. Specifically, the Company reduced occupancy of leased office space at its
Rochester, New York, Princeton, New Jersey, Reston, Virginia, Brentford, United Kingdom, and Ottawa, Canada facilities. The Company incurred $5,705 in lease exit costs associated with the remaining lease obligations, all of which involve cash
payments. All actions associated with the leased office space reductions were completed by June 2012, and all cash payments will be completed by January 2018.
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55
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
4. Restructuring and Other Charges (Continued)
Fiscal 2011
During the second and fourth quarters of fiscal 2011, the Company took actions designed to re-align the cost structure of its U.K. operations. Specifically, the Company reduced headcount at its U.K. facilities by a
total of 27 full-time employees and incurred $834 in one-time termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in December 2010 and April 2011 and all actions were
completed at those respective times. Related cash payments were completed in June 2011.
During the third and fourth quarters of fiscal
2011, the Company took actions designed to re-align the cost structure of its U.S. operations. Specifically, the Company reduced headcount at its U.S. facilities by a total of 21 full-time employees and incurred $330 in one-time
termination benefits, all of which involved cash payments. The reductions in staff were communicated to the affected employees in December 2010 and April 2011 and all actions were completed at those respective times. Related cash payments were
completed in June 2011.
During the fourth quarter of fiscal 2011, the Company reduced its occupancy of leased office space at its
Norwalk, Connecticut, Brentford, United Kingdom, and Portland, Oregon facilities. The Company incurred $1,942 in lease exit costs associated with the remaining lease obligations, all of which involve cash payments. All actions associated with the
leased office space reductions were completed in June 2011, and all cash payments will be completed in June 2015.
Summary of
Restructuring Charges and Reserves
The following table summarizes the restructuring charges recognized in our consolidated
statements of operations for the fiscal years ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Termination benefits
|
|
$
|
|
|
|
$
|
2,301
|
|
|
$
|
1,165
|
|
Lease commitments
|
|
|
1,302
|
|
|
|
5,705
|
|
|
|
1,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,302
|
|
|
$
|
8,006
|
|
|
$
|
3,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes activity during fiscal 2013 with respect to the Companys remaining reserves for
the restructuring activities described above and those undertaken in prior fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 1,
2012
|
|
|
Costs
Incurred
|
|
|
Changes in
Estimate
|
|
|
Cash
Payments
|
|
|
Non-Cash
Settlements
|
|
|
Balance,
June 30,
2013
|
|
Termination benefits
|
|
$
|
298
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(298
|
)
|
|
$
|
|
|
|
$
|
|
|
Lease commitments
|
|
|
6,278
|
|
|
|
1,302
|
|
|
|
|
|
|
|
(2,154
|
)
|
|
|
|
|
|
|
5,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining reserve
|
|
$
|
6,576
|
|
|
$
|
1,302
|
|
|
$
|
|
|
|
$
|
(2,452
|
)
|
|
$
|
|
|
|
$
|
5,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
4. Restructuring and Other Charges (Continued)
Other Charges
Other charges reflected in the Restructuring and other charges line shown on the Companys consolidated statements of operations
for the fiscal years ended June 30, 2012 and 2011 included the following:
|
|
|
Post-employment payments to former senior executives
In connection with their departures from the Company during fiscal 2011, we reached
negotiated settlements with Kimberly Till, Pavan Bhalla and Enzo Micali. Under the separation agreements, as modified, all cash payments to Ms. Till were completed in December 2012, while all cash payments to Messrs. Bhalla and Micali were
completed during fiscal 2012.
|
|
|
|
Other
For fiscal 2011, Other included costs associated with reorganizing the operational structure of the Companys Canadian
operations. In October 2011, the Companys obligation to fund those costs lapsed and accordingly, a credit of $331 was recognized at that time.
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Post-employment payments to former senior executives
|
|
$
|
(97
|
)
|
|
$
|
1,312
|
|
Other
|
|
|
(331
|
)
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(428
|
)
|
|
$
|
1,993
|
|
|
|
|
|
|
|
|
|
|
There were no such charges during the fiscal year ended June 30, 2013.
