UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the quarterly period ended September 30, 2001
------------------
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 1-7120
------
HARTE-HANKS, INC.
-----------------
(Exact name of registrant as specified in its charter)
Delaware 74-1677284
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Concord Plaza Drive, San Antonio, Texas 78216
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code -- 210/829-9000
------------
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 the number of shares outstanding of each of the issuer's classes of
common stock: $1 par value, 63,032,119 shares as of October 31, 2001.
2
HARTE-HANKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
September 30, 2001
<Table>
<Caption>
Page
----
Part I. Financial Information
Item 1. Interim Condensed Consolidated Financial
Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 3
2001 and December 31, 2000
Condensed Consolidated Statements of Operations - 4
Three months ended September 30, 2001 and 2000
Condensed Consolidated Statements of Operations - 5
Nine months ended September 30, 2001 and 2000
Condensed Consolidated Statements of Cash Flows - 6
Nine months ended September 30, 2001 and 2000
Condensed Consolidated Statements of Stockholders' 7
Equity - Nine months ended September 30, 2001 and
twelve months ended December 31, 2000
Notes to Unaudited Condensed Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
(a) Exhibits
(b) Reports on Form 8-K
Signature 18
</Table>
3
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (in thousands, except share amounts)
- --------------------------------------------------------------------------------
<Table>
<Caption>
(Unaudited)
September 30, December 31,
2001 2000
------------- -------------
Assets
Current assets
Cash and cash equivalents ................................ $ 20,022 $ 22,928
Accounts receivable, net ................................. 145,701 179,838
Inventory ................................................ 5,876 6,260
Prepaid expenses ......................................... 13,971 14,072
Current deferred income tax asset ........................ 8,102 7,648
Other current assets ..................................... 4,751 5,127
------------- -------------
Total current assets .................................. 198,423 235,873
Property, plant and equipment, net .......................... 110,550 112,065
Goodwill and other intangibles, net ......................... 426,145 439,148
Other assets ................................................ 19,383 20,019
------------- -------------
Total assets .......................................... $ 754,501 $ 807,105
============= =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ......................................... $ 49,015 $ 60,069
Accrued payroll and related expenses ..................... 20,101 31,429
Customer deposits and unearned revenue ................... 37,451 42,712
Income taxes payable ..................................... 22,222 5,135
Other current liabilities ................................ 7,375 10,619
------------- -------------
Total current liabilities ............................. 136,164 149,964
Long-term debt .............................................. 40,143 65,370
Other long-term liabilities ................................. 45,498 40,768
------------- -------------
Total liabilities ..................................... 221,805 256,102
------------- -------------
Stockholders' equity
Common stock, $1 par value, 250,000,000 shares
authorized. 78,106,103 and 76,916,339 shares
issued at September 30, 2001 and December 31,
2000, respectively .................................... 78,106 76,916
Additional paid-in capital ............................... 215,985 202,222
Accumulated other comprehensive loss ..................... (1,378) (2,105)
Retained earnings ........................................ 621,923 568,512
------------- -------------
914,636 845,545
Less treasury stock: 16,025,804 and 12,230,388
shares at cost at September 30, 2001 and
December 31, 2000, respectively ....................... (381,940) (294,542)
------------- -------------
Total stockholders' equity ............................ 532,696 551,003
------------- -------------
Total liabilities and stockholders' equity ............ $ 754,501 $ 807,105
============= =============
</Table>
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (in thousands, except per
share amounts)
- --------------------------------------------------------------------------------
(Unaudited)
<Table>
<Caption>
Three Months Ended September 30,
--------------------------------
2001 2000
------------ ------------
Operating revenues .............................................. $ 224,130 $ 243,205
------------ ------------
Operating expenses
Payroll ..................................................... 79,232 86,852
Production and distribution ................................. 77,489 86,047
Advertising, selling, general and administrative ............ 19,059 23,676
Depreciation ................................................ 8,072 7,394
Goodwill and intangible amortization ........................ 4,232 3,836
------------ ------------
188,084 207,805
------------ ------------
Operating income ................................................ 36,046 35,400
------------ ------------
Other expenses (income)
Interest expense ............................................ 637 275
Interest income ............................................. (57) (619)
Other, net .................................................. 2,303 312
------------ ------------
2,883 (32)
------------ ------------
Income before income taxes ...................................... 33,163 35,432
Income tax expense .............................................. 13,250 14,300
------------ ------------
