10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 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, 2000 ------------- 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, 67,746,223 shares as of July 31, 2000. 2 2 HARTE-HANKS, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT June 30, 2000
Page ---- Part I. Financial Information Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - 3 June 30, 2000 and December 31, 1999 Consolidated Statements of Operations - 4 Three months ended June 30, 2000 and 1999 Consolidated Statements of Operations - 5 Six months ended June 30, 2000 and 1999 Consolidated Statements of Cash Flows - 6 Six months ended June 30, 2000 and 1999 Consolidated Statements of Stockholders' Equity - 7 Six months ended June 30, 2000 and 1999 Notes to Interim Condensed Consolidated Financial 8 Statements Item 2. Management's Discussion and Analysis of Financial 11 Condition and Results of Operations Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 (a) Exhibits (b) Reports on Form 8-K Signature 17
3 3 Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except per share and share amounts) -------------------------------------------------------------------------------- (Unaudited)
June 30, December 31, 2000 1999 --------- ------------ Assets Current assets Cash and cash equivalents ......................... $ 43,974 $ 35,196 Accounts receivable, net .......................... 152,695 154,030 Inventory ......................................... 6,314 7,099 Prepaid expenses .................................. 12,340 12,651 Current deferred income tax asset ................. 6,798 6,848 Other current assets .............................. 5,697 4,309 --------- ------------ Total current assets ............................ 227,818 220,133 Property, plant and equipment, net .................. 112,730 106,250 Goodwill, net ....................................... 412,079 409,791 Other assets ........................................ 24,253 33,253 --------- ------------ Total assets .................................... $ 776,880 $ 769,427 ========= ============ Liabilities and Stockholders' Equity Current liabilities Accounts payable .................................. $ 57,629 $ 64,812 Accrued payroll and related expenses .............. 25,789 25,511 Customer deposits and unearned revenue ............ 28,906 35,622 Income taxes payable .............................. 9,916 13,667 Other current liabilities ......................... 16,396 14,405 --------- ------------ Total current liabilities ....................... 138,636 154,017 Long-term debt ...................................... 2,222 5,000 Other long-term liabilities ......................... 37,191 32,792 --------- ------------ Total liabilities ............................... 178,049 191,809 --------- ------------ Stockholders' equity Common stock, $1 par value, 250,000,000 shares authorized. 76,691,487 and 76,392,063 shares issued at June 30, 2000 and December 31, 1999, respectively .................................... 76,691 76,392 Additional paid-in capital .......................... 200,709 197,454 Accumulated other comprehensive income .............. 3,505 12,316 Retained earnings ................................... 529,095 493,362 --------- ------------ 810,000 779,524 Less treasury stock: 8,657,014 and 8,285,966 shares at cost at June 30, 2000 and December 31, 1999, respectively ................................ (211,169) (201,906) --------- ------------ Total stockholders' equity ........................ 598,831 577,618 --------- ------------ Total liabilities and stockholders' equity ........ $ 776,880 $ 769,427 ========= ============
See Notes to Interim Condensed Consolidated Financial Statements. 4 4 Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts) -------------------------------------------------------------------------------- (Unaudited)
Three Months Ended June 30, ---------------------------- 2000 1999 ------------ ------------ Operating revenues .................................... $ 235,693 $ 197,033 ------------ ------------ Operating expenses Payroll ............................................. 86,231 70,516 Production and distribution ......................... 80,711 72,777 Advertising, selling, general and administrative .... 22,386 14,947 Depreciation ........................................ 6,926 5,907 Goodwill and intangible amortization ................ 3,593 2,445 ------------ ------------ 199,847 166,592 ------------ ------------ Operating income ...................................... 35,846 30,441 ------------ ------------ Other expenses (income) Interest expense .................................... 220 49 Interest income ..................................... (613) (1,751) Other, net .......................................... 330 257 ------------ ------------ (63) (1,445) ------------ ------------ Income before income taxes ............................ 35,909 31,886 Income tax expense .................................... 14,514 13,118 ------------ ------------ Net income ............................................ $ 21,395 $ 18,768 ============ ============ Basic: Earnings per common share ........................... $ 0.31 $ 0.27 ============ ============ Weighted-average common shares outstanding .......... 68,347 70,519 ============ ============ Diluted: Earnings per common share ........................... $ 0.30 $ 0.26 ============ ============ Weighted-average common and common equivalent shares outstanding ............................... 70,492 72,781 ============ ============