5. Discontinued Operations
In July 2011, the Companys Board of Directors (the Board) approved the closure of its operations in Hong Kong,
Singapore and Shanghai (collectively, Harris Asia). This decision was based on the Boards determination that Harris Asias operations did not adequately support the Companys strategic objectives. While the operations of
Harris Asia ceased as of September 30, 2011, significant future cash flows attributable to those operations as a result of collecting outstanding accounts receivable and settling accounts payable and accrued expenses at December 31, 2011
and September 30, 2011 had not yet been eliminated. As such, the Company determined that Harris Asias operations did not qualify for treatment as discontinued operations for the fiscal quarters ended September 30, 2011 and
December 31, 2011.
In connection with the Companys closure of Harris Asia, the following charges were initially recognized
during fiscal 2012 in the Restructuring and other charges line shown on the Companys consolidated statements of operations and were subsequently reclassified to discontinued operations for the fiscal quarter ended March 31,
2012, since all significant future cash flows attributable to Harris Asia had been eliminated at that time:
|
|
|
|
|
Writeoff of intangible assets
|
|
$
|
489
|
|
Termination benefits to former employees
|
|
|
390
|
|
Payments to terminate office and equipment leases
|
|
|
231
|
|
Professional fees
|
|
|
180
|
|
Writeoff of fixed assets
|
|
|
149
|
|
Other
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
$
|
1,416
|
|
|
|
|
|
|
57
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
5. Discontinued Operations (Continued)
The revenues and losses attributable to Harris Asia and reported in discontinued operations were
as follows for the fiscal years ended June 30:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Revenues
|
|
$
|
493
|
|
|
$
|
4,600
|
|
Loss from discontinued operations
|
|
|
(1,854
|
)
|
|
|
(756
|
)
|
The balance sheet of the discontinued operations consisted solely of $181 in accrued expenses at June 30, 2012.
There were no assets, liabilities, revenue or expenses of the discontinued operations at June 30, 2013.
6. Fair Value Measurements
The hierarchy for inputs used in measuring fair value for financial assets and liabilities maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels:
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
|
Level 2 inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for
identical assets or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset and liability, either directly or indirectly.
|
|
|
|
Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset
or liability.
|
The following table presents the fair value hierarchy for the Companys financial assets and
liabilities measured at fair value on a recurring basis at June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring Fair Value Measurements
|
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
At June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
At June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contract
|
|
$
|
|
|
|
$
|
174
|
|
|
$
|
|
|
|
$
|
174
|
|
The fair value of the Companys interest rate swap was based on quotes from the respective counterparty, which
are corroborated by the Company using discounted cash flow calculations based upon forward interest-rate yield curves obtained from independent pricing services.
58
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
7. Property, Plant and Equipment
At June 30, property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Furniture and fixtures
|
|
$
|
5,825
|
|
|
$
|
5,911
|
|
Equipment
|
|
|
36,095
|
|
|
|
35,346
|
|
Leasehold improvements
|
|
|
6,559
|
|
|
|
6,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,479
|
|
|
|
47,895
|
|
Accumulated depreciation
|
|
|
(46,013
|
)
|
|
|
(45,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,466
|
|
|
$
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense on property, plant and equipment amounted to $1,079, $1,836 and $3,138 for the fiscal years
ended June 30, 2013, 2012 and 2011, respectively.
8. Goodwill
The Company had no goodwill at June 30, 2013 or 2012.
9. Acquired Intangible Assets Subject to Amortization
At June 30, acquired intangible assets subject to amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
Weighted-Average
Amortization
Period
(In Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
Contract-based intangibles
|
|
|
3
|
|
|
$
|
1,766
|
|
|
$
|
1,766
|
|
|
$
|
|
|
Internet respondent database
|
|
|
7
|
|
|
|
3,148
|
|
|
|
3,144
|
|
|
|
4
|
|
Customer relationships
|
|
|
10
|
|
|
|
20,447
|
|
|
|
14,838
|
|
|
|
5,609
|
|
Trade names
|
|
|
16
|
|
|
|
5,248
|
|
|
|
2,800
|
|
|
|
2,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
30,609
|
|
|
$
|
22,548
|
|
|
$
|
8,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
Weighted-Average
Amortization
Period
(In Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
Contract-based intangibles
|
|
|
3
|
|
|
$
|
1,768
|
|
|
$
|
1,768
|
|
|
$
|
|
|
Internet respondent database
|
|
|
7
|
|
|
|
3,080
|
|
|
|
2,861
|
|
|
|
219
|
|
Customer relationships
|
|
|
10
|
|
|
|
20,849
|
|
|
|
12,974
|
|
|
|
7,875
|
|
Trade names
|
|
|
16
|
|
|
|
5,250
|
|
|
|
2,549
|
|
|
|
2,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
30,947
|
|
|
$
|
20,152
|
|
|
$
|
10,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
9. Acquired Intangible Assets Subject to Amortization (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Aggregate amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended June 30:
|
|
$
|
2,584
|
|
|
$
|
2,771
|
|
|
$
|
2,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization expense for the fiscal years ending June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
$
|
2,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
$
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
$
|
1,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
1,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
$
|
1,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross carrying amount and accumulated amortization of the Companys acquired intangible assets for the
fiscal years ended June 30, 2013 and 2012, as well as the related amortization expense, reflect the impact of foreign currency exchange rate fluctuations during the period.
