1 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 June 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) <TABLE> <S> <C> Delaware 74-1677284 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) </TABLE> 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, 63,336,760 shares as of July 31, 2001.
2 2 HARTE-HANKS, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT June 30, 2001 <TABLE> <CAPTION> Page ---- <S> <C> Part I. Financial Information Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - 3 June 30, 2001 and December 31, 2000 Condensed Consolidated Statements of Operations - 4 Three months ended June 30, 2001 and 2000 Condensed Consolidated Statements of Operations - 5 Six months ended June 30, 2001 and 2000 Condensed Consolidated Statements of Cash Flows - 6 Six months ended June 30, 2001 and 2000 Condensed Consolidated Statements of Stockholders' 7 Equity - Six months ended June 30, 2001 and 2000 Notes to Unaudited Condensed Consolidated Financial 8 Statements Item 2. Management's Discussion and Analysis of Financial 12 Condition and Results of Operations Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17 (a) Exhibits (b) Reports on Form 8-K Signature 18 </TABLE>
3 3 Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except share amounts) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> (Unaudited) June 30, December 31, 2001 2000 --------- --------- <S> <C> <C> Assets Current assets Cash and cash equivalents ...................... $ 17,514 $ 22,928 Accounts receivable, net ....................... 145,657 179,838 Inventory ...................................... 6,001 6,260 Prepaid expenses ............................... 14,365 14,072 Current deferred income tax asset .............. 7,580 7,648 Other current assets ........................... 5,032 5,127 --------- --------- Total current assets ........................ 196,149 235,873 Property, plant and equipment, net ................ 114,127 112,065 Goodwill and other intangibles, net ............... 430,532 439,148 Other assets ...................................... 19,269 20,019 --------- --------- Total assets ................................ $ 760,077 $ 807,105 ========= ========= Liabilities and Stockholders' Equity Current liabilities Accounts payable ............................... $ 49,608 $ 60,069 Accrued payroll and related expenses ........... 21,668 31,429 Customer deposits and unearned revenue ......... 39,521 42,712 Income taxes payable ........................... 10,763 5,135 Other current liabilities ...................... 6,272 10,619 --------- --------- Total current liabilities ................... 127,832 149,964 Long-term debt .................................... 42,629 65,370 Other long-term liabilities ....................... 44,181 40,768 --------- --------- Total liabilities ........................... 214,642 256,102 --------- --------- Stockholders' equity Common stock, $1 par value, 250,000,000 shares authorized. 78,038,034 and 76,916,339 shares issued at June 30, 2001 and December 31, 2000, respectively .......................... 78,038 76,916 Additional paid-in capital ..................... 214,956 202,222 Accumulated other comprehensive income (loss) .. (2,670) (2,105) Retained earnings .............................. 603,873 568,512 --------- --------- 894,197 845,545 Less treasury stock: 14,596,274 and 12,230,388 shares at cost at June 30, 2001 and December 31, 2000, respectively ............. (348,762) (294,542) --------- --------- Total stockholders' equity .................. 545,435 551,003 --------- --------- Total liabilities and stockholders' equity .. $ 760,077 $ 807,105 ========= ========= </TABLE> See Notes to Unaudited Condensed Consolidated Financial Statements.
4 4 Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (in thousands, except per share amounts) - -------------------------------------------------------------------------------- (Unaudited) <TABLE> <CAPTION> Three Months Ended June 30, --------------------------- 2001 2000 --------- --------- <S> <C> <C> Operating revenues ................................. $ 228,654 $ 235,693 --------- --------- Operating expenses Payroll ........................................ 83,702 86,231 Production and distribution .................... 75,604 80,711 Advertising, selling, general and administrative 20,620 22,386 Depreciation ................................... 7,994 6,926 Goodwill and intangible amortization ........... 4,175 3,593 --------- --------- 192,095 199,847 --------- --------- Operating income ................................... 36,559 35,846 --------- --------- Other expenses (income) Interest expense ............................... 746 220 Interest income ................................ (53) (613) Other, net ..................................... 1,139 330 --------- --------- 1,832 (63) --------- --------- Income before income taxes ......................... 34,727 35,909 Income tax expense ................................. 13,891 14,514 --------- --------- Net income ......................................... $ 20,836 $ 21,395 ========= ========= Basic: Earnings per common share ...................... $ 0.33 $ 0.31 ========= ========= Weighted-average common shares outstanding ..... 63,472 68,347 ========= ========= Diluted: Earnings per common share ...................... $ 0.32 $ 0.30 ========= ========= Weighted-average common and common equivalent shares outstanding .......................... 65,062 70,492 ========= ========= </TABLE> See Notes to Unaudited Condensed Consolidated Financial Statements.
