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 March 31, 2002
--------------
[ ] 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, 62,854,814 shares as of April 30, 2002.
2
HARTE-HANKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
March 31, 2002
<Table>
<Caption>
Page
----
Part I. Financial Information
Item 1. Interim Condensed Consolidated Financial
Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations -
Three months ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 2002 and 2001 5
Consolidated Statements of Stockholders' Equity
and Comprehensive Income - Three months ended
March 31, 2002 and twelve months ended
December 31, 2001 6
Notes to Unaudited Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
(a) Exhibits
(b) Reports on Form 8-K
Signature 15
</Table>
3
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (in thousands, except share amounts)
- --------------------------------------------------------------------------------
<Table>
<Caption>
(Unaudited)
March 31, December 31,
2002 2001
---------- ------------
Assets
Current assets
Cash and cash equivalents ........................... $ 27,487 $ 30,468
Accounts receivable, net ............................ 127,949 138,409
Inventory ........................................... 4,985 5,835
Prepaid expenses .................................... 13,687 13,411
Current deferred income tax asset ................... 8,525 8,378
Other current assets ................................ 5,276 6,306
--------- ---------
Total current assets ............................. 187,909 202,807
Property, plant and equipment, net ..................... 104,415 109,428
Goodwill, net .......................................... 434,699 434,458
Other intangibles, net ................................. 3,717 3,867
Other assets ........................................... 20,138 20,489
--------- ---------
Total assets ..................................... $ 750,878 $ 771,049
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable .................................... $ 38,773 $ 42,990
Accrued payroll and related expenses ................ 17,309 21,550
Customer deposits and unearned revenue .............. 39,398 38,617
Income taxes payable ................................ 11,490 10,531
Other current liabilities ........................... 7,330 8,086
--------- ---------
Total current liabilities ........................ 114,300 121,774
Long-term debt ......................................... 10,261 48,312
Other long-term liabilities ............................ 50,252 48,597
--------- ---------
Total liabilities ................................ 174,813 218,683
--------- ---------
Stockholders' equity
Common stock, $1 par value, 250,000,000 shares
authorized. 79,271,200 and 78,281,458 shares
issued at March 31, 2002 and December 31,
2001, respectively ............................... 79,271 78,281
Additional paid-in capital .......................... 236,244 219,229
Accumulated other comprehensive income (loss) ....... (1,456) (1,293)
Retained earnings ................................... 658,716 640,635
Less treasury stock: 16,572,966 and 16,139,795
shares at cost at March 31, 2002 and
December 31, 2001, respectively .................. (396,710) (384,486)
--------- ---------
Total stockholders' equity ....................... 576,065 552,366
--------- ---------
Total liabilities and stockholders' equity ....... $ 750,878 $ 771,049
========= =========
</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 March 31,
----------------------------
2002 2001
--------- ---------
Operating revenues ...................................... $ 214,907 $ 232,120
--------- ---------
Operating expenses
Payroll ............................................. 81,405 90,788
Production and distribution ......................... 74,507 77,256
Advertising, selling, general and administrative .... 17,023 20,299
Depreciation ........................................ 8,361 7,703
Goodwill and intangible amortization ................ 150 4,222
--------- ---------
181,446 200,268
--------- ---------
Operating income ........................................ 33,461 31,852
--------- ---------
Other expenses (income)
Interest expense .................................... 369 987
Interest income ..................................... (50) (161)
Other, net .......................................... 267 472
--------- ---------
586 1,298
--------- ---------
Income before income taxes .............................. 32,875 30,554
Income tax expense ...................................... 12,607 12,191
--------- ---------
Net income .............................................. $ 20,268 $ 18,363
========= =========
Basic:
Earnings per common share ........................... $ 0.32 $ 0.28
========= =========
Weighted-average common shares outstanding .......... 62,519 64,660
========= =========
Diluted:
Earnings per common share ........................... $ 0.32 $ 0.28
========= =========
Weighted-average common and common equivalent
shares outstanding ............................... 64,220 66,381
========= =========
</Table>
A reconciliation of the effects of the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", on
net income and basic and diluted earnings per share is as follows:
<Table>
Net income .............................................. $ 20,268 $ 18,363
Add back: Goodwill amortization (net of tax effect) .... 2,985
--------- ---------
Adjusted net income ..................................... $ 20,268 $ 21,348
========= =========
Basic earnings per common share:
Net income .............................................. $ 0.32 $ 0.28
Add back: Goodwill amortization (net of tax effect) .... 0.05
--------- ---------
Adjusted net income ..................................... $ 0.32 $ 0.33
========= =========
Diluted earnings per common share:
Net income .............................................. $ 0.32 $ 0.28
Add back: Goodwill amortization (net of tax effect) .... 0.04
--------- ---------
Adjusted net income ..................................... $ 0.32 $ 0.32
========= =========
</Table>
SFAS No. 142 is described in Note B of the Notes to Unaudited Condensed
Consolidated Financial Statements.