10. Accrued Expenses
At June 30, accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Panelist incentives
|
|
$
|
2,574
|
|
|
$
|
2,702
|
|
Project-related accruals
|
|
|
1,581
|
|
|
|
2,910
|
|
Payroll and withholding expenses
|
|
|
1,901
|
|
|
|
1,890
|
|
Accrued vacation
|
|
|
1,677
|
|
|
|
1,772
|
|
Bonuses and commissions
|
|
|
4,161
|
|
|
|
3,715
|
|
Other
|
|
|
8,040
|
|
|
|
8,654
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,934
|
|
|
$
|
21,643
|
|
|
|
|
|
|
|
|
|
|
Other consists of accrued expenses that are individually less than 5% of total current liabilities.
11. Borrowings
On June 30, 2010, the Company entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A.
(JPMC), as Administrative Agent and Issuing Bank, and the Lenders party thereto, as further amended on August 27, 2010 (the Credit Agreement).
60
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
11. Borrowings (Continued)
The principal terms of the Credit Agreement are described below:
|
Credit Agreement
|
Availability:
$5,000 Revolving Line
The Revolving Line may be used to back letters of credit.
Requires the Company to maintain a minimum cash balance of the greater of $5,000 and 1.2 times the outstanding
amount under the Revolving Line (including outstanding letters of credit)
Term Loan original principal,
$15,581
|
Interest:
Company option:
Base Rate (greater of Federal Funds Rate plus 0.5%, LIBOR plus 1%, or Prime) plus an Applicable Rate based on
the pricing grid tied to the Companys Consolidated Total Leverage Ratio, as described below (the Pricing Grid)
OR
LIBOR plus an Applicable Rate based on the Pricing Grid
The Company
elected LIBOR and the interest swap agreement fixes the LIBOR-based portion of the rate at 4.32%
Interest payments are due at end of
LIBOR interest periods, but at least quarterly in arrears Letter of credit fees equal to 5% of outstanding face amounts until the first quarterly adjustment pursuant to the Pricing Grid, and are set under the Pricing Grid
thereafter
|
Interest Rate Swap:
Fixes the floating LIBOR interest portion of the rates on the amounts
outstanding under the Term Loan at 4.32% through September 30, 2013
Three-month LIBOR rate received on the swap matches the
LIBOR base rate paid on the Term Loan
|
Unused Facility Fees:
Fee fixed at 0.75% of unused Revolving Line
amount
|
Principal Payments:
Term Loan Maturity September 30, 2013
Revolving Line Maturity September 30, 2013
Revolving Line payable at maturity
Quarterly Term Loan Payments
$1,199
|
Financial Covenants:
Minimum Consolidated Interest Coverage Ratio of at least
3.00:1.00
Maximum Consolidated Leverage Ratio of 2.90:1.00 for quarterly periods ending through December 31, 2010, 2.70:1.00 for
the quarterly period ending March 31, 2011, and 2.50:1.00 for quarterly periods ending thereafter Minimum cash balance of the greater of $5,000 and 1.2 times the outstanding amount under the Revolving Line (including outstanding letters of
credit)
|
Collateral:
Secured by all domestic assets and 66% of equity interests in first tier
foreign subsidiaries
|
61
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
11. Borrowings (Continued)
On June 28, 2013, the Company completed the two remaining principal payments due on its term
loan and accordingly, had no outstanding debt under the Credit Agreement at June 30, 2013. The revolving line of credit under the Credit Agreement, which matures on September 30, 2013, remains unchanged and in place.