5 5 Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (in thousands, except per share amounts) - -------------------------------------------------------------------------------- (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, ------------------------- 2001 2000 --------- --------- <S> <C> <C> Operating revenues ................................. $ 460,774 $ 461,750 --------- --------- Operating expenses Payroll ........................................ 174,490 173,299 Production and distribution .................... 152,860 156,714 Advertising, selling, general and administrative 40,919 44,847 Depreciation ................................... 15,697 13,656 Goodwill and intangible amortization ........... 8,397 7,237 --------- --------- 392,363 395,753 --------- --------- Operating income ................................... 68,411 65,997 --------- --------- Other expenses (income) Interest expense ............................... 1,733 474 Interest income ................................ (214) (1,025) Other, net ..................................... 1,611 813 --------- --------- 3,130 262 --------- --------- Income before income taxes ......................... 65,281 65,735 Income tax expense ................................. 26,082 26,586 --------- --------- Net income ......................................... $ 39,199 $ 39,149 ========= ========= Basic: Earnings per common share ...................... $ 0.61 $ 0.57 ========= ========= Weighted-average common shares outstanding ..... 64,066 68,305 ========= ========= Diluted: Earnings per common share ...................... $ 0.60 $ 0.56 ========= ========= Weighted-average common and common equivalent shares outstanding .......................... 65,722 70,397 ========= ========= </TABLE> See Notes to Unaudited Condensed Consolidated Financial Statements.
6 6 Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands) - -------------------------------------------------------------------------------- (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, ------------------------- 2001 2000 --------- --------- <S> <C> <C> Operating Activities Net income ...................................................... $ 39,199 $ 39,149 Adjustments to reconcile net income to cash provided by operating activities: Depreciation ................................................. 15,697 13,656 Goodwill and intangible amortization ......................... 8,397 7,237 Amortization of option-related compensation .................. 109 277 Deferred income taxes ........................................ 2,943 3,281 Other, net ................................................... 1,870 361 Changes in operating assets and liabilities, net of acquisitions: Decrease in accounts receivable, net .......................... 34,181 2,616 Decrease in inventory ........................................ 259 785 Increase in prepaid expenses and other current assets ........ (198) (1,025) Decrease in accounts payable ................................. (9,902) (460) Decrease in other accrued expenses and other current liabilities ................................................ (9,794) (12,919) Other, net ................................................... (536) (2,427) --------- --------- Net cash provided by operating activities ................. 82,225 50,531 --------- --------- Investing Activities Acquisitions .................................................... (453) (9,147) Purchases of property, plant and equipment ...................... (18,811) (20,429) Proceeds from sale of property, plant and equipment ............. 335 123 --------- --------- Net cash used in investing activities ..................... (18,929) (29,453) --------- --------- Financing Activities Long-term borrowings ............................................ 223,000 2,222 Repayment of long-term borrowings ............................... (245,000) (5,000) Issuance of common stock ........................................ 6,355 3,154 Purchase of treasury stock ...................................... (49,266) (9,300) Issuance of treasury stock ...................................... 39 40 Dividends paid .................................................. (3,838) (3,416) --------- --------- Net cash used in financing activities ..................... (68,710) (12,300) --------- --------- Net increase (decrease) in cash ................................. (5,414) 8,778 Cash and cash equivalents at beginning of year .................. 22,928 35,196 --------- --------- Cash and cash equivalents at end of period ...................... $ 17,514 $ 43,974 ========= ========= </TABLE> See Notes to Unaudited Condensed Consolidated Financial Statements.