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (in thousands)
- --------------------------------------------------------------------------------
(Unaudited)
<Table>
<Caption>
Three Months Ended March 31,
----------------------------
2002 2001
--------- ---------
Operating Activities
Net income .............................................. $ 20,268 $ 18,363
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation ......................................... 8,361 7,703
Goodwill and intangible amortization ................. 150 4,222
Amortization of option-related compensation .......... 46 93
Deferred income taxes ................................ 1,823 1,178
Other, net ........................................... 14 604
Changes in operating assets and liabilities, net of
acquisitions:
Decrease in accounts receivable, net ................. 10,460 29,287
Decrease (increase) in inventory ..................... 850 (673)
Decrease (increase) in prepaid expenses and other
current assets .................................... 754 (360)
Increase (decrease)in accounts payable ............... (4,217) 10,404
Increase (decrease) in other accrued expenses
and other liabilities ............................. 462 (6,660)
Other, net ........................................... 203 (1,185)
--------- ---------
Net cash provided by operating activities ......... 39,174 62,976
--------- ---------
Investing Activities
Acquisitions ............................................ (245) --
Purchases of property, plant and equipment .............. (3,566) (8,963)
Proceeds from sale of property, plant and equipment ..... 96 154
--------- ---------
Net cash used in investing activities ............. (3,715) (8,809)
--------- ---------
Financing Activities
Long-term borrowings .................................... -- 112,000
Repayment of long-term borrowings ....................... (38,000) (143,000)
Issuance of common stock ................................ 8,595 3,820
Purchase of treasury stock .............................. (6,866) (26,497)
Issuance of treasury stock .............................. 18 21
Dividends paid .......................................... (2,187) (1,935)
--------- ---------
Net cash used in financing activities ............. (38,440) (55,591)
--------- ---------
Net increase (decrease) in cash ......................... (2,981) (1,424)
Cash and cash equivalents at beginning of year .......... 30,468 22,928
--------- ---------
Cash and cash equivalents at end of period .............. $ 27,487 $ 21,504
========= =========
</Table>
See Notes to Unaudited Condensed Consolidated Financial Statements.
6
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
and Comprehensive Income
- -------------------------------------------------------------------------------
(2002 Unaudited)
(in thousands)
<Table>
<Caption>
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock Income (Loss) Equity
------ ---------- -------- -------- ------------- -------------
Balance at January 1, 2001 .............. $76,916 $202,222 $568,512 $(294,542) $(2,105) $551,003
Common stock issued-
employee benefit plans ............. 177 3,275 -- -- -- 3,452
Exercise of stock options
for cash and by
surrender of shares ................ 1,188 7,311 -- (6,350) -- 2,149
Tax benefit of options exercised ........ -- 6,416 -- -- -- 6,416
Dividends paid ($0.12 per share) ........ -- -- (7,561) -- -- (7,561)
Treasury stock repurchase ............... -- -- -- (83,664) -- (83,664)
Treasury stock issued ................... -- 5 -- 70 -- 75
Comprehensive income, net of tax:
Net income ......................... -- -- 79,684 -- -- 79,684
Foreign currency
translation adjustment ......... -- -- -- -- (85) (85)
Change in net unrealized
gain (loss) on long-term
investments, net of
reclassification adjustments
(net of tax of $481) ........... -- -- -- -- 897 897
--------
Total comprehensive income .............. 80,496
------- -------- -------- --------- ------- --------
Balance at December 31, 2001 ............ 78,281 219,229 640,635 (384,486) (1,293) 552,366
Common stock issued-
employee benefit plans ............. 33 718 -- -- -- 751
Exercise of stock options for cash
and by surrender of shares ......... 957 9,789 -- (5,372) -- 5,374
Tax benefit of options exercised ........ -- 6,504 -- -- -- 6,504
Dividends paid ($0.035 per share) ....... -- -- (2,187) -- -- (2,187)
Treasury stock repurchase ............... -- -- -- (6,866) -- (6,866)
Treasury stock issued ................... -- 4 -- 14 -- 18
Comprehensive income, net of tax:
Net income ......................... -- -- 20,268 -- -- 20,268
Foreign currency
translation adjustment ......... -- -- -- -- (163) (163)
--------
Total comprehensive income .............. 20,105
------- -------- -------- --------- ------- --------
Balance at March 31, 2001 ............... $79,271 $236,244 $658,716 $(396,710) $(1,456) $576,065
======= ======== ======== ========= ======= ========
</Table>
See Notes to Unaudited Condensed Consolidated Financial Statements.