See Notes to Interim Condensed Consolidated Financial Statements. 5 5 Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts) -------------------------------------------------------------------------------- (Unaudited)
Six Months Ended June 30, -------------------------- 2000 1999 ----------- ----------- Operating revenues .................................... $ 461,750 $ 385,161 ----------- ----------- Operating expenses Payroll ............................................. 173,299 141,368 Production and distribution ......................... 156,714 142,185 Advertising, selling, general and administrative .... 44,847 30,994 Depreciation ........................................ 13,656 11,265 Goodwill and intangible amortization ................ 7,237 4,807 ----------- ----------- 395,753 330,619 ----------- ----------- Operating income ...................................... 65,997 54,542 ----------- ----------- Other expenses (income) Interest expense .................................... 474 90 Interest income ..................................... (1,025) (3,849) Other, net .......................................... 813 357 ----------- ----------- 262 (3,402) ----------- ----------- Income before income taxes ............................ 65,735 57,944 Income tax expense .................................... 26,586 23,842 ----------- ----------- Net income ............................................ $ 39,149 $ 34,102 =========== =========== Basic: Earnings per common share .......................... $ 0.57 $ 0.48 =========== =========== Weighted-average common shares outstanding .......... 68,305 70,856 =========== =========== Diluted: Earnings per common share ........................... $ 0.56 $ 0.47 =========== =========== Weighted-average common and common equivalent shares outstanding ................................ 70,397 73,193 =========== ===========
See Notes to Interim Condensed Consolidated Financial Statements. 6 6 Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) -------------------------------------------------------------------------------- (Unaudited)
Six Months Ended June 30, -------------------------- 2000 1999 ----------- ----------- Operating Activities Net income .............................................. $ 39,149 $ 34,102 Adjustments to reconcile net income to cash provided by operating activities: Depreciation ......................................... 13,656 11,265 Goodwill and intangible amortization ................. 7,237 4,807 Amortization of option-related compensation .......... 277 329 Deferred income taxes ................................ 3,281 4,725 Other, net ........................................... 361 141 Changes in operating assets and liabilities, net of acquisitions: Decrease in accounts receivable, net ................. 2,616 2,388 Decrease in inventory ................................ 785 2,395 Decrease (increase) in prepaid expenses and other current assets .................................... (1,025) 1,502 Decrease in accounts payable ......................... (460) (2,379) Decrease in other accrued expenses and other liabilities ............................. (12,919) (6,523) Other, net ........................................... (2,427) (1,496) ----------- ----------- Net cash provided by operating activities ......... 50,531 51,256 ----------- ----------- Investing Activities Acquisitions ............................................ (9,147) (33,228) Purchases of property, plant and equipment .............. (20,429) (13,537) Proceeds from sale of property, plant and equipment ..... 123 124 Net sales and maturities of available-for-sale short-term investments ............ -- 48,829 Other ................................................... -- (1,000) ----------- ----------- Net cash provided by (used in) investing activities ...................................... (29,453) 1,188 ----------- ----------- Financing Activities Long-term borrowings .................................... 2,222 -- Repayment of long-term borrowings ....................... (5,000) -- Issuance of common stock ................................ 3,154 4,758 Purchase of treasury stock .............................. (9,300) (47,271) Issuance of treasury stock .............................. 40 46 Dividends paid .......................................... (3,416) (2,827) ----------- ----------- Net cash used in financing activities ...................................... (12,300) (45,294) ----------- ----------- Net increase in cash .................................... 8,778 7,150 Cash and cash equivalents at beginning of year .......... 35,196 30,367 ----------- ----------- Cash and cash equivalents at end of period .............. $ 43,974 $ 37,517 =========== ===========