7 7 Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Stockholders' Equity - -------------------------------------------------------------------------------- (Unaudited) <TABLE> <CAPTION> Accumulated Additional Other Total Common Paid-In Retained Treasury Comprehensive Stockholders' Stock Capital Earnings Stock Income (Loss) Equity ----- ------- -------- ----- ------------- ------ <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 2000 ..... $ 76,392 $ 197,454 $ 493,362 $(201,906) $ 12,316 $ 577,618 Common stock issued- employee benefit plans .... 99 1,922 -- -- -- 2,021 Exercise of stock options ...... 200 933 -- -- -- 1,133 Tax benefit of options exercised ................. -- 397 -- -- -- 397 Dividends paid ($0.05 per share) .................... -- -- (3,416) -- -- (3,416) Treasury stock repurchase ...... -- -- -- (9,300) -- (9,300) Treasury stock issued .......... -- 3 -- 37 -- 40 Comprehensive income, net of tax: Net income ................ -- -- 39,149 -- -- 39,149 Foreign currency translation adjustment -- -- -- -- (1,030) (1,030) Change in net unrealized gain (loss) on long-term investments, net of reclassification adjustments (net of tax of $4,191) ........ -- -- -- -- (7,781) (7,781) --------- Total comprehensive income ..... 30,338 --------- --------- --------- --------- --------- --------- Balance at June 30, 2000 ....... $ 76,691 $ 200,709 $ 529,095 $(211,169) $ 3,505 $ 598,831 ========= ========= ========= ========= ========= ========= Balance at January 1, 2001 ..... $ 76,916 $ 202,222 $ 568,512 $(294,542) $ (2,105) $ 551,003 Common stock issued- employee benefit plans .... 96 1,770 -- -- -- 1,866 Exercise of stock options for cash and by surrender of shares ....... 1,026 4,990 -- (4,990) -- 1,026 Tax benefit of options exercised ................. -- 5,971 -- -- -- 5,971 Dividends paid ($0.06 per share) .................... -- -- (3,838) -- -- (3,838) Treasury stock repurchase ...... -- -- -- (49,266) -- (49,266) Treasury stock issued .......... -- 3 -- 36 -- 39 Comprehensive income, net of tax: Net income ................ -- -- 39,199 -- -- 39,199 Foreign currency translation adjustment -- -- -- -- (452) (452) Change in net unrealized gain (loss) on long-term investments, net of reclassification adjustments (net of tax of $61) ........... -- -- -- -- (113) (113) --------- Total comprehensive income ..... 38,634 --------- --------- --------- --------- --------- --------- Balance at June 30, 2001 ....... $ 78,038 $ 214,956 $ 603,873 $(348,762) $ (2,670) $ 545,435 ========= ========= ========= ========= ========= ========= </TABLE> See Notes to Unaudited Condensed Consolidated Financial Statements.
8 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 six months ended June 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 six month income tax provision of $13.9 million and $26.1 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 9 NOTE C - EARNINGS PER SHARE A reconciliation of basic and diluted earnings per share (EPS) is as follows: <TABLE> <CAPTION> Three Months Ended June 30, In thousands, except per share amounts 2001 2000 - -------------------------------------------------------------------------------------------- <S> <C> <C> BASIC EPS Net Income ................................................... $20,836 $21,395 ======= ======= Weighted-average common shares outstanding used in earnings per share computations .................... 63,472 68,347 ======= ======= Earnings per common share .................................... $ 0.33 $ 0.31 ======= ======= DILUTED EPS Net Income ................................................... $20,836 $21,395 ======= ======= Shares used in diluted earnings per share computations ....... 65,062 70,492 ======= ======= Earnings per common share .................................... $ 0.32 $ 0.30 ======= ======= Computation of shares used in earnings per share computations: Average outstanding common shares ............................ 63,472 68,347 Average common equivalent shares - dilutive effect of option shares ........................... 1,590 2,145 ------- ------- Shares used in diluted earnings per share computations ....... 65,062 70,492 ======= ======= </TABLE> <TABLE> <CAPTION> Six Months Ended June 30, In thousands, except per share amounts 2001 2000 - ------------------------------------------------------------------------------------------ <S> <C> <C> BASIC EPS Net Income ................................................... $39,199 $39,149 ======= ======= Weighted-average common shares outstanding used in earnings per share computations .................... 64,066 68,305 ======= ======= Earnings per common share .................................... $ 0.61 $ 0.57 ======= ======= DILUTED EPS Net Income ................................................... $39,199 $39,149 ======= ======= Shares used in diluted earnings per share computations ....... 65,722 70,397 ======= ======= Earnings per common share .................................... $ 0.60 $ 0.56 ======= ======= Computation of shares used in earnings per share computations: Average outstanding common shares ............................ 64,066 68,305 Average common equivalent shares - dilutive effect of option shares ........................... 1,656 2,092 ------- ------- Shares used diluted in earnings per share computations ....... 65,722 70,397 ======= ======= </TABLE> As of June 30, 2001 the Company had 786,210 antidilutive market price options outstanding, which have been excluded from the EPS calculations. NOTE D - BUSINESS SEGMENTS Harte-Hanks is a highly focused targeted media company with operations in two segments - direct and interactive marketing and shoppers.
10 10 Information about the Company's operations in different industry segments: <TABLE> <CAPTION> Three Months Ended June 30 In thousands 2001 2000 --------- --------- <S> <C> <C> Operating revenues Direct Marketing ................... $ 147,754 $ 159,351 Shoppers ........................... 80,900 76,342 --------- --------- Total operating revenues ....... $ 228,654 $ 235,693 ========= ========= Operating Income Direct Marketing ................... $ 21,338 $ 22,191 Shoppers ........................... 17,432 15,859 Corporate Activities ............... (2,211) (2,204) --------- --------- Total operating income ......... $ 36,559 $ 35,846 ========= ========= Income before income taxes Operating income ................... $ 36,559 $ 35,846 Interest expense ................... (746) (220) Interest income .................... 53 613 Other, net ......................... (1,139) (330) --------- --------- Total income before income taxes $ 34,727 $ 35,909 ========= ========= </TABLE> <TABLE> <CAPTION> Six Months Ended June 30 In thousands 2001 2000 --------- --------- <S> <C> <C> Operating revenues Direct Marketing ................... $ 305,547 $ 315,542 Shoppers ........................... 155,227 146,208 --------- --------- Total operating revenues ....... $ 460,774 $ 461,750 ========= ========= Operating Income Direct Marketing ................... $ 42,756 $ 43,550 Shoppers ........................... 30,214 26,946 Corporate Activities ............... (4,559) (4,499) --------- --------- Total operating income ......... $ 68,411 $ 65,997 ========= ========= Income before income taxes Operating income ................... $ 68,411 $ 65,997 Interest expense ................... (1,733) (474) Interest income .................... 214 1,025 Other, net ......................... (1,611) (813) --------- --------- Total income before income taxes $ 65,281 $ 65,735 ========= ========= </TABLE>
11 11 NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," issued in June 2001, establishes accounting and reporting standards for business combinations. This statement eliminates the pooling-of-interests method of accounting for business combinations and requires all business combinations to be accounted for using the purchase method. The Company is adopting SFAS No. 141 as of July 1, 2001. The adoption of SFAS No. 141 is not expected to have a material impact on the Company's financial statements. Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," issued in June 2001, establishes accounting and reporting standards for acquired goodwill and other intangible assets. This statement addresses the treatment of goodwill and other intangible assets that are acquired or have already been recognized in the financial statements. Under this statement, goodwill and certain other intangible assets will no longer be amortized, but will be required to be reviewed periodically for impairment of value. The Company will adopt SFAS No. 142 as of January 1, 2002. The Company is assessing the impact of SFAS No. 142 on its financial statements and believes that previously recorded goodwill and certain intangible assets will cease to be amortized upon adoption.
12 12 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 SIX MONTHS ENDED In thousands JUNE 30, 2001 JUNE 30, 2000 CHANGE JUNE 30, 2001 JUNE 30, 2000 CHANGE - ------------ ------------- ------------- ------ ------------- ------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $ 228,654 $ 235,693 -3.0% $ 460,774 $ 461,750 -0.2% Operating expenses 192,095 199,847 -3.9% 392,363 395,753 -0.8% --------- -------- --------- ---------- Operating income $ 36,559 $ 35,846 2.0% $ 68,411 $ 65,997 3.7% =========== ========== =========== ========== Net income $ 20,836 $ 21,395 -2.6% $ 39,199 $ 39,149 0.1% =========== ========== =========== ========== Diluted earnings per share $ 0.32 $ 0.30 6.7% $ 0.60 $ 0.56 7.1% =========== ========== =========== ========== </TABLE> Consolidated revenues declined 3.0% to $228.7 million while operating income grew 2.0% to $36.6 million in the second quarter of 2001 when compared to the second quarter of 2000. Overall operating expenses compared to 2000 decreased 3.9% to $192.1 million. Net income declined 2.6% to $20.8 million in the second quarter of 2001 when compared to the second quarter of 2000. Diluted earnings per share grew 6.7% to 32 cents per share, compared to 30 cents per share. The net income decline resulted from the growth in operating income offset by $1.1 million in higher interest expense and lower interest income and $1.2 million of write-downs on equity investments. DIRECT MARKETING Direct and interactive marketing operating results were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 2001 JUNE 30, 2000 CHANGE JUNE 30, 2001 JUNE 30, 2000 CHANGE - ------------ ------------- ------------- ------ ------------- ------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $ 147,754 $ 159,351 -7.3% $ 305,547 $ 315,542 -3.2% Operating expenses 126,416 137,160 -7.8% 262,791 271,992 -3.4% --------- -------- --------- ---------- Operating income $ 21,338 $ 22,191 -3.8% $ 42,756 $ 43,550 -1.8% =========== ========== =========== ========== </TABLE> Direct and interactive marketing revenues decreased $11.6 million, or 7.3%, in the second quarter of 2001 compared to 2000. These results reflect declines in the retail, high tech/telecom and financial services industry sectors, which represent direct and interactive marketing's largest vertical markets. Partially offsetting these results were increased revenues from the pharmaceutical, healthcare and automotive industry sectors. Both Customer Relationship Management (CRM) and Marketing Services revenues declined from the prior year. CRM revenues experienced declines in data processing, fulfillment, consulting and brokered customer list business, partially offset by increased internet and agency business and increased revenues attributable to acquisitions. Marketing Services experienced revenue declines in its targeted mail, print, logistics and personalized direct mail operations. Operating expenses decreased $10.7 million, or 7.8%, in the second quarter of 2001 compared to 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 $6.5 million due to decreased volumes and better pricing obtained from vendors. Also contributing to the decreased operating
13 13 expenses were decreased labor costs of $3.2 million due to a smaller workforce. General and administrative expense decreased $2.7 million due to decreased employee and professional services expenses. Depreciation and amortization expense increased $1.7 million due to goodwill associated with acquisitions and higher levels of capital investment to support future growth. Operating expenses were also impacted by prior year acquisitions. Direct and interactive marketing revenues decreased $10.0 million, or 3.2%, in the first six months of 2001 compared to the first six months of 2000. CRM revenues were soft while Marketing Services experienced decreased revenues in the first six months of 2001. Overall, these results were impacted by declines in the retail, financial services, high tech/telecom and insurance industry sectors partially offset by increased revenues from the healthcare, pharmaceutical and automotive industry sectors and prior year acquisitions. Operating expenses decreased $9.2 million, or 3.4%, in the first half of 2001 compared to the first half 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 $7.5 million due to decreased volumes and better pricing obtained from vendors. Also contributing to the decreased operating expenses were decreased labor costs of $0.3 million due to a smaller workforce. General and administrative expense decreased $4.7 million due to decreased employee and professional services expenses. Depreciation and amortization expense increased $3.3 million due to goodwill associated with acquisitions and higher levels of 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 SIX MONTHS ENDED In thousands JUNE 30, 2001 JUNE 30, 2000 CHANGE JUNE 30, 2001 JUNE 30, 2000 CHANGE - ------------ ------------- ------------- ------ ------------- ------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $ 80,900 $ 76,342 6.0% $ 155,227 $ 146,208 6.2% Operating expenses 63,468 60,483 4.9% 125,013 119,262 4.8% --------- -------- --------- ---------- Operating income $ 17,432 $ 15,859 9.9% $ 30,214 $ 26,946 12.1% =========== ========== =========== ========== </TABLE> Shopper revenues increased $4.6 million, or 6.0%, in the second 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 distribution products, primarily 4-color glossy heatset flyers and preprinted inserts and its in-book products. Shoppers also continued to experience success in up-selling ads onto its web-site. In the quarter, Shoppers experienced declines in its employment and automotive related advertising sectors. Operating expenses increased $3.0 million, or 4.9%, in the second quarter of 2001 compared to 2000. The increase in operating expenses was primarily due to increases in labor costs of $0.8 million and additional production costs of $1.5 million, including increased postage of $1.0 million due to increased volumes and higher postage rates. Shopper revenues increased $9.0 million, or 6.2%, in the first six months of 2001 compared to the first six 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 distribution products, primarily 4-color glossy heatset flyers and preprinted inserts and its in-book products. Shoppers also continued to experience success in up-selling ads onto
