XNAS:HPOL Harris Interactive, Inc. Quarterly Report 10-Q Filing - 3/31/2012
Effective Date 3/31/2012
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
FOR THE QUARTER ENDED MARCH 31, 2012 OR
FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 000-27577
HARRIS INTERACTIVE INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
161 Sixth Avenue, New York, New York 10013 (Address of principal executive offices) (212) 539-9600 (Registrant’s telephone number, including area code) N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x On May 11, 2012, 57,234,614 shares of the Registrant’s Common Stock, $.001 par value, were outstanding.
Table of ContentsFORM 10-Q QUARTER ENDED MARCH 31, 2012 INDEX
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Table of ContentsCONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts) (Unaudited)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Table of ContentsNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) 1. Financial Statements The unaudited consolidated financial statements included herein reflect, in the opinion of the management of Harris Interactive Inc. and its subsidiaries (collectively, the “Company”), all normal recurring adjustments necessary to fairly state the Company’s unaudited consolidated financial statements for the periods presented. 2. Basis of Presentation Unaudited Consolidated Financial Statements The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated balance sheet as of June 30, 2011 has been derived from the audited consolidated financial statements of the Company. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed by the Company with the Securities and Exchange Commission (“SEC”) on September 28, 2011. Future Liquidity Considerations At March 31, 2012, the Company had cash and cash equivalents of $13,167, compared with $14,084 at June 30, 2011. Available sources of cash to support known or reasonably likely cash requirements over the next 12 months include cash and cash equivalents on hand, additional cash that may be generated from the Company’s operations, and funds to the extent available through its credit facilities discussed in Note 8, “Borrowings”. While the Company believes that its available sources of cash, including funds available through its revolving line that are subject to certain requirements, including minimum cash balances, will support known or reasonably likely cash requirements over the next 12 months, including quarterly principal payments of $1,199 and interest payments due under the Company’s credit agreement, the Company’s ability to generate cash from its operations is dependent upon its ability to profitably generate revenue, which requires that it continually develops new business, both for growth and to replace completed projects. Although work for no one client constitutes more than 10% of revenue, the Company has 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. The Company’s ability to profitably generate revenue depends not only on execution of its business plans, but also on general market factors outside of its control. As many of the Company’s clients treat all or a portion of their market research expenditures as discretionary, the Company’s ability to profitably generate revenue is adversely impacted whenever there are adverse macroeconomic conditions in the markets the Company serves. 3. Recent Accounting Pronouncements In May 2011, the Financial Accounting Standards Board (“FASB”) issued amended accounting guidance related to fair value measurements and disclosure requirements. The amended guidance clarifies the application of existing fair value measurement requirements and is effective on a prospective basis for fiscal years beginning after December 15, 2011. The Company will adopt this amended guidance on July 1, 2012 and does not expect that adoption will have a material impact on its consolidated financial statements.
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Table of ContentsIn June 2011, the FASB issued new accounting guidance to update the presentation of comprehensive income in consolidated financial statements. Under this new guidance, an entity has the option 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 in its annual financial statements. This guidance is effective for fiscal years beginning after December 15, 2011. The Company will adopt this guidance on July 1, 2012 and does not expect that adoption will have a material impact on its consolidated financial statements. 4. Restructuring and Other Charges Restructuring During the nine months ended March 31, 2012, the Company continued to take actions designed to re-align the cost structure of its U.S. and U.K. operations. Specifically, the Company
The following table summarizes the restructuring charges recognized in the Company’s unaudited consolidated statements of operations for the three and nine months ended March 31:
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Table of ContentsThe following table summarizes activity during the nine months ended March 31, 2012 with respect to the Company’s remaining reserves for the restructuring activities described above and those undertaken in prior fiscal years:
Other Charges For the nine months ended March 31, 2011, other charges reflected in the “Restructuring and other charges” line shown on the Company’s unaudited consolidated statements of operations included $331 in costs associated with reorganizing the operational structure of the Company’s Canadian operations. A corresponding liability was recorded in the “Accrued expenses” line shown on the Company’s unaudited consolidated balance sheet at that time. In October 2011, the Company’s obligation to fund those costs lapsed and accordingly, a credit of $331 was initially recognized at that time and is reflected in other charges for the nine months ended March 31, 2012. 5. Discontinued Operations In July 2011, the Company’s Board of Directors (the “Board”) approved the closure of the Company’s operations in Hong Kong, Singapore and Shanghai (collectively, “Harris Asia”). This decision was based on the Board’s determination that Harris Asia’s operations did not adequately support the Company’s 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 Asia’s 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 Company’s closure of Harris Asia, the following charges were initially recognized in the “Restructuring and other charges” line shown on the Company’s unaudited consolidated statement of operations for the fiscal quarters ended September 30, 2011 and December 31, 2011:
The foregoing charges have been reclassified to discontinued operations for the fiscal quarter ended March 31, 2012 since all significant future cash flows attributable to Harris Asia were eliminated during the quarter.
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Table of ContentsThe revenues and income (loss) attributable to Harris Asia and reported in discontinued operations are as follows:
The assets and liabilities attributable to Harris Asia and reported in discontinued operations are as follows:
6. Fair Value Measurements The hierarchy for inputs used in measuring fair value for financial assets and liabilities is designed to maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels:
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Table of ContentsThe following table presents the fair value hierarchy for the Company’s financial liabilities measured at fair value on a recurring basis:
The fair value of the Company’s interest rate swap was based on quotes from the respective counterparty, which the Company corroborated using discounted cash flow calculations based upon forward interest-rate yield curves obtained from independent pricing services. 7. Acquired Intangible Assets Subject to Amortization At March 31, 2012 and June 30, 2011, acquired intangible assets subject to amortization consisted of the following:
The gross carrying amount and accumulated amortization of the Company’s acquired intangible assets for the three and nine months ended March 31, 2012, as well as the related amortization expense, reflect the impact of foreign currency exchange rate fluctuations during the period.
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Estimated amortization expense for the fiscal years ending June 30:
8. Borrowings On June 30, 2010, the Company entered into an Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and Issuing Bank, and the Lenders party thereto, as further amended on August 27, 2010 (the “Credit Agreement”).
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Table of ContentsThe principal terms of the Credit Agreement are described below:
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The Pricing Grid provides for quarterly adjustment of rates and fees, and is as follows:
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 On September 27, 2011, the Company entered into Amendment Agreement No. 2 and Waiver (“Amendment No. 2”) to the Credit Agreement (as amended, the “Amended Credit Agreement”). 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. 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 Amended Credit Agreement continue to be secured by the Company’s 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 Company’s credit facilities under the Amended Credit Agreement consist of its term loan, which matures September 30, 2013, and a revolving line of credit. A maximum amount of $5,000 remains available under the revolving line of credit, subject to the Company’s satisfaction of certain conditions. Pursuant to Amendment No. 2, until the Company achieves trailing twelve month adjusted EBITDA of $5,000, borrowings under the revolving line of credit are limited to the lesser of $2,000 or the Company’s net U.S. accounts receivable, defined as its U.S. accounts receivable
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Table of Contentsplus its U.S. unbilled accounts receivable, less its deferred revenue. The principal amount outstanding under the term loan, $10,787 at June 30, 2011, and the payment terms of the term loan remained unchanged. Pursuant to Amendment No. 2, the manner in which outstanding amounts accrue interest remains unchanged under the Amended Credit Agreement, except that the Eurodollar Applicable Rate (Adjusted LIBO Applicable Rate) and ABR Applicable Rate are fixed at 5.50% and 4.50%, respectively, through March 31, 2012. Amendment No. 2 also impacted certain financial covenants, as follows:
At March 31, 2012, the Company was in compliance with all of the covenants under the Amended Credit Agreement. At March 31, 2012, the required principal repayments of the term loan under the Amended Credit Agreement for the remaining three months of the fiscal year ending June 30, 2012 and the two succeeding fiscal years are as follows:
At March 31, 2012 and June 30, 2011, the Company had no outstanding borrowings under the revolving line of credit and $352 and $359, respectively, in outstanding letters of credit. The letters of credit reduce the remaining undrawn portion of the revolving line of credit that is available for future borrowings. Interest Rate Swap 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 matches the outstanding amount of the term loan and the three-month LIBOR rate received on the swap matches the LIBOR base rate on the term loan. The term of the interest rate swap was extended through September 30, 2013 to be consistent with the maturity date of the term loan. At March 31, 2012 and June 30, 2011, the Company had liabilities of $243 and $513, respectively, in the “Other liabilities” line item of its consolidated balance sheet to reflect the fair value of the interest rate swap. 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 opted not to re-designate its 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 both the three and nine months ended March 31, 2012 and such treatment will continue for the foreseeable future.
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Table of Contents9. Stock-Based Compensation The following table illustrates the stock-based compensation expense for stock options and restricted stock issued under the Company’s Long-Term Incentive Plans (the “Incentive Plans”), stock options issued to new employees outside the Incentive Plans, and shares issued under the Company’s Employee Stock Purchase Plans (“ESPPs”) included in the Company’s unaudited consolidated statements of operations for the three and nine months ended March 31:
The Company did not capitalize stock-based compensation expense as part of the cost of an asset for any periods presented. The following table provides a summary of the status of the Company’s employee and director stock options (including options issued under the Incentive Plans and options issued outside the Incentive Plans to new employees) for the nine months ended March 31, 2012:
In February and March 2012, the Company modified certain performance-based stock options such that the options now vest in ten equal tranches upon the achievement of certain revised performance targets. These modifications resulted in the Company recording an additional $202 of stock-based compensation expense for the three and nine months ended March 31, 2012. The following table provides a summary of the status of the Company’s employee and director restricted stock awards for the nine months ended March 31, 2012:
At March 31, 2012, there was $3,331 of total unrecognized stock-based compensation expense related to non-vested stock-based compensation arrangements granted under the Incentive Plans and the ESPPs. That expense is expected to be recognized over a weighted-average period of 2.1 years.
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Table of Contents10. Income Taxes The Company recorded an income tax benefit in continuing operations of $88 for the three months ended March 31, 2012, compared with an income tax provision of $177 for the same prior year period. The tax benefit for the three months ended March 31, 2012 was comprised primarily of tax benefits related to pre-tax losses in certain of the Company’s international jurisdictions. For the three months ended March 31, 2011, the tax provision was comprised primarily of tax expense related to pre-tax income in certain of the Company’s international jurisdictions. The Company recorded an income tax benefit in continuing operations of $85 for the nine months ended March 31, 2012, compared with an income tax provision of $12 for the same prior year period. The tax benefit for the nine months ended March 31, 2012 was comprised primarily of tax benefits related to pre-tax losses in certain of the Company’s international jurisdictions. For the nine months ended March 31, 2011, the tax provision was comprised primarily of an additional tax benefit of $188 in France that was applied for and refunded during the quarter. Income tax expense of $130 was included in discontinued operations for the nine months ended March 31, 2012 related to the closure of the Company’s operations in Asia, of which $150 was recorded as a discrete tax provision during the three months ended September 30, 2011. A full valuation allowance continued to be recorded at March 31, 2012 against the Company’s U.S. and U.K. deferred tax assets. The Company will continue to assess the realizability of its deferred tax assets in accordance with the FASB guidance for income taxes and will adjust the valuation allowances should all or a portion of the deferred tax assets become realizable in the future. 11. Comprehensive Income The following table sets forth the components of the Company’s total comprehensive income for the three and nine months ended March 31:
12. Share Repurchase Program Under the share repurchase program (the “Repurchase Program”) authorized by the Board on March 6, 2012, the Company repurchased 18,300 shares of its common stock at an average price per share of $1.06 for an aggregate purchase price of $19 during the three months ended March 31, 2012. All shares repurchased were subsequently retired. At March 31, 2012, the Repurchase Program had $2,981 in remaining capacity. 13. Net Loss Per Share Basic net loss per share is computed by dividing net loss by the weighted-average number of shares outstanding for the period. Diluted net loss per share reflects the potential dilution of securities that could share in earnings. When the impact of stock options or other stock-based compensation is anti-dilutive, they are excluded from the calculation.
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Table of ContentsThe following table sets forth the reconciliation of the basic and diluted net loss per share computations for the three and nine months ended March 31:
Unvested restricted stock and unexercised stock options to purchase 7,160,209 and 4,467,001 shares of the Company’s stock for the three and nine months ended March 31, 2012 and 2011, respectively, at weighted-average prices per share of $1.44 and $2.12, respectively, were not included in the computations of diluted net loss per share because their impact was anti-dilutive during the respective periods. 14. Enterprise-Wide Disclosures The Company is comprised of operations in North America and Europe. Non-U.S. market research is comprised of operations in the United Kingdom, Canada, France and Germany. The Company’s operations in Asia ceased as of September 30, 2011 and are classified as discontinued operations for all current and prior periods presented herein. There were no intercompany transactions that materially affected the Company’s financial statements, and all intercompany sales have been eliminated upon consolidation. The Company’s business model for offering custom market research is consistent across the geographic regions in which it operates. Geographic management facilitates local execution of the Company’s global strategies. The Company maintains global leaders with responsibility across all geographic regions for the majority of its critical business processes, and the most significant performance evaluations and resource allocations made by the Company’s chief operating decision-maker are made on a global basis. Accordingly, the Company has concluded that it has one reportable segment. The Company has prepared the financial results for geographic information on a basis that is consistent with the manner in which management internally disaggregates information to assist in making internal operating decisions. The Company has allocated common expenses among these geographic regions differently than it would for stand-alone information prepared in accordance with GAAP. Geographic operating income (loss) may not be consistent with measures used by other companies.
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Table of ContentsGeographic information for the periods presented herein is as follows:
15. Commitments and Contingencies The Company has several non-cancelable operating leases for office space and equipment. There were no material changes to the financial obligations for such leases during the nine months ended March 31, 2012 from those disclosed in Note 19, “Commitments and Contingencies,” to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed by the Company with the SEC on September 28, 2011.
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Table of Contents16. Legal Proceedings In the normal course of business, the Company is at times subject to pending and threatened legal actions and proceedings. After reviewing any pending and threatened actions and proceedings with legal counsel, management does not expect the outcome of such actions or proceedings to have a material adverse effect on the Company’s business, financial condition or results of operations. Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding expectations, beliefs, plans, objectives, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as, “may”, “should”, “expects”, “plans”, “anticipates”, “feel”, “believes”, “estimates”, “predicts”, “potential”, “continue”, “consider”, “possibility”, or the negative of these terms or other comparable terminology . All forward-looking statements included in this document are based on the information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. Actual results could differ materially from the results discussed herein. Factors that might cause or contribute to such differences include but are not limited to, those discussed in the Risk Factors section set forth in reports or documents the Company files from time to time with the Securities and Exchange Commission (“SEC”), such as its Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed by the Company with the SEC on September 28, 2011. Risks and uncertainties also include quarterly variations in financial results, actions of competitors, and the Company’s ability to sustain and grow its revenue base, maintain and improve cost efficient operations, develop and maintain products and services attractive to the market, maintain compliance with financial covenants under its credit agreement, obtain additional cash resources should it be necessary to do so, and maintain compliance with certain Nasdaq listing requirements. Note: Amounts shown below are in thousands of U.S. Dollars for our continuing operations, unless otherwise noted. Also, references herein to “we”, “our”, “us”, “its”, the “Company” or “Harris Interactive” refer to Harris Interactive Inc. and its subsidiaries, unless the context specifically requires otherwise. Overview Harris Interactive is a leading global custom market research firm that uses web-based, telephone and other research methodologies to provide clients with information about the views, behaviors and attitudes of people worldwide. For the three months ended March 31, 2012:
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Significant Events Amendment Agreement and Waiver On September 27, 2011, we entered into an amendment and waiver to our credit agreement. At June 30, 2011, we were not in compliance with the leverage and interest coverage ratio covenants contained in our credit agreement largely due to the magnitude of restructuring and other charges incurred during the fiscal year ended June 30, 2011. Pursuant to the amendment agreement and waiver, these covenant violations were permanently waived. The amendment and waiver includes both the addition and modification of certain definitions, terms, and financial covenants. Obligations under our credit agreement continue to be secured by our domestic assets and 66% of the equity interests in first tier foreign subsidiaries. In accordance with ASC Topic 470, we evaluated the change in cash flows, determined that there was not a greater than 10% change, and concluded that the amendment and waiver did not result in an extinguishment of debt. The credit facilities under our credit agreement consist of our term loan, which matures September 30, 2013, and a revolving line of credit. A maximum amount of $5,000 remains available under the revolving line of credit, subject to our satisfaction of certain conditions. Pursuant to the amendment agreement and waiver, until we achieve trailing twelve month adjusted EBITDA of $5,000, borrowings under the revolving line of credit are limited to the lesser of $2,000 or our net U.S. accounts receivable, defined as our U.S. accounts receivable plus our U.S. unbilled accounts receivable, less our deferred revenue. The amendment agreement and waiver did not change the principal amount outstanding under, or the payment terms of, the term loan. Pursuant to the amendment agreement and waiver, the manner in which outstanding amounts accrue interest remained 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. The amendment agreement and waiver impacted certain financial covenants, as follows:
At March 31, 2012, we were in compliance with all of the covenants under our credit agreement, as amended by the amendment agreement and waiver. Restructuring and Other Charges During the nine months ended March 31, 2012, we continued to take actions designed to re-align the cost structure of our U.S. and U.K. operations. Specifically, we
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The following table summarizes the restructuring charges recognized in our unaudited consolidated statements of operations for the three and nine months ended March 31:
The following table summarizes activity during the nine months ended March 31, 2012 with respect to our remaining reserves for the restructuring activities described above and those undertaken in prior fiscal years:
Other Charges For the nine months ended March 31, 2011, other charges reflected in the “Restructuring and other charges” line shown on our unaudited consolidated statements of operations included $331 in costs associated with reorganizing the operational structure of our Canadian operations. A corresponding liability was recorded in the “Accrued expenses” line shown in our unaudited consolidated balance sheet at that time. In October 2011, our obligation to fund those costs lapsed and accordingly, a credit of $331 was initially recognized at that time and is reflected in other charges for the nine months ended March 31, 2012.
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Table of ContentsDiscontinued Operations In July 2011, our Board of Directors approved the closure of our operations in Hong Kong, Singapore and Shanghai (collectively, “Harris Asia”). This decision was based on the Board’s determination that Harris Asia’s operations did not adequately support our 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 we determined that Harris Asia’s operations did not qualify for treatment as discontinued operations for the fiscal quarters ended September 30, 2011 and December 31, 2011. In connection with our closure of Harris Asia, the following charges were initially recognized in the “Restructuring and other charges” line shown on our unaudited consolidated statement of operations for the fiscal quarters ended September 30, 2011 and December 31, 2011:
The foregoing charges have been reclassified to discontinued operations for the fiscal quarter ended March 31, 2012 since all significant future cash flows attributable to Harris Asia were eliminated during the quarter. The revenues and income (loss) attributable to Harris Asia and reported in discontinued operations are as follows:
The assets and liabilities of the discontinued operations were as follows:
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Table of ContentsCritical Accounting Policies and Estimates The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The most significant of these areas involving difficult or complex judgments made by management with respect to the preparation of our consolidated financial statements in fiscal 2012 include:
In each situation, management is required to make estimates about the effects of matters or future events that are inherently uncertain. During the nine months ended March 31, 2012, there were no changes to the items that we disclosed as our critical accounting policies and estimates in management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed by us with the SEC on September 28, 2011. Results of Operations Three Months Ended March 31, 2012 Versus Three Months Ended March 31, 2011 The following table sets forth the results of our continuing operations, expressed both as a dollar amount and as a percentage of revenue from services, for the three months ended March 31, 2012 and 2011, respectively:
Revenue from services. Revenue from services decreased by $2,872, or 7.8%, to $34,117 for the three months ended March 31, 2012 compared with the same prior year period. Excluding foreign currency exchange rate differences, revenue from services for the three months ended March 31, 2012 decreased by 7.9% compared with the same prior year period. As more fully described below, revenue from services was impacted by several factors.
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Table of ContentsNorth American revenue decreased by $1,928 to $25,696 for the three months ended March 31, 2012 compared with the same prior year period, a decrease of 7.0%. By country, North American revenue for the three months ended March 31, 2012 was comprised of:
European revenue decreased by $944 to $8,421 for the three months ended March 31, 2012 compared with the same prior year period, a decrease of 10.1%. By country, European revenue for the three months ended March 31, 2012 was comprised of:
Cost of services. Cost of services was $20,791 or 60.9% of total revenue for the three months ended March 31, 2012, compared with $24,401 or 66.0% of total revenue for the same prior year period. Cost of services for the three months ended March 31, 2012 was principally impacted by direct labor savings derived from the restructuring actions discussed above under “Restructuring and Other Charges”. Selling, general and administrative. Selling, general and administrative expense for the three months ended March 31, 2012 was $12,580 or 36.9% of total revenue, compared with $12,469 or 33.7% of total revenue for the same prior year period. The increase in selling, general and administrative expense for the three months ended March 31, 2012 was principally impacted by a $274 increase in stock-based compensation expense, of which $202 was attributable to modifications to certain performance-based stock options during the quarter. Depreciation and amortization. Depreciation and amortization expense was $1,136 or 3.3% of total revenue for the three months ended March 31, 2012, compared with $1,490 or 4.0% of total revenue for the same prior year period. The decrease in depreciation and amortization expense for the three months ended March 31, 2012 when compared with the same prior year period is the result of fixed and intangible assets that became fully depreciated or amortized during fiscal 2011 and the first nine months of fiscal 2012, combined with decreased capital spending as part of our overall focus on controlling costs.
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Table of ContentsRestructuring and other charges. See above under “Restructuring and Other Charges” for details regarding restructuring and other charges for the three months ended March 31, 2012 and 2011. Interest expense, net. Interest expense, net, was $196 or less than 1% of total revenue for the three months ended March 31, 2012, compared with $235 or less than 1% of total revenue for the same prior year period. Interest expense for the three months ended March 31, 2012 reflects the impact of the decline in our outstanding debt as we continue to make required principal payments. Income taxes. We recorded an income tax benefit in continuing operations of $88 for the three months ended March 31, 2012, compared with an income tax provision of $177 for the same prior year period. The tax benefit for the three months ended March 31, 2012 was comprised primarily of tax benefits related to pre-tax losses in certain of our international jurisdictions. For the three months ended March 31, 2011, the tax provision was comprised primarily of tax expense related to pre-tax income in certain of our international jurisdictions. Based upon management’s assessment of the realizability of the Company’s deferred tax assets in the U.S. and U.K., a full valuation allowance continued to be recorded at March 31, 2012. Nine Months Ended March 31, 2012 Versus Nine Months Ended March 31, 2011 The following table sets forth the results of our continuing operations, expressed both as a dollar amount and as a percentage of revenue from services, for the nine months ended March 31, 2012 and 2011, respectively:
Revenue from services. Revenue from services decreased by $5,484, or 4.7%, to $111,002 for the nine months ended March 31, 2012 compared with the same prior year. Excluding foreign currency exchange rate differences, revenue from services for the nine months ended March 31, 2012 decreased by 5.4% compared with the same prior year period. As more fully described below, revenue from services was impacted by several factors. North American revenue decreased by $571 to $84,318 for the nine months ended March 31, 2012 compared with the same prior year period, an decrease of 0.7%. By country, North American revenue for the nine months ended March 31, 2012 was comprised of:
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Table of ContentsEuropean revenue decreased by $4,912 to $26,684 for the nine months ended March 31, 2012 compared with the same prior year period, a decrease of 15.5%. By country, European revenue for the nine months ended March 31, 2012 was comprised of:
Cost of services. Cost of services was $68,799 or 62.0% of total revenue for the nine months ended March 31, 2012, compared with $76,640 or 65.8% of total revenue for the same prior year period. Cost of services for the nine months ended March 31, 2012 was principally impacted by direct labor savings derived from the restructuring actions discussed above under “Restructuring and Other Charges”. Selling, general and administrative. Selling, general and administrative expense for the nine months ended March 31, 2012 was $35,579 or 32.1% of total revenue, compared with $36,490 or 31.3% of total revenue for the same prior year period. The decrease in selling, general and administrative expense was principally impacted by a $911 decrease in rent expense, which was driven by space reductions taken during fiscal 2011 and 2012. Depreciation and amortization. Depreciation and amortization expense was $3,602 or 3.2% of total revenue for the nine months ended March 31, 2012, compared with $4,478 or 3.8% of total revenue for the same prior year period. The decrease in depreciation and amortization expense for the nine months ended March 31, 2012 when compared with the same prior year period is the result of fixed and intangible assets that became fully depreciated or amortized during fiscal 2011 and the first nine months of fiscal 2012, combined with decreased capital spending as part of our overall focus on controlling costs. Restructuring and other charges. See above under “Restructuring and Other Charges” for details regarding restructuring and other charges for the nine months ended March 31, 2012 and 2011. Interest expense, net. Interest expense, net, was $557 or less than 1% of total revenue for the nine months ended March 31, 2012, compared with $932 or less than 1% of total revenue for the same prior year period. Interest expense for the nine months ended March 31, 2012 reflects the impact of the decline in our outstanding debt as we continue to make required principal payments. Income taxes. We recorded an income tax benefit in continuing operations of $85 for the nine months ended March 31, 2012, compared with an income tax provision of $12 for the same prior year period. The tax benefit for the nine months ended March 31, 2012 was comprised primarily of tax benefits related to pre-tax losses in certain of our international jurisdictions. For the nine months ended March 31, 2011, the tax provision was comprised primarily of an additional tax benefit of $188 in France that was applied for and refunded during the quarter.
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Table of ContentsIncome tax expense of $130 was included in discontinued operations for the nine months ended March 31, 2012 related to the closure of our Asian operations, of which $150 was recorded as a discrete tax provision during the three months ended September 30, 2011. Based upon management’s assessment of the realizability of our deferred tax assets in the U.S. and U.K., a full valuation allowance continued to be recorded at March 31, 2012. Significant Factors Affecting our Performance Key Operating Metrics We closely track certain key operating metrics, specifically bookings and secured revenue. These key operating metrics enable us to measure the current and forecasted performance of our business relative to historical trends. Key operating metrics for continuing operations for the three months ended March 31, 2012 and the four preceding fiscal quarters 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 March 31, 2012 were $39.5 million, an increase of 1.4% compared with $39.0 million for the same prior year period. Excluding foreign exchange rate differences, bookings were up 3.4% over the same prior year period. Bookings in local currency compared with the same prior year period were principally impacted by the following:
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.
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Table of ContentsInformation concerning our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenue over time. There are no third-party standards or requirements governing the calculation of bookings. New bookings involve estimates and judgments regarding new contracts and renewals, as well as extensions and additions to existing contracts. Subsequent cancellations, suspensions and other matters may affect the amount of bookings previously reported. Secured Revenue (formerly referred to as ending sales backlog) is defined as prior period secured revenue plus current period bookings, less revenue recognized on outstanding projects as of the end of the period. Secured revenue helps us manage our future staffing levels more accurately and is also an indicator of the effectiveness of our marketing and sales initiatives. Based on our experience, projects included in secured revenue at the end of a fiscal period generally convert to revenue from services during the following twelve months. Secured revenue for the three months ended March 31, 2012 was $50.5 million, a decrease of 8.0% compared with $54.9 million for the same prior year period. Excluding foreign exchange rate differences, secured revenue was down 7.0% over the same prior year period. The decrease in secured revenue was mainly impacted by the bookings declines we experienced during the first half of fiscal 2012. Financial Condition, Liquidity and Capital Resources Cash and Cash Equivalents The following table sets forth net cash provided by operating activities, net cash used in investing activities, and net cash used in financing activities, for the nine months ended March 31:
Net cash provided by operating activities. Net cash provided by operating activities was $3,588 for the nine months ended March 31, 2012, compared with $1,100 provided by operating activities for the same prior year period. The change was primarily due to our improved efforts in closely managing our cash, which resulted in improved working capital during the nine months ended March 31, 2012 compared with the same prior year period. Net cash used in investing activities. Net cash used in investing activities was $427 for the nine months ended March 31, 2012, compared with $577 for the same prior year period. Investing activities for the nine months ended March 31, 2012 and 2011 consisted solely of capital expenditures. Net cash used in financing activities. Net cash used in financing activities was $3,568 for the nine months ended March 31, 2012, compared with $3,439 for the same prior year period. Cash used during both periods was for required principal payments on our outstanding debt, offset by cash received from the purchase of shares by employees through our Employee Stock Purchase Plan and the exercise of employee stock options. Additionally, net cash used in financing activities included $19 used during the three months ended March 31, 2012 in connection with repurchases of our common stock made under our share repurchase program. Working Capital At March 31, 2012, we had cash and cash equivalents of $13,167 compared with $14,084 at June 30, 2011. Available sources of cash to support known or reasonably likely cash requirements over the next 12 months include cash and cash equivalents on hand, additional cash that may be generated from our operations, and funds to the extent available through our credit facilities discussed below. While we believe that our available sources of cash, including funds available through our revolving line that are subject to certain minimum cash balance requirements, will support known or reasonably likely cash requirements over the next 12 months, including quarterly principal payments of $1,199 and
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Table of Contentsinterest payments due under our credit agreement, our ability to generate cash from our operations is dependent upon our ability to profitably generate revenue, which requires that we continually develop profitable new business, both for growth and to replace completed projects. Although work for no one client constitutes more than 10% of our revenue, we have had to find significant amounts of replacement and additional revenue as client relationships and work for continuing clients change and will likely have to continue to do so in the future. Our ability to profitably generate revenue depends not only on our execution of our business plans, but also on general market factors outside of our control. As many of our clients treat all or a portion of their market research expenditures as discretionary, our ability to profitably generate revenue is adversely impacted whenever there are adverse macroeconomic conditions in the markets we serve. Our capital requirements depend on numerous factors, including but not limited to, market acceptance of our products and services, the resources we allocate to the continuing development of new products and services, our technology infrastructure and online panels, and the marketing and selling of our products and services. We are able to control or defer certain capital and other expenditures in order to help preserve cash if necessary. We expect to incur capital expenditures of between $500 and $1,000 during the fiscal year ending June 30, 2012. Credit Facilities The required principal repayments under our credit agreement for the remaining three months of the fiscal year ending June 30, 2012 and each of the two succeeding fiscal years are set forth in Note 8, “Borrowings”, to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. At March 31, 2012, we had no outstanding borrowings under our revolving line of credit and $347 of outstanding letters of credit. The letters of credit reduce the remaining undrawn portion of the revolving line of credit that is available for future borrowings. At June 30, 2011, we were not in compliance with certain financial covenants under our credit agreement largely due to the magnitude of restructuring and other charges incurred during fiscal 2011. On September 27, 2011, these covenant violations were permanently waived through an amendment agreement and waiver, as more fully described above under “Significant Events – Amendment Agreement and Waiver” and in Note 8, “Borrowings”, to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. At March 31, 2012, the Company was in compliance with all of the covenants under the credit agreement, as amended by the amendment agreement and waiver. Interest Rate Swap The principal terms of our interest rate swap are described in Note 8, “Borrowings”, to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements and Contractual Obligations At March 31, 2012, we did not have any transaction, agreement, or other contractual arrangement constituting an “off-balance sheet arrangement” as defined in Item 303(a)(4) of Regulation S-K. There have been no material changes outside the ordinary course of business during the three months ended March 31, 2012 to our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed by us with the SEC on September 28, 2011. Recent Accounting Pronouncements See Note 3, “Recent Accounting Pronouncements”, to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q for a discussion of the impact of recently issued accounting pronouncements on our unaudited consolidated financial statements at March 31, 2012 and for the nine months then ended, as well as the expected impact on our consolidated financial statements for future periods.
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Table of ContentsItem 3 — Quantitative and Qualitative Disclosures about Market Risk We have two kinds of market risk exposures, interest rate exposure and foreign currency exposure. We have no market risk sensitive instruments entered into for trading purposes. In light of current economic conditions, we reviewed the cash equivalents held by us. We do not believe that our holdings have a material liquidity risk under current market conditions. Interest Rate Exposure At March 31, 2012, we had outstanding debt under our credit facilities of $7,191. The debt matures September 30, 2013 and bears interest at the floating adjusted LIBOR plus an applicable margin. Our interest rate swap fixes the floating adjusted LIBOR portion of the interest rate at 4.32% through September 30, 2013. The additional applicable margin is set at 5.50% through March 31, 2012, resulting in an effective interest rate of 9.82% on our outstanding debt at March 31, 2012. Foreign Currency Exposure As a result of operating in foreign markets, our financial results could be affected by significant changes in foreign currency exchange rates. We have international operations in North America and Europe. Therefore, we are subject to foreign currency rate exposure. Non-U.S. transactions are denominated in the functional currencies of the respective countries in which our foreign subsidiaries reside. Our consolidated assets and liabilities are translated into U.S. Dollars at the applicable exchange rates in effect as of the balance sheet date. Consolidated income and expense items are translated into U.S. Dollars at the average exchange rates for each period presented. Accumulated net translation adjustments are recorded in the accumulated other comprehensive income component of stockholders’ equity. We measure our risk related to foreign currency rate exposure on two levels, the first being the impact of operating results on the consolidation of foreign subsidiaries that are denominated in the functional currencies of their home countries, and the second being the extent to which we have instruments denominated in foreign currencies. Foreign exchange translation gains and losses are included in our results of operations since we consolidate the results of our international operations, which are denominated in each country’s functional currency, with our U.S. results. The impact of translation gains or losses on net income from consolidating foreign subsidiaries was not material for the periods presented. We have historically had low exposure to changes in foreign currency exchange rates upon consolidating the results of our foreign subsidiaries with our U.S. results due to the size of our foreign operations in comparison to our consolidated operations. However, if the operating profits of our international operations increase as a percentage of our consolidated operations, our exposure to the appreciation or depreciation in the U.S. Dollar could have a more significant impact on our net income (loss) and cash flows. Thus, we evaluate our exposure to foreign currency fluctuation risk on an ongoing basis. Since our foreign operations are conducted using foreign currencies, we bear additional risk of fluctuations in exchange rates because of instruments denominated in foreign currencies. We have historically had low exposure to changes in foreign currency exchange rates with regard to instruments denominated in foreign currencies, given the amount and short-term nature of the maturity of these instruments. The carrying values of financial instruments denominated in foreign currencies, including cash, cash equivalents, accounts receivable and accounts payable, approximate fair value because of the short-term nature of the maturity of these instruments. We performed a sensitivity analysis at March 31, 2012. 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.
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Table of ContentsItem 4 — Controls and Procedures Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended). Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of March 31, 2012 (the end of the period covered by this Quarterly Report on Form 10-Q) were effective. Further, there have been no changes in our internal control over financial reporting identified in connection with management’s evaluation thereof during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In the normal course of business, we are at times subject to pending and threatened legal actions and proceedings. After reviewing with legal counsel any pending and threatened actions and proceedings, management does not expect the outcome of such actions or proceedings to have a material adverse effect on our business, financial condition, results of operations, or cash flows. There are no material changes from the risk factors related to our business as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed by us with the SEC on September 28, 2011. Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds The following table shows the monthly activity for our Repurchase Program for the three months ended March 31, 2012: ISSUER PURCHASES OF EQUITY SECURITIES
Item 3 — Defaults Upon Senior Securities None. Item 4 — Mine Safety Disclosures None. None.
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Table of ContentsPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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