The Pricing Grid for the term loan provided for quarterly adjustment of rates and fees, and was as follows:
|
|
|
|
|
|
|
|
|
|
|
Pricing Level
|
|
Consolidated
Total
Leverage
Ratio
|
|
ABR
Applicable
Rate
|
|
Adjusted
LIBO
Applicable
Rate
|
|
Letter
of
Credit
Applicable
Rate
|
|
Commitment
Fee
Rate
|
1
|
|
< 1.0
|
|
2.50%
|
|
3.50%
|
|
3.50%
|
|
0.50%
|
2
|
|
³
1.0
but < 1.5
|
|
3.25%
|
|
4.25%
|
|
4.25%
|
|
0.75%
|
3
|
|
³
1.5 but < 2.0
|
|
3.50%
|
|
4.50%
|
|
4.50%
|
|
0.75%
|
4
|
|
³
2.0 but <
2.5
|
|
3.75%
|
|
4.75%
|
|
4.75%
|
|
0.75%
|
5
|
|
³
2.5
|
|
4.00%
|
|
5.00%
|
|
5.00%
|
|
1.00%
|
The Pricing Grid continues to apply to the revolving line of credit, with the rates and fees adjusting on a
quarterly basis as set forth above.
The Credit Agreement contains customary representations, default provisions, and affirmative and
negative covenants, including among others prohibitions of dividends, sales of certain assets and mergers, and restrictions related to acquisitions, indebtedness, liens, investments, share repurchases and capital expenditures. Among others, the
Company may freely transfer assets and incur obligations among its domestic subsidiaries, but limitations apply to transfers of assets and loans to foreign subsidiaries.
Amendment Agreement and Waiver
At June 30, 2011, the Company was not in compliance
with the Consolidated Total Leverage and Consolidated Interest Coverage Ratio covenants contained in the Credit Agreement largely due to the magnitude of restructuring and other charges incurred during the fiscal year ended June 30, 2011. As a
result, on September 27, 2011, the Company entered into Amendment Agreement No. 2 and Waiver (Amendment No. 2) to the Credit Agreement. Pursuant to Amendment No. 2, these covenant violations were permanently
waived. Amendment No. 2 includes both the addition and modification of certain definitions, terms, and financial covenants in the Credit Agreement. Obligations under the Credit Agreement, as amended by Amendment No. 2, continue to be
secured by the Companys domestic assets and 66% of the equity interests in first tier foreign subsidiaries. In accordance with ASC Topic 470, the Company evaluated the change in cash flows, determined that there was not a greater than 10%
change, and concluded that Amendment No. 2 did not result in an extinguishment of debt.
The Companys credit facilities under
the Credit Agreement, as amended by Amendment No. 2, consisted of its term loan, which was to mature September 30, 2013 but was paid off in full on June 28, 2013, and consists of a revolving line of credit. A maximum amount of $5,000
remains available under the revolving line of credit, subject to the Companys satisfaction of certain conditions. Pursuant to Amendment No. 2, the manner in which outstanding amounts accrue interest remains unchanged, except that the
Eurodollar Applicable Rate (Adjusted LIBO Applicable Rate) and ABR Applicable Rate were fixed at 5.50% and 4.50%, respectively, through March 31, 2012.
62
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
11. Borrowings (Continued)
Amendment No. 2 also impacted certain financial covenants, as follows:
|
|
|
The Consolidated Interest Coverage Ratio and Consolidated Total Leverage Ratio covenants were suspended for the fiscal quarters ended September 30,
2011, December 31, 2011 and March 31, 2012. During each of those fiscal quarters, the Company was subject to trailing twelve month adjusted EBITDA covenants of $4,548, $3,817 and $4,424, respectively.
|
|
|
|
For fiscal quarters commencing on or after April 1, 2012, the Company is subject to the Consolidated Interest Coverage Ratio and Consolidated Total Leverage
Ratio covenants contained in the Credit Agreement.
|
|
|
|
Cash paid to fund restructuring and other charges incurred on or before September 30, 2011 was limited to amounts agreed upon in Amendment No. 2.
|
|
|
|
The Company was required to maintain minimum global cash of $7,000 and U.S. cash of $1,000 through June 30, 2012, and was subject to only a minimum
global cash requirement of $5,000 during fiscal 2013.
|
Fiscal 2013 Loan Repayment
On June 28, 2013, the Company completed the last two remaining term loan payments due under the Credit Agreement, as amended by Amendment
No. 2. As a result of making these payments, which totaled $2,398, the Company had no outstanding debt as of June 30, 2013. In connection with the debt payoff, the Company terminated the associated interest rate swap agreement for a
nominal amount. The terms of the Companys revolving line of credit under the Credit Agreement, as amended by Amendment No. 2, remain unchanged.