See Notes to Interim Condensed Consolidated Financial Statements. 7 7 Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity -------------------------------------------------------------------------------- (Unaudited)
Accumulated Additional Other Total Common Paid-In Retained Treasury Comprehensive Stockholders' In thousands Stock Capital Earnings Stock Income Equity --------- ---------- --------- --------- ------------- ------------- Balance at January 1, 1999 ...... $ 75,789 $ 189,698 $ 425,999 $(114,395) $ -- $ 577,091 Common stock issued- employee benefit plans ....... 103 2,128 -- -- -- 2,231 Exercise of stock options ....... 364 2,163 -- -- -- 2,527 Tax benefit of options exercised .................... -- 1,370 -- -- -- 1,370 Dividends paid ($0.04 per share) ....................... -- -- (2,827) -- -- (2,827) Treasury stock repurchase ....... -- -- -- (47,271) -- (47,271) Treasury stock issued ........... -- 15 -- 31 -- 46 Comprehensive income, net of tax: Net income ................... -- -- 34,102 -- -- 34,102 ------------- Total comprehensive income ...... 34,102 --------- ---------- --------- --------- ------------- ------------- Balance at June 30, 1999 ........ $ 76,256 $ 195,374 $ 457,274 $(161,635) $ -- $ 567,269 ========= ========== ========= ========= ============= ============= 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 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 ========= ========== ========= ========= ============= =============
See Notes to Interim Condensed Consolidated Financial Statements. 8 8 Harte-Hanks, Inc. and Subsidiaries Notes to Interim Condensed Consolidated Financial Statements (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited Interim Condensed Consolidated Financial Statements include the accounts of Harte-Hanks, Inc. and subsidiaries (the "Company"). The statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31. 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, 1999. 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 $14.5 million and $26.6 million, respectively, was calculated using an effective income tax rate of approximately 40.4%. The Company's effective income tax rate is derived by estimating pretax income and income tax expense for the year ending December 31, 2000. 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. NOTE C - EARNINGS PER SHARE A reconciliation of basic and diluted earnings per share is as follows:
Three Months Ended June 30, In thousands, except per share amount 2000 1999 ----------- ----------- BASIC EPS Net Income ........................................................ $ 21,395 $ 18,768 =========== =========== Weighted-average common shares outstanding used in earnings per share computations ......................... 68,347 70,519 =========== =========== Earnings per common share ......................................... $ 0.31 $ 0.27 =========== =========== DILUTED EPS Net Income ........................................................ $ 21,395 $ 18,768 =========== =========== Shares used in earnings per share computations .................... 70,492 72,781 =========== =========== Earnings per common share ......................................... $ 0.30 $ 0.26 =========== =========== Computation of shares used in earnings per share computations: Average outstanding common shares ................................. 68,347 70,519 Average common equivalent shares - dilutive effect of option shares ................................ 2,145 2,262 ----------- ----------- Shares used in earnings per share computations .................... 70,492 72,781 =========== ===========
9 9
Six Months Ended June 30, In thousands, except per share amount 2000 1999 ----------- ----------- BASIC EPS Net Income ........................................................ $ 39,149 $ 34,102 =========== =========== Weighted-average common shares outstanding used in earnings per share computations ......................... 68,305 70,856 =========== =========== Earnings per common share ......................................... $ 0.57 $ 0.48 =========== =========== DILUTED EPS Net Income ........................................................ $ 39,149 $ 34,102 =========== =========== Shares used in earnings per share computations .................... 70,397 73,193 =========== =========== Earnings per common share ......................................... $ 0.56 $ 0.47 =========== =========== Computation of shares used in earnings per share computations: Average outstanding common shares ................................. 68,305 70,856 Average common equivalent shares - dilutive effect of option shares ................................ 2,092 2,337 ----------- ----------- Shares used in earnings per share computations .................... 70,397 73,193 =========== ===========
As of June 30, 2000 the Company had 526,956 antidilutive market price options outstanding. NOTE D - 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:
Three Months Ended June 30 In thousands 2000 1999 ------------ ------------ Operating revenues Direct Marketing ........................ $ 159,351 $ 128,985 Shoppers ................................ 76,342 68,048 ------------ ------------ Total operating revenues ............ $ 235,693 $ 197,033 ============ ============ Operating income Direct Marketing ........................ $ 22,191 $ 18,524 Shoppers ................................ 15,859 13,758 Corporate Activities .................... (2,204) (1,841) ------------ ------------ Total operating income .............. $ 35,846 $ 30,441 ============ ============ Income before income taxes Operating income ........................ $ 35,846 $ 30,441 Interest expense ........................ (220) (49) Interest income ......................... 613 1,751 Other, net .............................. (330) (257) ------------ ------------ Total income before income taxes .... $ 35,909 $ 31,886 ============ ============
10 10
Six Months Ended June 30, In thousands 2000 1999 ----------- ----------- Operating revenues Direct Marketing ........................ $ 315,542 $ 253,919 Shoppers ................................ 146,208 131,242 ----------- ----------- Total operating revenues ............ $ 461,750 $ 385,161 =========== =========== Operating income Direct Marketing ........................ $ 43,550 $ 35,808 Shoppers ................................ 26,946 22,543 Corporate Activities .................... (4,499) (3,809) ----------- ----------- Total operating income .............. $ 65,997 $ 54,542 =========== =========== Income before income taxes Operating income ........................ $ 65,997 $ 54,542 Interest expense ........................ (474) (90) Interest income ......................... 1,025 3,849 Other, net .............................. (813) (357) ----------- ----------- Total income before income taxes .... $ 65,735 $ 57,944 =========== ===========
11 11 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Operating results were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 2000 JUNE 30, 1999 CHANGE JUNE 30, 2000 JUNE 30, 1999 CHANGE ------------ ------------- ------------- ------ ------------- ------------- ------ Revenues $ 235,693 $ 197,033 19.6% $ 461,750 $ 385,161 19.9% Operating expenses 199,847 166,592 20.0% 395,753 330,619 19.7% --------- --------- --------- --------- Operating income $ 35,846 $ 30,441 17.8% $ 65,997 $ 54,542 21.0% ========= ========= ========= ========= Net income $ 21,395 $ 18,768 14.0% $ 39,149 $ 34,102 14.8% ========= ========= ========= ========= Diluted earnings per share $ 0.30 $ 0.26 15.4% $ 0.56 $ 0.47 19.1% ========= ========= ========= =========
Consolidated revenues grew 19.6% to $235.7 million and operating income grew 17.8% to $35.8 million in the second quarter of 2000 when compared to the second quarter of 1999. The Company's overall growth resulted from acquisitions, increased business with both new and existing customers and from the sale of new products and services. Overall operating expenses compared to 1999 increased 20.0% to $199.8 million. Net income grew 14.0% to $21.4 million, or 30 cents per share, compared to 26 cents per share on a diluted basis. The net income growth resulted from the growth in operating income offset by a decrease of $1.1 million in interest income. DIRECT MARKETING Direct and interactive marketing operating results were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 2000 JUNE 30, 1999 CHANGE JUNE 30, 2000 JUNE 30, 1999 CHANGE ------------ ------------- ------------- ------ ------------- ------------- ------ Revenues $ 159,351 $ 128,985 23.5% $ 315,542 $ 253,919 24.3% Operating expenses 137,160 110,461 24.2% 271,992 218,111 24.7% --------- --------- --------- ---------- Operating income $ 22,191 $ 18,524 19.8% $ 43,550 $ 35,808 21.6% ========= ========= ========= ==========
Direct and interactive marketing revenues increased $30.4 million, or 23.5%, in the second quarter of 2000 compared to 1999. Revenue increases were lead by Customer Relationship Management (CRM) which had strong growth for the quarter. CRM revenues increased due to increased business with existing customers and new customer gains. CRM increases were also influenced by the October 1999 acquisition of ZD Market Intelligence, renamed Harte-Hanks Market Intelligence. The traditional growth oriented business-to-business activities of CRM experienced significant growth for the quarter compared to 1999. The high technology, retail and mutual fund industry sectors contributed significantly to overall CRM revenue growth, offsetting continued slowdowns in the insurance and healthcare industry sectors. Marketing services experienced steady revenue growth, led by its targeted mail operations. Marketing services' revenues increased due to increased product sales as well as new product sales to new and existing customers, primarily in the banking and non-bank finance industry sectors. The May 1999 acquisition of Direct Marketing Associates, Inc. (DMA) also contributed to the marketing services revenue increase. Operating expenses increased $26.7 million, or 24.2%, in the second quarter of 2000 compared to 1999. Payroll costs increased $13.2 million due to expanded hiring to support future revenue growth. Also contributing to the increased 12 12 operating expenses were additional production and distribution costs of $5.8 million due to increased volumes. General and administrative expense increased $5.3 million due to increased employee and professional services expenses. Depreciation and amortization expense increased $2.1 million due to goodwill associated with acquisitions and higher levels of capital investment to support growth. Operating expenses were also impacted by the acquisitions noted above. Direct and interactive marketing revenues increased $61.6 million, or 24.3%, in the first six months of 2000 compared to the first six months of 1999. Both CRM and marketing services experienced strong revenue growth in the first six months of 2000. Overall, revenue growth resulted from increased business with both new and existing customers, particularly customers in the high technology, non-bank finance and retail industries, and the acquisitions noted above. Operating expenses rose $53.9 million, or 24.7%, in the first half of 2000 compared to the first half of 1999. Payroll costs increased $27.3 million due to expanded hiring to support revenue growth. In addition, production costs increased $11.1 million due to increased volumes. General and administrative expense increased $10.4 million due to increased employee and professional services expenses. Depreciation and amortization expense increased $4.6 million due to goodwill associated with acquisitions and higher levels of capital investment to support growth. The acquisitions mentioned above also contributed to the increased operating expenses. SHOPPERS Shopper operating results were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 2000 JUNE 30, 1999 CHANGE JUNE 30, 2000 JUNE 30, 1999 CHANGE ------------ ------------- ------------- ------ ------------- ------------- ------ Revenues $ 76,342 $ 68,048 12.2% $ 146,208 $ 131,242 11.4% Operating expenses 60,483 54,290 11.4% 119,262 108,699 9.7% --------- --------- --------- ---------- Operating income $ 15,859 $ 13,758 15.3% $ 26,946 $ 22,543 19.5% ========= ========= ========= ==========
Shopper revenues increased $8.3 million, or 12.2%, in the second quarter of 2000 compared to 1999. Revenue increases were the result of improved sales in established markets as well as new 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, employment and automotive related advertising, and its distribution products, primarily 4-color glossy heatset flyers and preprinted inserts. Shoppers also continued to experience success in up-selling ads onto its web-site. In the quarter, Shoppers experienced slowdowns in its real-estate and personals advertising segments. Operating expenses increased $6.2 million, or 11.4%, in the second quarter of 2000 compared to 1999. The increase in operating expenses was primarily due to increases in labor costs of $2.4 million and additional production costs of $2.0 million, including increased postage of $1.4 million due to increased volumes. Shopper revenues increased $15.0 million, or 11.4%, in the first six months of 2000 compared to the first six months of 1999. Revenue increases were the result of improved sales in established markets as well as new 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, employment and automotive related advertising and its distribution products, primarily 4-color glossy heatset flyers and preprinted inserts. Shoppers also continued to experience success in up-selling ads onto its web-site. In the first half of 2000, Shoppers experienced slowdown in its personals advertising segments. Operating expenses increased $10.6, or 9.7%, in the first half of 2000 compared to the first half of 1999. The increase in operating expenses was primarily due 13 13 to increases in labor costs of $4.1 million and additional production costs of $3.2 million, including increased postage of $2.1 million due to increased volumes. Other Income and Expense The Company realized a loss of approximately $0.4 million in the first half of 2000 on the disposal of certain fixed assets. In addition, the Company wrote off approximately $0.2 million of other assets in the first half of 2000. Interest Expense/Interest Income Interest income decreased $1.1 million in the second quarter of 2000 and $2.8 million in the first six months of 2000 over the same periods in 1999. The decrease in the first six months of 2000 over the same period in 1999 was due to larger cash and investment balances in the first half of 1999. The Company sold substantially all of its short-term investments throughout 1999 in order to fund acquisitions and repurchase the Company's stock. Interest expense increased $0.2 million in the second quarter of 2000 and $0.4 million in the first six months of 2000 over the same periods in 1999. The increase was primarily due to amortization of financing costs and commitment charges relating to the unsecured revolving credit facilities the Company obtained in November 1999. Income Taxes The Company's income tax expense increased $1.4 million in the second quarter of 2000 and $2.7 million in the first six months of 2000 compared to the same periods in 1999. This increase was due primarily to the higher pre-tax income levels. The effective tax rate was 40.4% for the second quarter of 2000 and the first six months of 2000 compared to 41.1% for the same periods in 1999. Liquidity and Capital Resources Cash provided by operating activities for the six months ended June 30, 2000 was $50.5 million. Net cash outflows from investing activities were $29.5 million for the first six months of 2000 compared to net cash inflows of $1.1 million for the first six months of 1999. The cash outflows in 2000 primarily relate to purchases of fixed assets. The cash inflows from investing activities in 1999 were primarily attributable to sales and maturities of marketable securities totaling $48.8 million, the proceeds of which were used to fund acquisitions and to repurchase the Company's stock. Net cash outflows from financing activities were $12.3 million in 2000 compared to net cash outflows of $45.3 million in 1999. The cash outflow from financing activities in both 2000 and 1999 is attributable primarily to the repurchase of the Company's stock. Capital resources are also available from and provided through the Company's two unsecured credit facilities. These credit facilities, two $100 million variable rate, revolving loan commitments, were put in place on November 4, 1999. All borrowings under the $100 million revolving 364-Day Credit Agreement are to be repaid by November 3, 2000 unless the Company requests and is granted a 364-day extension. All borrowings under the $100 million revolving Three-Year Credit Agreement are to be repaid by November 4, 2002. As of June 30, 2000, the Company had $200 million of unused borrowing capacity under these two credit facilities. In addition, capital resources are available to the Company through an unsecured credit facility obtained for the purpose of financing the construction of a new building in Belgium. This credit facility, a $2.5 million variable rate, revolving loan commitment was put in place on November 29, 1999 and has no stated maturity. $0.3 million of unused borrowing capacity is available from this credit facility as of June 30, 2000. Management believes that its credit facilities, together with cash provided from operating activities, will be sufficient to fund operations and anticipated acquisitions and capital service needs for the foreseeable future. 14 14 Acquisitions In June, 2000, the Company acquired the UK based Hi-Tech Marketing Limited, a leading pan-European provider of CRM services to the technology, telecommunications and financial services industries. Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB No. 101"). SAB No. 101 summarizes the SEC's staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company understands that the SEC staff is preparing a document to address significant implementation issues related to SAB No. 101. To the extent that SAB No. 101 ultimately changes revenue recognition practices, the Company will adopt SAB No. 101 no later than the fourth quarter of fiscal year 2000 through a cumulative effect adjustment. Any cumulative effect adjustment will be computed as of January 1, 2000. The Company cannot determine the potential impact that SAB No. 101 may have on its consolidated financial position or results of operations at this time. In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION: AN INTERPRETATION OF APB OPINION NO. 25. Among other issues, Interpretation No. 44 clarifies the application of Accounting Principles Board Opinion No. 25 (APB No. 25) regarding (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock options in a business combination. The provisions of Interpretation No. 44 affecting the Company are to be applied on a prospective basis effective July 1, 2000. 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 -- The Company could suffer a material adverse effect 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 and shopper businesses, and it expects to pursue additional acquisition opportunities. Acquisition activities, even if not consummated, require substantial amounts of management time and can distract from 15 15 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 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 business. The present standard postage rates went into effect in January 1999, and a rate increase is expected in 2001. 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. Newsprint Prices -- Newsprint 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. 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. 16 16 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 2, 2000. At the meeting the stockholders were requested to vote on the following: a) To elect David L. Copeland, Dr. Peter T. Flawn and Christopher M. Harte as Class I directors for a three-year term. The result of the vote was as follows:
For Withheld ----------- ---------- David L. Copeland 48,195,471 404,362 Dr. Peter T. Flawn 48,185,962 413,871 Christopher M. Harte 48,193,743 406,090
The names of each director whose term of office continued are: Larry Franklin, Houston H. Harte, Richard M. Hochhauser and James L. Johnson. b) To approve an amendment to the Company's stock option plan that increases by three million the number of shares of common stock that may be issued under the plan. The result of the vote was as follows
For Against Abstain ----------- ----------- --------- 42,393,869 5,601,822 604,142
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See index to Exhibits on Page 18. (b) No Form 8-K has been filed during the three months ended June 30, 2000. 17 17 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 11, 2000 /s/ Jacques D. Kerrest --------------- ------------------------------- Date Jacques D. Kerrest Senior Vice President, Finance and Chief Financial Officer 18 18
Exhibit No. Description of Exhibit Page No. ------- ---------------------- -------- 2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 2(b) Agreement and Plan of Merger dated as of February 4, 1996 among Harte-Hanks Communications, Inc., HHD Acquisition Corp. and DiMark, Inc. (filed as Appendix A to the Company's Registration Statement No. 333-02047 and incorporated by reference herein). 2(c) Agreement and Plan of Merger and Reorganization, dated as of May 16, 1997, by and between The E.W. Scripps Company and Harte-Hanks Communications, Inc. (filed as Exhibit 2.1 to the Company's Form 8-K dated May 22, 1997 and incorporated by reference herein). 2(d) Acquisition Agreement, dated as of May 16, 1997, by and between The E.W. Scripps Company and Harte-Hanks Communications, Inc. (filed as Exhibit 2.2 to the Company's Form 8-K dated May 22, 1997 and incorporated by reference herein). 2(e) Stock Purchase Agreement dated as of July 26, 1997 between ABC, Inc. and Harte-Hanks Communications, Inc. (filed as Exhibit 2(e) to the Company's Form 10-Q for the nine months ended September 30, 1997 and incorporated by reference herein). 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).
19 19
Exhibit No. Description of Exhibit Page No. ------- ---------------------- -------- 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) 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 Communications, Inc. and Larry Franklin, dated as of July 23, 1993 (filed as Exhibit 10(f) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(d) Form of Severance Agreement between Harte-Hanks Communications, Inc. and certain Executive Officers of the Company, dated as of July 7 or December 28,1997 (filed as Exhibit 10(f) to the Company's Form 10-K for the year ended December 31, 1997 and incorporated by reference herein). 10(e) Form of Severance Agreement between Harte-Hanks, Inc. and Richard M. Hochhauser dated as of January 25, 2000 (filed as Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1999 and incorporated by reference herein). 10(f) 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(g) 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(h) Harte-Hanks, Inc. Amended and Restated 1991 Stock Option Plan. 20 10(i) 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(j) 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 incorporate by reference herein). *11 Statement Regarding Computation of Net Income (Loss) Per Common Share. 27 *21 Subsidiaries of the Company. 28 *27 Financial Data Schedule. 29
---------- *Filed herewith