Net income ...................................................... $ 19,913 $ 21,132
============ ============
Basic:
Earnings per common share ................................... $ 0.32 $ 0.31
============ ============
Weighted-average common shares outstanding .................. 62,600 67,519
============ ============
Diluted:
Earnings per common share ................................... $ 0.31 $ 0.30
============ ============
Weighted-average common and common equivalent
shares outstanding ....................................... 64,022 69,782
============ ============
</Table>
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (in thousands, except per
share amounts)
- --------------------------------------------------------------------------------
(Unaudited)
<Table>
<Caption>
Nine Months Ended September 30,
--------------------------------
2001 2000
-------------- --------------
Operating revenues ......................................... $ 684,904 $ 704,955
-------------- --------------
Operating expenses
Payroll ................................................ 253,722 260,151
Production and distribution ............................ 230,349 242,761
Advertising, selling, general and administrative ....... 59,978 68,523
Depreciation ........................................... 23,769 21,050
Goodwill and intangible amortization ................... 12,629 11,073
-------------- --------------
580,447 603,558
-------------- --------------
Operating income ........................................... 104,457 101,397
-------------- --------------
Other expenses (income)
Interest expense ....................................... 2,370 749
Interest income ........................................ (271) (1,644)
Other, net ............................................. 3,914 1,125
-------------- --------------
6,013 230
-------------- --------------
Income before income taxes ................................. 98,444 101,167
Income tax expense ......................................... 39,332 40,886
-------------- --------------
Net income ................................................. $ 59,112 $ 60,281
============== ==============
Basic:
Earnings per common share .............................. $ 0.93 $ 0.89
============== ==============
Weighted-average common shares outstanding ............. 63,577 68,043
============== ==============
Diluted:
Earnings per common share .............................. $ 0.91 $ 0.86
============== ==============
Weighted-average common and common equivalent
shares outstanding .................................. 65,155 70,192
============== ==============
</Table>
See Notes to Unaudited Condensed Consolidated Financial Statements.
6
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (in thousands)
- --------------------------------------------------------------------------------
(Unaudited)
<Table>
<Caption>
Nine Months Ended September 30,
--------------------------------
2001 2000
------------ ------------
Operating Activities
Net income ............................................................. $ 59,112 $ 60,281
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation ........................................................ 23,769 21,050
Goodwill and intangible amortization ................................ 12,629 11,073
Amortization of option-related compensation ......................... 158 418
Deferred income taxes ............................................... 2,918 3,878
Other, net .......................................................... 4,026 961
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable, net ..................... 34,137 (6,220)
Decrease in inventory ............................................... 384 837
Decrease (increase) in prepaid expenses and other
current assets ................................................... 477 (246)
Decrease in accounts payable ........................................ (10,348) (12,874)
Increase (decrease) in other accrued expenses
and other current liabilities .................................... (1,486) 2,524
Other, net .......................................................... 242 (5,406)
------------ ------------
Net cash provided by operating activities ........................ 126,018 76,276
------------ ------------
Investing Activities
Acquisitions .......................................................... (453) (9,207)
Purchases of property, plant and equipment ............................ (23,503) (26,125)
Proceeds from sale of property, plant and equipment ................... 682 144
Net sales and maturities of
available-for-sale investments ...................................... -- 88
------------ ------------
Net cash used in investing activities ............................ (23,274) (35,100)
------------ ------------
Financing Activities
Long-term borrowings ................................................... 242,000 3,288
Repayment of long-term borrowings ...................................... (267,000) (5,000)
Issuance of common stock ............................................... 7,330 4,369
Purchase of treasury stock ............................................. (82,336) (33,406)
Issuance of treasury stock ............................................. 57 61
Dividends paid ......................................................... (5,701) (5,099)
------------ ------------
Net cash used in financing activities ............................ (105,650) (35,787)
------------ ------------
Net increase (decrease) in cash ........................................ (2,906) 5,389
Cash and cash equivalents at beginning of year ......................... 22,928 35,196
------------ ------------
Cash and cash equivalents at end of period ............................. $ 20,022 $ 40,585
============ ============
</Table>
See Notes to Unaudited Condensed Consolidated Financial Statements.