At June 30, 2013 and June 30, 2012, the Company had no outstanding borrowings under the revolving line of credit and $341 and $345, respectively, in outstanding letters of credit. The outstanding letters
of credit reduce the remaining undrawn portion of the revolving line of credit that is available for future borrowings.
Interest
Rate Swap
Effective September 21, 2007, the Company entered into an interest rate swap agreement with JPMC, which
effectively fixed the floating LIBOR interest portion of the rates on the term loans outstanding under the Credit Agreement at 5.08% through September 21, 2012. The three-month LIBOR rate received on the swap matched the LIBOR base rate paid on
the term loans since both used three-month LIBOR. The swap had an initial notional value of $34,625, which declined as payments were made on the term loans so that the amount outstanding under those term loans and the notional amount of the swap
were always equal.
As a result of Amendment No. 2, the Company modified the terms of its interest rate swap to ensure that the
notional amount of the swap matched the outstanding amount of the term loan and the three-month LIBOR rate received on the swap matched the LIBOR base rate on the term loan. At that time, the term of the interest rate swap was extended through
September 30, 2013 to be consistent with the maturity date of the term loan and the applicable spread referenced in the pricing grid set forth above is added to the 4.32% rate fixed by the interest rate swap. As a result of these modifications,
the Company re-designated its interest rate swap as a cash flow hedge and determined it to be highly effective at that time.
63
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
11. Borrowings (Continued)
The interest rate swap was effective at June 30, 2010 and through the nine months ended
March 31, 2011. During those periods, changes in the fair value of the interest rate swap were recorded through other comprehensive income, and there was no ineffectiveness that was recorded through interest expense. The interest rate swap was
not an effective cash flow hedge at June 30, 2011 as a result of the covenant violations discussed above, and the Company recorded a charge to interest expense of $68, the amount of the change in the swaps fair value during the fourth
quarter of fiscal 2011. At September 30, 2011, the Company opted not to re-designate its interest rate swap as a cash flow hedge. As such, the change in the fair value of the interest rate swap, $339, was recorded through interest expense for
the fiscal year ended June 30, 2012, and throughout fiscal 2013 until the interest rate swaps termination on June 28, 2013.
At June 30, 2013 and 2012, the Company had liabilities of $0 and $174, respectively, in the Other liabilities line item of its consolidated balance sheet to reflect the fair value of the interest
rate swap.
12. Stockholders Equity
Common Stock
100,000,000 shares of the Companys Common Stock (Common Stock), par value $.001 per share, are authorized by the Companys Certificate of Incorporation, as amended in fiscal 2000.
Restricted Stock Award Withholdings
The Company issues restricted stock awards as part of the Incentive Plans, as defined in Note 13, Stock-Based Compensation. For certain of the restricted stock awards granted, the number of shares
released on the date the restricted stock awards vest is net of the statutory withholding requirements that the Company pays to the appropriate taxing authorities on behalf of its employees. The shares repurchased to satisfy the statutory
withholding requirements are immediately retired.
Share Repurchase Program
Under the share repurchase program (the Repurchase Program) authorized by the Board on March 6, 2012, the Company repurchased
14,300 and 65,107 shares, respectively, of its common stock at average prices per share of $1.09 and $1.08, respectively, for an aggregate purchase price of $16 and $70, respectively, during the fiscal years ended June 30, 2013 and 2012. All
shares repurchased were subsequently retired.
The Repurchase Program calls for up to $3,000 of share repurchases to be made at
managements discretion in the open market or through privately negotiated transactions from time to time through March 5, 2014 in compliance with applicable laws, rules, and regulations, subject to cash requirements for other purposes,
and other relevant factors, such as trading price, trading volume, general market and business conditions, Company performance, and the Companys compliance with the covenants under its credit agreement.
At June 30, 2013, the Repurchase Program had $2,914 in remaining capacity.