14 14 its web-site. In the first half of 2001, Shoppers experienced declines in its automotive and real estate advertising sectors. Operating expenses increased $5.8, or 4.8%, in the first half of 2001 compared to the first half of 2000. The increase in operating expenses was primarily due to increases in labor costs of $1.6 million and additional production costs of $3.7 million, including increased postage of $2.5 million due to increased volumes and higher postage rates. Other Income and Expense In the first half of 2001 the Company recorded losses of approximately $1.0 million on the write-down of an investment which was being accounted for under the cost method and $0.7 million on the write-down of an investment which is classified as available-for-sale. Interest Expense/Interest Income Interest income decreased $0.6 million in the second quarter of 2001 and $0.8 million in the first six months of 2001 compared to the same periods in 2000. These decreases were due to larger cash and investment balances and higher interest rates in the first half of 2000. Interest expense increased $0.5 million in the second quarter of 2001 and $1.3 million in the first six months of 2001 over the same periods in 2000. The increase was due primarily to higher debt levels in the first half of 2001, the proceeds of which were primarily used to repurchase the Company's stock. Income Taxes The Company's income tax expense decreased $0.6 million in the second quarter of 2001 and $0.5 million in the first six 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 second quarter of 2001 and the first six months of 2001 compared to 40.4% for the same periods in 2000. Liquidity and Capital Resources Cash provided by operating activities for the six months ended June 30, 2001 was $82.2 million, compared to $50.5 million for the six months ended June 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 $18.9 million for the first six months of 2001 compared to net cash outflows of $29.5 million for the first six 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 $68.7 million in 2001 compared to net cash outflows of $12.3 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 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, 2000 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 November 1, 2001. As of June 30, 2001, the Company had $167 million of unused borrowing capacity under these two credit facilities. Management believes
15 15 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. 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 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. Qualified personnel are in great demand and are likely to remain a limited resource for the foreseeable future. Postal Rates -- The Company's shoppers are delivered by standard mail, and postage is the second largest expense, behind payroll, in the Company's shopper
16 16 business. The present standard postage rates went into effect in January 2001 and are expected to increase in the third quarter of 2001. 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.
17 17 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting of stockholders on May 8, 2001. At the meeting the stockholders were requested to vote on the following: To elect Larry Franklin and James L. Johnson as Class II directors for a three-year term. The result of the vote was as follows: <TABLE> <CAPTION> For Withheld ---------- --------- <S> <C> <C> Larry Franklin 53,627,884 2,569,962 James L. Johnson 56,011,739 186,107 </TABLE> The names of each director whose term of office continued are: David L. Copeland, Dr. Peter T. Flawn, Christopher M. Harte, Houston H. Harte and Richard M. Hochhauser. 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 June 30, 2001.
18 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. August 14, 2001 /s/ Jacques D. Kerrest --------------- -------------------------------------------- Date Jacques D. Kerrest Senior Vice President, Finance and Chief Financial Officer
19 19 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Description of Exhibit Page No. --- ---------------------- -------- <S> <C> <C> 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) Amended and Restated Bylaws (filed as Exhibit 3(b) to the Company's Registration Statement No. 33-69202 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. 2 dated October 30, 2000 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, 2000 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). </TABLE>
20 20 <TABLE> <CAPTION> Exhibit No. Description of Exhibit Page No. --- ---------------------- -------- <S> <C> <C> 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). 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. 22 </TABLE> - --------------------- *Filed herewith