7
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 footnotes
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 ended March 31, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002. 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, 2001.
Certain prior period amounts have been reclassified for comparative purposes.
NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued 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. SFAS No. 142 requires 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 also requires 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 does not believe any of its previously recorded
intangibles have an indefinite life and such recorded intangibles are amortized
over their respective estimated useful lives.
The Company adopted the provisions of SFAS No. 141 on July 1, 2001, and the
provisions of SFAS No. 142 on January 1, 2002. In connection with the adoption
of SFAS No. 141 and 142, the Company evaluated its existing intangible assets
and goodwill, and did not find it necessary to make any reclassifications in
order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. The Company has also reassessed the useful lives and residual
values of all intangible assets acquired in purchase business combinations, and
has not found it necessary to make any amortization period adjustments. In
addition, to the extent an intangible asset is identified as having an
indefinite useful life, the Company is required to test the intangible asset for
impairment in accordance with the provisions of SFAS No. 142 prior to July 1,
2002. Any impairment loss will be measured as of January 1, 2002 and recognized
as the cumulative effect of a change in accounting principle in the second
quarter of 2002.
In connection with the transitional goodwill impairment evaluation, SFAS No. 142
requires 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.
8
The Company has identified its reporting units as Customer Relationship
Management (CRM), Marketing Services, and Shoppers. The Company is in the
process of determining the carrying value of each of these reporting units by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of January 1, 2002. 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 its assets
and liabilities (recognized and unrecognized) 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 January 1, 2002. 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 measured as of January 1, 2002
and 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, January 1, 2002, the Company had unamortized
goodwill in the amount of $434.5 million and unamortized identifiable intangible
assets in the amount of $3.9 million, all of which are subject to the transition
provisions of SFAS No. 141 and 142. As of March 31, 2002, the Company had
unamortized goodwill in the amount of $434.7 and unamortized identifiable
intangible assets were $3.7 million. Amortization expense related to goodwill
was $4.1 million for the three months ended March 31, 2001. The Company expects
to complete its initial impairment assessment during the second quarter of 2002.
Based on its preliminary review, the Company does not expect to record any
transitional goodwill impairment upon the completion of its initial impairment
assessment.
A reconciliation of the effects of the adoption of Statement No. 142 on net
income and basic and diluted earnings per share is presented on the face of the
Consolidated Statements of Operations. For the purposes of these footnotes, all
2001 numbers have been restated as if SFAS No. 142 had been adopted for the
period.
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 adopted SFAS No. 144 as
of January 1, 2002 with no material impact on its financial statements.
9
NOTE C - INCOME TAXES
The Company's quarterly income tax provision of $12.6 million was calculated
using an effective income tax rate of approximately 38.3%. The Company's
effective income tax rate is derived by estimating pretax income and income tax
expense for the year ending December 31, 2002. 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
which are not deductible for federal income tax purposes.
NOTE D - EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share is as follows:
<Table>
<Caption>
Three Months Ended March 31,
----------------------------
In thousands, except per share amounts 2002 2001
- -------------------------------------- ------- -------
BASIC EPS
Net Income ........................................................ $20,268 $21,348
======= =======
Weighted-average common shares outstanding
used in earnings per share computations ......................... 62,519 64,660
======= =======
Earnings per common share ......................................... $ 0.32 $ 0.33
======= =======
DILUTED EPS
Net Income ........................................................ $20,268 $21,348
======= =======
Shares used in diluted earnings per share computations ............ 64,220 66,381
======= =======
Earnings per common share ......................................... $ 0.32 $ 0.32
======= =======
Computation of shares used in earnings per share computations:
Average outstanding common shares ................................. 62,519 64,660
Average common equivalent shares -
dilutive effect of option shares ................................ 1,701 1,721
------- -------
Shares used in diluted earnings per share computations ............ 64,220 66,381
======= =======
</Table>
NOTE E - BUSINESS SEGMENTS
Harte-Hanks is a highly focused targeted media company with operations in two
segments - direct and interactive marketing and shoppers.
Information about the Company's operations in different industry segments:
<Table>
<Caption>
Three Months Ended March 31
---------------------------
In thousands 2002 2001
- ------------ --------- ---------
Operating revenues
Direct Marketing ........................ $ 136,654 $ 157,793
Shoppers ................................ 78,253 74,327
--------- ---------
Total operating revenues ............ $ 214,907 $ 232,120
========= =========
Operating Income
Direct Marketing ........................ $ 20,049 $ 24,472
Shoppers ................................ 15,509 13,800
Corporate Activities .................... (2,097) (2,348)
--------- ---------
Total operating income .............. $ 33,461 $ 35,924
========= =========
Income before income taxes
Operating income ........................ $ 33,461 $ 35,924
Interest expense ........................ (369) (987)
Interest income ......................... 50 161
Other, net .............................. (267) (472)
--------- ---------
Total income before income taxes .... $ 32,875 $ 34,626
========= =========
</Table>
10
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
- -------------------------------------------------------------------------------
For the purposes of the Management's Discussion and Analysis section of this
report, all 2001 numbers have been restated as if SFAS No. 142 had been adopted
for the period.
RESULTS OF OPERATIONS
Operating results were as follows:
<Table>
<Caption>
THREE MONTHS ENDED
In thousands MARCH 31, 2002 MARCH 31, 2001 CHANGE
- ------------ -------------- -------------- ------
Revenues $214,907 $232,120 (7.4)%
Operating expenses 181,446 196,196 (7.5)%
-------- --------
Operating income $ 33,461 $ 35,924 (6.9)%
======== ========
Net income $ 20,268 $ 21,348 (5.1)%
======== ========
Diluted earnings
per share $ 0.32 $ 0.32 0.0%
======= ========
</Table>
Consolidated revenues declined 7.4% to $214.9 million and operating income
declined 6.9% to $33.5 million in the first quarter of 2002 when compared to the
first quarter of 2001. Overall operating expenses compared to 2001 decreased
6.9% to $181.4 million.
Net income declined 5.1% to $20.3 million, while diluted earnings per share was
flat versus 2001 at 32 cents per share. The net income decline was a result of
the decline in operating income, partially offset by $0.5 million lower net
interest expense.
DIRECT MARKETING
Direct and interactive marketing operating results were as follows:
<Table>
<Caption>
THREE MONTHS ENDED
In thousands MARCH 31, 2002 MARCH 31, 2001 CHANGE
- ------------ -------------- -------------- ------
Revenues $136,654 $157,793 (13.4)%
Operating expenses 116,605 133,321 (12.5)%
-------- -------
Operating income $ 20,049 $ 24,472 (18.1)%
======== =======
</Table>
Direct and interactive marketing revenues decreased $21.1 million, or 13.4%, in
the first quarter of 2002 compared to 2001. 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,
high-tech/telecom and pharmaceutical/healthcare. Both Customer Relationship
Management (CRM) and Marketing Services revenues declined from the prior year.
CRM experienced revenue declines in data processing, lead generation,
consulting, internet, software and brokered business, partially offset by
revenues attributable to the November 2001 acquisition of Sales Support
Services, Inc. Marketing Services experienced revenue declines in its
personalized direct mail and targeted mail operations, partially offset by
increased revenues from its logistics operations.
Operating expenses decreased $16.7 million, or 12.5%, in the first quarter of
2002 compared to 2001. The overall decrease in operating expenses was primarily
due to the Company's efforts to manage its cost structure in response to the
decline in revenues, as well as reduced variable expenses resulting from lower
revenue levels. Labor costs decreased $10.7 million due to lower volumes and
staff reductions. Production and distribution costs decreased $3.6 million due
primarily to decreased volumes. General and administrative expense decreased
11
$3.1 million due to decreased employee and professional services expenses.
Operating expenses were also impacted by the prior year acquisition noted above.
SHOPPERS
Shopper operating results were as follows:
<Table>
<Caption>
THREE MONTHS ENDED
In thousands MARCH 31, 2002 MARCH 31, 2001 CHANGE
- ------------ -------------- -------------- ------
Revenues $78,253 $74,327 5.3%
Operating expenses 62,744 60,527 3.7%
------- -------
Operating income $15,509 $13,800 12.4%
======= =======
</Table>
Shopper revenues increased $3.9 million, or 5.3%, in the first quarter of 2002
compared to 2001. Revenue increases were the result of improved sales in
established markets as well as year-over-year geographic expansions into new
neighborhoods, primarily in California. 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 pre-printed
inserts and 4-color glossy heatset flyers. These increases were partially offset
by declines in employment advertising, print-and-deliver and coupon book
revenues.
Operating expenses increased $2.2 million, or 3.7%, in the first quarter of 2002
compared to 2001. The increase in operating expenses was primarily due to
increases in labor costs of $1.4 million and additional production costs of $0.8
million, including increased postage due to increased volumes and higher postage
rates. Partially offsetting these increased operating expenses were decreased
paper costs, due to lower rates for both newsprint and job paper, and lower
promotion expense.
Other Income and Expense
Other net expense primarily consists of bank charges and stockholders expenses.
Interest Expense/Interest Income
Interest expense decreased $0.6 million in the first quarter of 2002 compared to
the same period in 2001 due primarily to lower debt levels and lower interest
rates in the first quarter of 2002.
Interest income decreased $0.1 million in the first quarter of 2002 compared to
the same period in 2001 due primarily to lower interest rates during the first
quarter of 2002.
Income Taxes
The Company's income tax expense decreased $0.7 million in the first quarter of
2002 compared to the first quarter of 2001. This decrease was due primarily to
the lower pre-tax income levels. The effective tax rate was 38.3% for the first
quarter of 2002 and 2001.
Liquidity and Capital Resources
Cash provided by operating activities for the three months ended March 31, 2002
was $39.2 million, compared to $63.0 million for the first three months of 2001.
The decrease in 2002 primarily related to first quarter collections of a lower
accounts receivable balance at December 31, 2001 than at December 31, 2000. Net
cash outflows from investing activities were $3.7 million for the first three
months of 2002, compared to $8.8 million for the first three months of 2001. The
cash outflow in both years primarily relate to purchases of fixed assets. Net
cash outflows from financing activities were $38.4 million in 2002 compared to
12
$55.6 million in 2001. The difference between cash outflows in 2002 and 2001 is
attributable primarily to a larger amount spent for the repurchase of treasury
stock in 2001.
Capital resources are 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 October 26, 2001 the Company was granted a
364-day extension to its $100 million revolving 364-Day Credit Agreement. All
borrowings under the $100 million revolving 364-Day Credit Agreement are to be
repaid by October 25, 2002. As of March 31, 2002, the Company had $193 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 expenditures needs for the foreseeable future.
The Company has classified its debt at March 31, 2002 as long-term as it is the
Company's intent to refinance all outstanding balances under these credit
facilities at the time they expire. The Company believes it will be able to
obtain additional credit facilities at comparable amounts and terms based on the
Company's financial position and relationships with its existing lenders.
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 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
13
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 - 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 the threats to the postal service
that occurred last year. 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 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
strength of the local economies in those markets. Direct and interactive
marketing revenues are dependent on national and international economics.
Interest Rates - Interest rate movements in Europe and the United States can
affect the amount of interest the Company pays related to its debt and the
amount it earns on cash equivalents. The Company's primary interest rate
exposure is to interest rate fluctuations in Europe, specifically EUROLIBOR
rates due to their impact on interest related to the Company's two $100 million
credit facilities. The Company also has exposure to interest rate fluctuations
in the United States, specifically commercial paper and overnight time deposit
rates as these affect the Company's earnings on its excess cash.
14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See index to Exhibits on Page 16.
(b) No Form 8-K has been filed during the three months ended
March 31, 2002.
15
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.
May 14, 2002 /s/ Jacques D. Kerrest
------------ ----------------------------------
Date Jacques D. Kerrest
Senior Vice President, Finance and
Chief Financial Officer
16
<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 (filed as Exhibit 3(b) to the
Company's Form 10-Q for the nine months ended September 30, 2001
and incorporated by reference herein).
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] (filed as Exhibit 4(c) to the Company's Form 10-Q
for the nine months ended September 30, 2001 and incorporated by
reference herein).
4(d) Other long term debt instruments are not being filed pursuant to
Section (b)(4)(ii) 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).
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).
</Table>
17
<Table>
<Caption>
Exhibit
No. Description of Exhibit Page No.
- ------- ---------------------- --------
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(g) to the Company's Form 10-Q for the six
months ended June 30, 1998 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).
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).
*10(m) Agreement between Harte-Hanks, Inc. and Larry Franklin regarding
role of Chairman of the Board of Directors of Harte-Hanks, Inc.
dated as of April 1, 2002. 18
*21 Subsidiaries of the Company. 22
</Table>
- ---------
*Filed herewith