Stockholder Rights Plan
On March 11, 2005, the Board adopted a stockholder rights plan, as set forth in the Rights Agreement, dated March 11, 2005 (the Rights Agreement). Under the Rights Agreement, the Board
64
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
12. Stockholders Equity (Continued)
declared a dividend distribution of one preferred share purchase right (a Right) for each outstanding share of Common Stock to stockholders of record as of the close of business on
March 29, 2005 (the Record Date). In addition, one Right automatically attaches to each share of Common Stock issued between the Record Date and the Distribution Date (defined below). Each Right entitles the holder to purchase from
the Company a unit consisting of one one-thousandth of a share (a Unit) of the Companys Series A Preferred Stock, par value $.01 per share (Preferred Stock), at a cash exercise price of $27.48 per Unit, subject to
adjustment under certain conditions specified in the Rights Agreement. The Rights will separate from Common Stock and will become exercisable only when a public announcement has been made that a person or group acquires beneficial ownership of 15%
or more of the outstanding shares of the Common Stock (an Acquiring Person), other than as a result of repurchases of stock by the Company or certain inadvertent actions by a stockholder, or ten days after a person commences, or publicly
announces the intention to commence (which intention to commence remains in effect for five business days after such announcement), a tender offer or exchange offer that could result in the person or group becoming an Acquiring Person and that is
not terminated within such ten-day period (the earlier of such dates being referred to as the Distribution Date). If a person or group becomes an Acquiring Person, each holder of a Right (other than the Acquiring Person and certain of
its related parties, whose Rights become null and void) will be entitled to receive upon exercise of each Right that number of Units equal to $27.48 (as adjusted) multiplied by the number of Units for which the Right is then exercisable, divided by
50% of the then current per share market price of the Common Stock. If there are insufficient shares of Preferred Stock to permit full exercise of all of the Rights, holders of Rights may instead receive shares of Common Stock, other securities,
cash or property, or a combination thereof. If, at any time after a person or group becomes an Acquiring Person, the Company is acquired in a merger or other business combination transaction with an Acquiring Person or certain other types of
transaction specified in the Rights Agreement, each holder of a Right (other than the Acquiring Person and certain of its related parties, whose Rights become null and void) will be entitled to receive upon exercise of each Right, in lieu of shares
of Preferred Stock, that number of shares of Common Stock of the surviving entity equal to $27.48 (as adjusted) multiplied by the number of Units for which the Right is then exercisable, divided by 50% of the then current per share market price of
the surviving entitys common stock.
The Rights are not exercisable until a Distribution Date occurs and will expire on
March 11, 2015, unless earlier terminated or redeemed by the Company in accordance with the Rights Agreement. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including without
limitation, no right to vote or receive dividends. The Rights Agreement is reviewed and evaluated at least once every three years by a TIDES Committee of independent directors. During the fiscal 2013 year-end closing process, the TIDES
Committee reviewed the Rights Agreement and recommended no changes to it.
13. Stock-Based Compensation
The Company adopted a Long Term Incentive Plan in 1999, amended in November 2004 (1999 Incentive Plan), and a 2007
Long Term Incentive Plan (2007 Incentive Plan and together with the 1999 Incentive Plan, the Incentive Plans). The Company also adopted an Employee Stock Purchase Plan in 1999, amended in November 2004 (1999
ESPP), and a 2007 Employee Stock Purchase Plan, amended in November 2009 and 2011 (2007 ESPP and together with the 1999 ESPP, the ESPPs).
65
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
13. Stock-Based Compensation (Continued)
The Company did not capitalize stock-based compensation expense as part of the cost of an asset
for any periods presented. The following table illustrates the stock-based compensation expense included in the Companys consolidated statements of operations for the cost of stock options and restricted stock issued under the Incentive Plans,
stock options issued to new employees outside the Incentive Plans, and shares issued under the ESPPs for the fiscal years ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Cost of services
|
|
$
|
39
|
|
|
$
|
31
|
|
|
$
|
12
|
|
Selling, general and administrative
|
|
|
2,262
|
|
|
|
1,796
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,301
|
|
|
$
|
1,827
|
|
|
$
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Any potential tax benefits associated with incentive stock options are recognized if and when the Company receives a
tax deduction associated with the options. Accordingly, due to the timing of the recognition of the tax benefit versus the related stock-based compensation expense, the Companys effective tax rate was increased for the fiscal years ended
June 30, 2013, 2012 and 2011.
