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 ---- <S> <C> 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 ---------- ------------ <S> <C> <C> 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 --------- --------- <S> <C> <C> 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> <S> <C> <C> 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 --------- --------- <S> <C> <C> 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 ------ ---------- -------- -------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> 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 - -------------------------------------- ------- ------- <S> <C> <C> 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 - ------------ --------- --------- <S> <C> <C> 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 - ------------ -------------- -------------- ------ <S> <C> <C> <C> 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 - ------------ -------------- -------------- ------ <S> <C> <C> <C> 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 - ------------ -------------- -------------- ------ <S> <C> <C> <C> 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. - ------- ---------------------- -------- <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) 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. - ------- ---------------------- -------- <S> <C> <C> 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