7
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity (2001 Unaudited)
- --------------------------------------------------------------------------------
<Table>
<Caption>
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock Income (Loss) Equity
----------- ----------- --------- --------- ------------- -------------
Balance at December 31, 1999 ...... $ 76,392 $ 197,454 $ 493,362 $(201,906) $ 12,316 $ 577,618
Common stock issued-
employee benefit plans ....... 196 3,809 -- -- -- 4,005
Exercise of stock options ......... 328 2,173 -- -- -- 2,501
Tax benefit of options
exercised .................... -- 1,581 -- -- -- 1,581
Dividends paid ($0.10 per
share) ....................... -- -- (6,736) -- -- (6,736)
Treasury stock repurchase ......... -- -- -- (92,706) -- (92,706)
Treasury stock issued ............. -- 11 -- 70 -- 81
Warrants repurchased (net of
tax of $1,511) ............... -- (2,806) -- -- -- (2,806)
Comprehensive income, net of
tax:
Net income ................... -- -- 81,886 -- -- 81,886
Foreign currency
translation adjustment ... -- -- -- -- (1,208) (1,208)
Change in net unrealized
gain (loss) on
long-term investments,
net of reclassification
adjustments (net of
tax of $7,115) ........... -- -- -- -- (13,213) (13,213)
-----------
Total comprehensive income ........ 67,465
----------- ----------- --------- --------- ------------- -------------
Balance at December 31, 2000 ...... $ 76,916 $ 202,222 $ 568,512 $(294,542) $ (2,105) $ 551,003
Common stock issued-
employee benefit plans ....... 136 2,525 -- -- -- 2,661
Exercise of stock options
for cash and by
surrender of shares .......... 1,054 5,211 -- (5,114) -- 1,151
Tax benefit of options
exercised .................... -- 6,022 -- -- -- 6,022
Dividends paid ($0.09 per
share) ....................... -- -- (5,701) -- -- (5,701)
Treasury stock repurchase ......... -- -- -- (82,336) -- (82,336)
Treasury stock issued ............. -- 5 -- 52 -- 57
Comprehensive income, net of
tax:
Net income ................... -- -- 59,112 -- -- 59,112
Foreign currency
translation adjustment ... -- -- -- -- (170) (170)
Change in net unrealized
gain (loss) on
long-term investments,
net of reclassification
adjustments (net of
tax of $483) ............. -- -- -- -- 897 897
-------------
Total comprehensive income ........ 59,839
----------- ----------- --------- --------- ------------- -------------
Balance at September 30,
2001 ......................... $ 78,106 $ 215,985 $ 621,923 $(381,940) $ (1,378) $ 532,696
=========== =========== ========= ========= ============= =============
</Table>
See Notes to Unaudited Condensed Consolidated Financial Statements.
8
Harte-Hanks, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of Harte-Hanks, Inc. and subsidiaries (the "Company").
The statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and disclosure
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
months and nine months ended September 30, 2001 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2001. For
further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report on Form 10-K for the year
ended December 31, 2000.
Certain prior period amounts have been reclassified for comparative purposes.
NOTE B - INCOME TAXES
The Company's quarterly and nine month income tax provision of $13.3 million and
$39.3 million, respectively, was calculated using an effective income tax rate
of approximately 40.0%. The Company's effective income tax rate is derived by
estimating pretax income and income tax expense for the year ending December 31,
2001. The effective income tax rate calculated is higher than the federal
statutory rate of 35% due to the addition of state taxes and to certain expenses
recorded for financial reporting purposes (primarily goodwill amortization)
which are not deductible for federal income tax purposes.
9
NOTE C - EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share (EPS) is as follows:
<Table>
<Caption>
Three Months Ended September 30,
In thousands, except per share amounts 2001 2000
---------- ----------
BASIC EPS
Net Income ........................................................ $ 19,913 $ 21,132
========== ==========
Weighted-average common shares outstanding
used in earnings per share computations ......................... 62,600 67,519
========== ==========
Earnings per common share ......................................... $ 0.32 $ 0.31
========== ==========
DILUTED EPS
Net Income ........................................................ $ 19,913 $ 21,132
========== ==========
Shares used in diluted earnings per share computations ............ 64,022 69,782
========== ==========
Earnings per common share ......................................... $ 0.31 $ 0.30
========== ==========
Computation of shares used in earnings per share computations:
Average outstanding common shares ................................. 62,600 67,519
Average common equivalent shares -
dilutive effect of option shares ................................ 1,422 2,263
---------- ----------
Shares used in diluted earnings per share computations ............ 64,022 69,782
========== ==========
</Table>
<Table>
<Caption>
Nine months ended September 30,
In thousands, except per share amounts 2001 2000
------------ ------------
BASIC EPS
Net Income ........................................................ $ 59,112 $ 60,281
============ ============
Weighted-average common shares outstanding
used in earnings per share computations ......................... 63,577 68,043
============ ============
Earnings per common share ......................................... $ 0.93 $ 0.89
============ ============
DILUTED EPS
Net Income ........................................................ $ 59,122 $ 60,281
============ ============
Shares used in diluted earnings per share computations ............ 65,155 70,192
============ ============
Earnings per common share ......................................... $ 0.91 $ 0.86
============ ============
Computation of shares used in earnings per share computations:
Average outstanding common shares ................................. 63,577 68,043
Average common equivalent shares -
dilutive effect of option shares ................................ 1,578 2,149
------------ ------------
Shares used in diluted earnings per share computations ............ 65,155 70,192
============ ============
</Table>
As of September 30, 2001 the Company had approximately 1,202,000 antidilutive
market price options outstanding, which have been excluded from the EPS
calculations.
10
NOTE D - BUSINESS SEGMENTS
Harte-Hanks is a highly focused targeted media company with operations in two
segments - direct and interactive marketing and shoppers.
<Table>
<Caption>
Three Months Ended September 30
In thousands 2001 2000
------------ ------------
Operating revenues
Direct Marketing ........................ $ 143,474 $ 165,608
Shoppers ................................ 80,656 77,597
------------ ------------
Total operating revenues ............ $ 224,130 $ 243,205
============ ============
Operating Income
Direct Marketing ........................ $ 20,624 $ 21,544
Shoppers ................................ 17,597 15,603
Corporate Activities .................... (2,175) (1,747)
------------ ------------
Total operating income .............. $ 36,046 $ 35,400
============ ============
Income before income taxes
Operating income ........................ $ 36,046 $ 35,400
Interest expense ........................ (637) (275)
Interest income ......................... 57 619
Other, net .............................. (2,303) (312)
------------ ------------
Total income before income taxes .... $ 33,163 $ 35,432
============ ============
</Table>
<Table>
<Caption>
Nine Months Ended September 30
In thousands 2001 2000
------------ ------------
Operating revenues
Direct Marketing ........................ $ 449,021 $ 481,150
Shoppers ................................ 235,883 223,805
------------ ------------
Total operating revenues ............ $ 684,904 $ 704,955
============ ============
Operating Income
Direct Marketing ........................ $ 63,380 $ 65,094
Shoppers ................................ 47,811 42,549
Corporate Activities .................... (6,734) (6,246)
------------ ------------
Total operating income .............. $ 104,457 $ 101,397
============ ============
Income before income taxes
Operating income ........................ $ 104,457 $ 101,397
Interest expense ........................ (2,370) (749)
Interest income ......................... 271 1,644
Other, net .............................. (3,914) (1,125)
------------ ------------
Total income before income taxes .... $ 98,444 $ 101,167
============ ============
</Table>
11
NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for separately. SFAS
No. 142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of".
The Company is required to adopt the provisions of SFAS No. 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001 and
SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS No. 142. SFAS No. 141
will require, upon adoption of SFAS No. 142, that the Company evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Upon adoption of SFAS No. 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation, SFAS No. 142
will require the Company to perform an assessment of whether there is an
indication that goodwill and equity-method goodwill is impaired as of the date
of adoption. To accomplish this, the Company must identify its reporting units
and determine the carrying value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company will then have up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of it assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with SFAS No. 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of operations.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $418.2 million and unamortized identifiable intangible assets in
the amount of $3.9 million, all of which will be subject to the transition
provisions of SFAS No. 141 and 142. Amortization expense related to goodwill was
$14.8 million and $12.2 million for the year ended December 31, 2000 and the
nine months ended September 30, 2001, respectively. Because of the extensive
effort needed to comply with adopting SFAS No. 141 and 142, it is not
practicable to reasonably estimate the impact of adopting these Statements on
the Company's financial statements at the date of this report, including whether
any transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
12
SFAS No. 143, "Accounting for Asset Retirement Obligations," issued in June
2001, addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or normal use of the asset. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The Company will adopt SFAS No. 143 as of January 1, 2003. At this time
the Company does not believe that the adoption of SFAS No. 143 will have a
material impact on its financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
issued in August 2001, addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 supersedes both SFAS
No. 121 and APB Opinion No. 30, and establishes a single accounting model for
long-lived assets to be disposed of by sale. The Company will adopt SFAS No. 144
as of January 1, 2002. At this time the Company does not believe that the
adoption of SFAS No. 144 will have a material impact on its financial
statements.
13
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Operating results were as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 2001 SEPT. 30, 2000 CHANGE SEPT. 30, 2001 SEPT. 30, 2000 CHANGE
-------------- -------------- ------ -------------- -------------- ------
Revenues $ 224,130 243,205 -7.8% $ 684,904 $ 704,955 -2.8%
Operating expenses 188,084 207,805 -9.5% 580,447 603,558 -3.8%
-------------- -------------- -------------- --------------
Operating income $ 36,046 $ 35,400 1.8% $ 104,457 $ 101,397 3.0%
============== ============== ============== ==============
Net income $ 19,913 $ 21,132 -5.8% $ 59,112 $ 60,281 -1.9%
============== ============== ============== ==============
Diluted earnings
per share $ 0.31 $ 0.30 3.3% $ 0.91 $ 0.86 5.8%
============== ============== ============== ==============
</Table>
Consolidated revenues declined 7.8% to $224.1 million while operating income
grew 1.8% to $36.0 million in the third quarter of 2001 when compared to the
third quarter of 2000. Overall operating expenses compared to 2000 decreased
9.5% to $188.1 million.
Net income declined 5.8% to $19.9 million in the third quarter of 2001 when
compared to the third quarter of 2000. Diluted earnings per share grew 3.3% to
31 cents per share, compared to 30 cents per share. The net income decline
resulted from the growth in operating income offset by $0.9 million in net
interest expense and $2.0 million of write-downs on equity investments.
DIRECT MARKETING
Direct and interactive marketing operating results were as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 2001 SEPT. 30, 2000 CHANGE SEPT. 30, 2001 SEPT. 30, 2000 CHANGE
-------------- -------------- ------ -------------- -------------- ------
Revenues $ 143,474 $ 165,608 -13.4% $ 449,021 $ 481,150 -6.7%
Operating expenses 122,850 144,064 -14.7% 385,641 416,056 -7.3%
-------------- -------------- -------------- --------------
Operating income $ 20,624 $ 21,544 -4.3% $ 63,380 $ 65,094 -2.6%
============== ============== ============== ==============
</Table>
Direct and interactive marketing revenues decreased $22.1 million, or 13.4%, in
the third quarter of 2001 compared to 2000. These results reflect declines in
almost all of direct and interactive marketing's vertical markets, including
declines in the segment's largest vertical markets, retail, financial services
and high tech/telecom. The overall decline was partially offset by strong growth
in revenues from the pharmaceutical industry. Both Customer Relationship
Management (CRM) and Marketing Services revenues declined from the prior year.
CRM experienced revenue declines in data processing, agency, fulfillment,
consulting, telesales and brokered customer list business, partially offset by
increased software revenue and increased revenues attributable to acquisitions.
Marketing Services experienced revenue declines in its targeted mail, logistics,
and personalized direct mail.
Operating expenses decreased $21.2 million, or 14.7%, in the third quarter of
2001 compared to 2000. The overall decrease in operating expenses was primarily
due to the Company's continuing efforts to manage its cost structure during the
current difficult economic environment and to control discretionary costs.
Production and distribution costs decreased $9.0 million due to decreased
volumes and better pricing obtained from vendors. Also contributing to the
decreased operating expenses were decreased labor costs of $7.8 due to a smaller
workforce. General and administrative expense decreased $5.5 million due to
decreased employee and professional services expenses. Depreciation and
amortization expense increased $1.1 million due to goodwill associated with
prior year acquisitions and depreciation of new capital investments to support
future growth. Operating expenses were also impacted by prior year acquisitions.
Direct and interactive marketing revenues decreased $32.1 million, or 6.7%, in
the first nine months of 2001 compared to the first nine months of 2000. Both
CRM and Marketing
14
Services experienced decreased revenues in the first nine months of 2001.
Overall, these results were impacted by declines in almost all of direct and
interactive marketing's vertical markets, including declines in the segment's
largest vertical markets, retail, financial services and high tech/telecom.
Partially offsetting these declines were revenues attributable to prior year
acquisitions and strong revenue growth in the health care and pharmaceutical
industries.
Operating expenses decreased $30.4 million, or 7.3%, in the first nine months of
2001 compared to the first nine months of 2000. The overall decrease in
operating expenses was primarily due to the Company's efforts to manage its cost
structure during the current difficult economic environment and to control
discretionary costs. Production and distribution costs decreased $16.5 million
due to decreased volumes and better pricing obtained from vendors. Also
contributing to the decreased operating expenses were decreased labor costs of
$8.1 million due to a smaller workforce. General and administrative expense
decreased $10.3 million primarily due to decreased employee and professional
services expenses. Depreciation and amortization expense increased $4.4 million
due to goodwill associated with prior year acquisitions and new capital
investment to support future growth. Operating expenses were also impacted by
prior year acquisitions.
SHOPPERS
Shopper operating results were as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 2001 SEPT. 30, 2000 CHANGE SEPT. 30, 2001 SEPT. 30, 2000 CHANGE
-------------- -------------- ------ -------------- -------------- ------
Revenues $ 80,656 $ 77,597 3.9% $ 235,883 $ 223,805 5.4%
Operating expenses 63,059 61,994 1.7% 188,072 181,256 3.8%
-------------- -------------- -------------- --------------
Operating income $ 17,597 $ 15,603 12.8% $ 47,811 $ 42,549 12.4%
============== ============== ============== ==============
</Table>
Shopper revenues increased $3.1 million, or 3.9%, in the third quarter of 2001
compared to 2000. Revenue increases were the result of improved sales in
established markets as well as new year-over-year geographic expansions into new
neighborhoods in both California and Florida. From a product-line perspective,
Shoppers had growth in both its in-book products, primarily core sales and real
estate related advertising, and its distribution products, primarily 4-color
glossy heatset flyers. In the quarter, Shoppers experienced declines in its
in-book employment advertising section and in its coupon book and
print-and-deliver product lines.
Operating expenses increased $1.1 million, or 1.7%, in the third quarter of 2001
compared to 2000. The increase in operating expenses was primarily due to
additional promotion costs of $0.8 million and increased production costs of
$0.4 million, including increased postage of $0.3 million due to higher postage
rates and increased insurance costs of $0.5 million. Labor costs decreased $0.2
million in the quarter, partially offsetting the increased operating expenses.
Shopper revenues increased $12.1 million, or 5.4%, in the first nine months of
2001 compared to the first nine months of 2000. Revenue increases were the
result of improved sales in established markets as well as new year-over-year
geographic expansions into new neighborhoods in both California and Florida.
From a product-line perspective, Shoppers had growth in both its in-book
products, primarily core sales and real estate and employment related
advertising, and its distribution products, primarily pre-printed inserts and
4-color glossy heatset flyers. In the first nine months of 2000, Shoppers
experienced slowdowns in its in-book automotive advertising section and its
coupon book and print-and-deliver product lines.
Operating expenses increased $6.8 million, or 3.8%, in the first nine months of
2001 compared to the first nine months of 2000. The increase in operating
expenses was primarily due to increases in labor costs of $1.2 million,
additional promotion costs of $2.3 million and additional production costs of
$4.1 million, including increased postage of $2.8 million due to increased
volumes and higher postage rates, and increased paper costs of $0.9 million due
to higher paper rates.
15
Other Income and Expense
During the first nine months of 2001 the Company recorded losses of
approximately $2.7 million on the write-down of investments which are classified
as available-for-sale and $1.0 million on the write-down of an investment which
was being accounted for under the cost method. These investments were written
down due to the fact that their estimated fair values fell below their carrying
values for a period of time that was viewed as other than temporary by the
Company's management.
Interest Expense/Interest Income
Interest income decreased $0.6 million in the third quarter of 2001 and $1.4
million in the first nine months of 2001 when compared to the same periods in
2000. These decreases were due to larger cash and investment balances and higher
interest rates during the first nine months of 2000.
Interest expense increased $0.4 million in the third quarter of 2001 and $1.6
million in the first nine months of 2001 over the same periods in 2000. The
increase was primarily due to higher debt levels during the first nine months of
2001, the proceeds of which were primarily used to repurchase the Company's
stock.
Income Taxes
The Company's income tax expense decreased $1.1 million in the third quarter of
2001 and $1.6 million in the first nine months of 2001 compared to the same
periods in 2000. This decrease was due primarily to the lower pre-tax income
levels. The effective tax rate was 40.0% for the third quarter and the first
nine months of 2001 compared to 40.4% for the same periods in 2000.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended September 30,
2001 was $126.0 million, compared to $76.3 million for the nine months ended
September 30, 2000. The increase in 2001 primarily related to increased
collections of a higher accounts receivable balance at December 31, 2000 than at
December 31, 1999. Net cash outflows from investing activities were $23.3
million for the first nine months of 2001 compared to net cash outflows of $35.1
million for the first nine months of 2000. The cash outflows in 2001 primarily
relate to purchases of fixed assets, while the cash outflows in 2000 were
attributable to purchases of fixed assets and acquisitions. Net cash outflows
from financing activities were $105.7 million in 2001 compared to net cash
outflows of $35.8 million in 2000. The cash outflow in 2001 is attributable
primarily to the repurchase of the Company's stock and net repayments of
borrowings, while the cash outflow in 2000 primarily related to the repurchase
of the Company's stock.
Capital resources are also available from and provided through the Company's two
unsecured credit facilities. These credit facilities, two $100 million variable
rate, revolving loan commitments, were put in place on November 4, 1999. All
borrowings under the $100 million revolving Three-Year Credit Agreement are to
be repaid by November 4, 2002. On November 2, 2001 the Company was granted a
364-day extension to its $100 million revolving 364-Day Credit Agreement. All
borrowings under the 364-Day Credit Agreement are to be repaid by November 1,
2002. As of September 30, 2001, the Company had $170 million of unused borrowing
capacity under these two credit facilities. Management believes that its credit
facilities, together with cash provided from operating activities, will be
sufficient to fund operations and anticipated acquisitions and capital service
needs for the foreseeable future.
Factors That May Affect Future Results and Financial Condition
From time to time, in both written reports and oral statements by senior
management, the Company may express its expectations regarding its future
performance. These "forward-looking statements" are inherently uncertain, and
investors should realize that events could turn out to be other than what senior
management expected. Set forth below are some key factors which could affect the
Company's future performance, including its revenues, net
16
income and earnings per share; however, the risks described below are not the
only ones the Company faces. Additional risks and uncertainties that are not
presently known, or that the Company currently considers immaterial, could also
impair the Company's business operations.
Legislation -- There could be a material adverse impact on the Company's direct
and interactive marketing business due to the enactment of legislation or
industry regulations arising from public concern over consumer privacy issues.
Restrictions or prohibitions could be placed upon the collection and use of
information that is currently legally available.
Data Suppliers -- There could be a material adverse impact on the Company's
direct and interactive marketing business if owners of the data the Company uses
were to withdraw the data. Data providers could withdraw their data if there is
a competitive reason to do so or if legislation is passed restricting the use of
the data.
Acquisitions -- In recent years the Company has made a number of acquisitions in
its direct and interactive marketing segment, and it expects to pursue
additional acquisition opportunities. Acquisition activities, even if not
consummated, require substantial amounts of management time and can distract
from normal operations. In addition, there can be no assurance that the
synergies and other objectives sought in acquisitions will be achieved.
Competition -- Direct and interactive marketing is a rapidly evolving business,
subject to periodic technological advancements, high turnover of customer
personnel who make buying decisions, and changing customer needs and
preferences. Consequently, the Company's direct and interactive marketing
business faces competition in both of its sectors -- CRM and Marketing Services.
The Company's shopper business competes for advertising, as well as for readers,
with other print and electronic media. Competition comes from local and regional
newspapers, magazines, radio, broadcast and cable television, shoppers and other
communications media that operate in the Company's markets. The extent and
nature of such competition are, in large part, determined by the location and
demographics of the markets targeted by a particular advertiser, and the number
of media alternatives in those markets. Failure to continually improve the
Company's current processes and to develop new products and services could
result in the loss of the Company's customers to current or future competitors.
In addition, failure to gain market acceptance of new products and services
could adversely affect the Company's growth.
Qualified Personnel -- The Company believes that its future prospects will
depend in large part upon its ability to attract, train and retain highly
skilled technical, client services and administrative personnel. While dependent
on employment levels and general economic conditions, qualified personnel
historically have been in great demand and from time to time in the foreseeable
future will likely remain a limited resource.
Postal Rates and Service -- The Company's shoppers and direct and interactive
marketing services depend on the United States Postal Service ("USPS") to
deliver products. The Company's shoppers are delivered by standard mail, and
postage is the second largest expense, behind payroll, in the Company's shopper
business. The present standard postage rates went into effect in the third
quarter of 2001 and are expected to increase in the second half of 2002. Future
postage rates may also be impacted by the USPS's response to recent threats to
the postal system. Overall shopper postage costs are expected to grow moderately
as a result of this increase as well as anticipated increases in circulation and
insert volumes. Postal rates also influence the demand for the Company's direct
and interactive marketing services even though the cost of mailings is borne by
the Company's customers and is not directly reflected in the Company's revenues
or expenses.
Paper Prices -- Paper represents a substantial expense in the Company's shopper
operations. In recent years newsprint prices have fluctuated widely, and such
fluctuations can materially affect the results of the Company's operations.
Economic Conditions -- Changes in national economic conditions, such as events
following the September 11, 2001 attacks, can affect levels of advertising
expenditures generally, and such changes can affect each of the Company's
businesses. In addition, revenues from the Company's shopper business are
dependent to a large extent on local advertising expenditures in the markets in
which they operate. Such expenditures are substantially affected by the
17
strength of the local economies in those markets. Direct and interactive
marketing revenues are dependent on national and international economics.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See index to Exhibits on Page 19.
(b) No Form 8-K has been filed during the three months ended
September 30, 2001.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
HARTE-HANKS, INC.
November 14, 2001 /s/ Jacques D. Kerrest
----------------- ---------------------------------------
Date Jacques D. Kerrest
Senior Vice President, Finance and
Chief Financial Officer
EXHIBIT INDEX
<Table>
<Caption>
Exhibit
No. Description of Exhibit Page No.
- ------- --------------------------------------------------------------- --------
3(a) Amended and Restated Certificate of Incorporation (filed as
Exhibit 3(a) to the Company's Form 10-K for the year ended
December 31, 1993 and incorporated by reference herein).
*3(b) Second Amended and Restated Bylaws 22
3(c) Amendment dated April 30, 1996 to Amended and Restated
Certificate of Incorporation (filed as Exhibit 3(c) to the
Company's Form 10-Q for the nine months ended September 30, 1996
and incorporated by reference herein).
3(d) Amendment dated May 5, 1998 to Amended and Restated Certificate
of Incorporation (filed as Exhibit 3(d) to the Company's Form
10-Q for the six months ended June 30, 1998 and incorporated by
reference herein).
3(e) Amended and Restated Certificate of Incorporation as amended
through May 5, 1998 (filed as Exhibit 3(e) to the Company's Form
10-Q for the six months ended June 30, 1998 and incorporated by
reference herein).
4(a) 364-Day Credit Agreement dated as of November 4, 1999 between
Harte-Hanks, Inc. and the Lenders named therein [$100 million].
(filed as Exhibit 4(a) to the Company's form 10-Q for the nine
months ended September 30, 1999 and incorporated by reference
herein).
4(b) Three-Year Credit Agreement dated as of November 4, 1999 between
Harte-Hanks, Inc. and the Lenders named therein [$100 million].
(filed as Exhibit 4(b) to the Company's form 10-Q for the nine
months ended September 30, 1999 and incorporated by reference
herein).
*4(c) Amendment No. 3 dated October 26, 2001 to 364-Day Credit
Agreement [$100 million]. 47
4(d) Other long term debt instruments are not being filed pursuant to
Section (b)(4)(iii) of Item 601 of Regulation S-K. Copies of
such instruments will be furnished to the Commission upon
request.
10(a) 1984 Stock Option Plan (filed as Exhibit 10(d) to the Company's
Form 10-K for the year ended December 31, 1984 and
incorporated herein by reference).
</Table>
<Table>
<Caption>
Exhibit
No. Description of Exhibit Page No.
- ------- --------------------------------------------------------------- --------
10(b) Registration Rights Agreement dated as of September 11, 1984
among HHC Holding Inc. and its stockholders (filed as Exhibit
10(b) to the Company's Form 10-K for the year ended December
31, 1993 and incorporated by reference herein).
10(c) Severance Agreement between Harte-Hanks, Inc. and Larry
Franklin, dated as of December 15, 2000 (filed as Exhibit
10(c) to the Company's Form 10-K for the year ended December
31, 2000 and incorporated by reference herein).
10(d) Severance Agreement between Harte-Hanks, Inc. and Richard M.
Hochhauser dated as of December 15, 2000 (filed as Exhibit
10(d) to the Company's Form 10-K for the year ended
December 31, 2000 and incorporated by reference herein).
10(e) Form 1 of Severance Agreement between Harte-Hanks, Inc. and
certain Executive Officers of the Company, dated as of
December 15, 2000 (filed as Exhibit 10(e) to the Company's
Form 10-K for the year ended December 31, 2000 and
incorporated by reference herein).
10(f) Form 2 of Severance Agreement between Harte-Hanks, Inc. and
certain Executive Officers of the Company, dated as of
December 15, 2000 (filed as Exhibit 10(f) to the Company's
Form 10-K for the year ended December 31, 2000 and
incorporated by reference herein).
10(g) Harte-Hanks, Inc. Amended and Restated Restoration Pension Plan
dated as of January 1, 2000 (filed as Exhibit 10(f) to the
Company's Form 10-K for the year ended December 31, 1999 and
Incorporated by reference herein).
10(h) Harte-Hanks Communications, Inc. 1996 Incentive Compensation
Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the
nine months ended September 30, 1996 and incorporated by reference
herein).
10(i) Harte-Hanks, Inc. Amended and Restated 1991 Stock Option Plan
(filed as Exhibit 10(h) to the Company's Form 10-Q for the six
months ended June 30, 2000 and incorporated by reference herein).
10(j) Harte-Hanks, Inc. 1998 Director Stock Plan (filed as Exhibit 10(h)
to the Company's Form 10-Q for the six months ended June 30, 1998
and incorporated by reference herein).
10(k) Harte-Hanks, Inc. Deferred Compensation Plan (filed as Exhibit
10(i) to the Company's Form 10-K for the year ended December
31, 1998 and incorporated by reference herein).
</Table>
<Table>
<Caption>
Exhibit
No. Description of Exhibit Page No.
- ------- --------------------------------------------------------------- --------
10(l) Amendment One to Harte-Hanks, Inc. Amended and Restated
Restoration Plan dated December 18, 2000 (filed as Exhibit 10(l)
to the Company's Form 10-K for the year ended December 31, 2000
and incorporated by reference herein).
*21 Subsidiaries of the Company. 53
</Table>
- ----------
*Filed herewith