The Company determines the fair value of each option award on the date of grant using the
Black-Scholes option-pricing model. Expected volatilities are based on historical volatilities from daily share price observations for the Companys stock covering a period commensurate with the expected term of the options granted. The Company
continues to use the simplified method as permitted by ASC 718-10 for purposes of determining the expected life of options when granted, but has corroborated the expected option life derived using this method to the expected option
lives used by other public companies within the market research industry to ensure reasonableness. The risk-free interest rate is based on the implied yield available at the time the options were granted on U.S. Treasury zero coupon issues with
a remaining term equal to the expected life of the options when granted. The expected dividend yield is based on the Companys historical practice of electing not to pay dividends to its stockholders.
Long Term Incentive Plans
The Company maintains the Incentive Plans, under which it may grant nonqualified and incentive stock options, as well as restricted stock awards to employees and directors of the Company. The Company grants options
to purchase Common Stock at an exercise price equal to the fair market value as of the date of grant. Time-based options generally vest over a period of up to four years for employees, and expire after ten years from the date of grant or earlier, if
in connection with termination of employment or service as a director. Certain options vest upon the achievement of performance targets. Vesting of options is accelerated in certain circumstances upon a change in control. Restricted stock awards
generally vest over a period of up to four years for employees and one year for directors, and, generally, any unvested portion is forfeited upon termination of employment or service as a director. Certain restricted stock awards vest upon
achievement of performance targets.
The Company has registered a total of 10,250,000 shares of Common Stock for issuance under the
Incentive Plans. At June 30, 2013, 1,392,353 shares were unissued and available for grant under the Incentive Plans.
66
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
13. Stock-Based Compensation (Continued)
Investor Stock Options
At June 30, 2013 and 2012, the Company had outstanding non-qualified investor options to acquire 88,887 shares of Common Stock that were
issued in connection with the Companys acquisition of Novatris, S.A. in March 2004. Investor options are not included as options under the Incentive Plans.
Summary of Options and Restricted Stock Award Status
The following table provides a
summary of the status of the Companys employee stock options (including options issued under the Incentive Plans, as well as options issued outside the Incentive Plans to new employees) for the fiscal years ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
Options outstanding at July 1
|
|
|
5,218,927
|
|
|
$
|
1.54
|
|
|
|
6,396,373
|
|
|
$
|
1.53
|
|
|
|
3,873,452
|
|
|
$
|
2.38
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
290,500
|
|
|
|
0.65
|
|
|
|
4,750,500
|
|
|
|
0.75
|
|
Forfeited
|
|
|
(144,816
|
)
|
|
|
2.05
|
|
|
|
(1,343,779
|
)
|
|
|
1.33
|
|
|
|
(2,160,913
|
)
|
|
|
1.36
|
|
Exercised
|
|
|
(174,365
|
)
|
|
|
0.67
|
|
|
|
(124,167
|
)
|
|
|
0.38
|
|
|
|
(66,666
|
)
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30
|
|
|
4,899,746
|
|
|
$
|
1.55
|
|
|
|
5,218,927
|
|
|
$
|
1.54
|
|
|
|
6,396,373
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2012 and 2011, 160,000 and 3,381,000, respectively, of the options granted represent awards that vest
in ten equal tranches upon the achievement of certain performance targets. In February and March 2012, the Company modified such performance based targets. 1,029,000 and 936,000 of such performance-based options vested during fiscal 2013 and 2012,
respectively, due to the achievement of certain of the modified performance targets.
The total intrinsic value of options exercised
during the fiscal years ended June 30, 2013, 2012 and 2011 was $118, $29 and $34, respectively.
The following weighted-average
assumptions were used to value options granted by the Company during the fiscal years ended June 30:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Risk-free interest rate
|
|
|
2.3
|
%
|
|
|
2.8
|
%
|
Weighted-average expected life (in years)
|
|
|
6.5
|
|
|
|
6.7
|
|
Volatility factor
|
|
|
71
|
%
|
|
|
66
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
Weighted-average fair value
|
|
$
|
0.47
|
|
|
$
|
0.46
|
|
No options were granted during the fiscal year ended June 30, 2013.
Cash received from the exercise of employee stock options was $116, $47 and $28 for the fiscal years ended June 30, 2013, 2012 and 2011,
respectively.
67
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Years Ended June 30, 2013, 2012 and 2011
13. Stock-Based Compensation (Continued)
The following table provides further detail regarding the Companys granted and outstanding
employee stock options (including options issued under the Incentive Plans, as well as options issued outside the Incentive Plans to new employees) at June 30, 2013: