-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S+lmviFWlO9LWaAUEELvBpjXB0915wBhLyQM4SvSQL1/V6+Hdi9eA0veW1L7WI82 NjWr5K2+34HXFixHx8vtXQ== 0000950134-02-002964.txt : 20020415 0000950134-02-002964.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950134-02-002964 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARTE HANKS INC CENTRAL INDEX KEY: 0000045919 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PUBLISHING [2741] IRS NUMBER: 741677284 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07120 FILM NUMBER: 02593700 BUSINESS ADDRESS: STREET 1: 200 CONCORD PLAZA DR STE 800 CITY: SAN ANTONIO STATE: TX ZIP: 78216 BUSINESS PHONE: 2108299000 FORMER COMPANY: FORMER CONFORMED NAME: HARTE HANKS NEWSPAPERS INC DATE OF NAME CHANGE: 19771010 FORMER COMPANY: FORMER CONFORMED NAME: HARTE HANKS COMMUNICATIONS INC DATE OF NAME CHANGE: 19920703 10-K405 1 d95098e10-k405.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2001 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 78216 SAN ANTONIO, TEXAS (ZIP CODE) (Address of principal executive officers) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE -- 210-829-9000 ---------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED ------------------- ---------------------------- Common Stock New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None ---------------- (Title of class) 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 by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Aggregate market value of the Company's voting stock held by non-affiliates on February 1, 2002, based on the $28.32 per share closing price for the Company's Common Stock on the New York Stock Exchange on such date: approximately $1,183,000,000. SHARES OUTSTANDING AT FEBRUARY 1, 2002: Common Stock - 62,563,925 shares DOCUMENTS INCORPORATED BY REFERENCE: The Company's Annual Report to Stockholders for the year ended December 31, 2001 (incorporated in Part II to the extent provided in Items 5, 6, 7 and 8 hereof). Definitive Proxy Statement for the Company's May 7, 2002 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (incorporated in Part III to the extent provided in Items 10, 11 and 12 hereof). ================================================================================ 2 Harte-Hanks, Inc. Table of Contents Form 10-K Report December 31, 2001
Page Part I Item 1. Business 3 Item 2. Properties 3 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 10 Item 8. Financial Statements and Supplementary Data 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 Part III Item 10. Directors and Executive Officers of the Registrant 10 Item 11. Executive Compensation 11 Item 12. Security Ownership of Certain Beneficial Owners and Management 11 Item 13. Certain Relationships and Related Transactions 11 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 11 Signatures 15
3 ITEM 1. BUSINESS AND ITEM 2. PROPERTIES INTRODUCTION Harte-Hanks is an international direct and interactive marketing services company that provides end-to-end customer relationship management (CRM), related marketing services solutions and shopper publications to a wide range of industries serving both consumer and business-to-business markets. The Company's direct and interactive marketing business operates both nationally and internationally, while its shopper business operates in selected local and regional markets in California and Florida. The Company believes that marketing is undergoing a transition from traditional mass media marketing to targeted marketing and CRM. The transition is being driven by the increasing sophistication and efficiency of technology and a growing need among marketers to customize the products and services they offer to customers. Direct and interactive marketing, which represents 66% of the Company's revenue, is leading the movement toward highly targeted marketing and CRM. The Company's shopper business applies similar targeting principles. Harte-Hanks strategy is based on five key elements: being a market leader in each of its businesses; increasing revenues through growing its base businesses, introducing new products, entering new markets and making acquisitions; using technology to create competitive advantages; employing people who can partner effectively with its clients; and creating shareholder value. Company revenues totaled $917.9 million in 2001. Harte-Hanks is the successor to a newspaper business begun in Texas in the early 1920's by Houston Harte and Bernard Hanks. In 1972, the Company went public and was listed on the New York Stock Exchange. The Company became private in a leveraged buyout initiated by management in 1984. In 1993, the Company again went public and listed its common stock on the NYSE. In October 1997, the Company sold all of its remaining traditional media operations (consisting of newspapers, television and radio companies) in order to focus all of its efforts on its direct and interactive services and shoppers operations. See Note N of "Notes to Consolidated Financial Statements" for certain financial information about the Company's two business segments - direct and interactive marketing and shoppers. DIRECT MARKETING GENERAL Harte-Hanks operates an international direct and interactive marketing services company that provides end-to-end CRM and related marketing services solutions to a wide range of industries serving both consumer and business-to-business markets. The Company utilizes advanced technologies to enable its clients to identify, reach, influence and nurture their customers. The Company believes that developments in technology and trends toward more sophisticated marketing analysis and measurement will continue to result in increased usage of direct and interactive marketing services. The Company's solutions use technology as the enabler to capture, analyze and disseminate customer and prospect data at all points of contact. The Harte-Hanks customer-centric models allow it to be the overall solutions provider for driving traffic to brick-and-mortar locations, Web sites or call/contact centers. With a full-service approach - CRM professional services to implementation to ongoing support; strong product and service brands including Alllink(TM), Trillium(TM) and nTouch; the use of targeted media from mail to Internet to Web to telephone; end-to-end execution from design and print to personalized mail and email production - Harte-Hanks provides practical implementation of technology and understands the needs of clients and their customers to deliver best-of-breed solutions. The Company's client base is both domestic and international. In 2001, Harte-Hanks Direct Marketing had revenues of $601.9 million, which accounted for approximately 66% of the Company's total revenues. In 2001, Harte-Hanks made one acquisition in its direct and interactive marketing business segment. This acquisition expanded the Company's services and client base in its CRM sector. Harte-Hanks expanded its 4 services to the automotive, energy and other industries through the acquisition of Sales Support Services, Inc., a leading business-to-business lead generation, order processing and fulfillment services company with operations in New Jersey, Texas and California. CUSTOMER RELATIONSHIP MANAGEMENT Harte-Hanks Customer Relationship Management (CRM) uses technology as an enabler to capture, to analyze and to disseminate customer and prospect data across all points of customer contact. The Company helps clients manage the inquiries they receive from their marketing efforts, whether from Web sites, e-mail, toll-free numbers, trade shows, fax programs or other sources. These inquiries, or leads, are qualified, tracked and distributed both to appropriate sales channels and to client management for analysis, decision-making and/or additional interaction in order for clients to more effectively manage their customer and prospect relationships. Using proprietary software and open software solutions, the Company also builds contact databases for its clients using the information gained from these CRM activities. These databases help clients measure the return on their marketing communications and make more informed decisions about future marketing efforts. The Company also builds customized marketing databases for specific clients and provides them with easy-to-use tools to perform analysis and to target their best customers and prospects. Using its proprietary name and address matching software, Trillium(TM), the Company standardizes large numbers of customer records from multiple sources, integrates them into a single database for each client and, if needed, appends demographic and lifestyle information. In most cases, these databases are delivered for use on clients' personal computers, networks or workstations, where the Company's software applications and solutions help clients predict the likely results of marketing promotions and track recipients' buying behavior. Relational databases are built for clients from a range of facilities, each specializing in specific market segments. These databases are moved to the client's site or maintained at Harte-Hanks with on-line access to client locations. In addition to building a client's database and providing software solutions for analytics and campaign management, Harte-Hanks CRM performs regular database updates. Harte-Hanks CRM also offers its software module Trillium(TM) for clients who want to integrate data quality capabilities into their data warehouse or operational systems. In addition, the Company operates as a service bureau, preparing list selections, maximizing deliverability and reducing clients' mailing costs through sophisticated postal coding, hygiene and address updates through a non-exclusive National Change of Address license with the U.S. Postal Service. As a further extension of the client's marketing arm, Harte-Hanks provides marketing research and analytics services. Specific capabilities include tracking and reporting, media analysis, modeling, database profiling, primary data collection, marketing applications, consulting and program development. CRM services are marketed to specific industries or markets with services and software products tailored to each industry or market. Having established the basic technological foundation, the Company is able to provide CRM services to new industries and markets by modifying its existing technology and information applications. The Company currently provides CRM services to all of its primary markets in addition to a range of select markets. The Company expanded its CRM services by the November 2001 acquisition of Sales Support Services, Inc., a leading business-to-business lead generation, order processing and fulfillment services company to the automotive, energy and other industries. The Company strengthened its suite of CRM offerings by forming a number of strategic alliances during the year. Harte-Hanks Trillium(TM) Software joined the Siebel Alliance Program as a Premier Software Partner and has successfully validated its Trillium Connector for Siebel eBusiness Applications. Trillium Software has also 5 completed the development of an active interface to the Microsoft SQL Server 2000 Data Transformation Service and has been accepted into Microsoft's Data Warehouse program. These alliances were developed to align industry leading software technologies in a tightly integrated solution for developing the most accurate and reliable customer information for customer data integration, customer data management, e-business and data warehouse applications. Additionally, Trillium Software was named a key business partner to the Compaq Computer Corporation's Zero Latency Enterprise (ZLE) architecture. The Compaq ZLE solution enables companies to converge key business operations in order to enhance customer relations, strengthen global supply chain linkages, and improve decision making through real-time business intelligence and knowledge management. Trillium Software is the component of Compaq's ZLE architecture used to clean, standardize and link data in real-time. Depending on the needs of its clients, Harte-Hanks CRM capabilities are provided in a specialized, coordinated and integrated approach through 16 facilities nationwide. These centers possess some industry specialization and are linked together to support certain clients that experience volume spikes or seek high-growth needs. The Company also provides CRM services internationally through 10 offices located outside of the United States. MARKETING SERVICES Harte-Hanks provides a variety of services to help clients develop and execute targeted marketing communication programs. These include such upfront services as creative and graphics, along with back-end services such as printing, personalization of communication pieces using laser and inkjet printing, target mail and fulfillment, and transportation logistics. The Company's mail tracking capability and long-standing relationships with the U.S. Postal Service help ensure that customer mailings reach their destinations on time. And, by controlling the final stage of the print distribution process through its logistics operations, the Company facilitates the delivery of its clients' materials while holding costs to a minimum. Increasingly, clients seek execution programs as part of Harte-Hanks end-to-end solutions. Harte-Hanks also offers direct marketing agency services to create the plan to manage direct and interactive marketing communication efforts. These services combine information-based strategy and brand-building creative efforts across both traditional direct and interactive media. Depending upon the needs of clients, Harte-Hanks marketing services capabilities are provided in a specialized, coordinated and integrated approach through 16 facilities nationwide. SALES AND MARKETING The national direct and interactive marketing sales forces of Harte-Hanks are headquartered in Cincinnati, Ohio, with additional offices maintained throughout the United States and Europe, as well as office locations in Australia, Canada and South America. In addition, the Company has affiliates in Asia. The sales forces, with industry-specific knowledge and experience, emphasize the cross-selling of a full range of direct and interactive marketing services and are supported by employees in each sector. The overall sales focus is to position Harte-Hanks as a marketing partner and a single-source solution for a client's targeted marketing needs. 6 FACILITIES Direct and interactive marketing services are provided at the following facilities: CRM MARKETING SERVICES (CONTINUED) Austin, Texas Forty Fort, Pennsylvania Billerica, Massachusetts Fullerton, California Clearwater, Florida Grand Prairie, Texas Fort Worth, Texas Jacksonville, Florida Glen Burnie, Maryland Langhorne, Pennsylvania La Jolla, California Memphis, Tennessee Lake Katrine, New York Sacramento, California Lake Mary, Florida Shawnee, Kansas Monroe Township, New Jersey Westville, New Jersey New York, New York Ontario, California NATIONAL SALES HEADQUARTERS River Edge, New Jersey Cincinnati, Ohio San Diego, California Sterling Heights, Michigan Valencia, California INTERNATIONAL OFFICES West Bridgewater, Massachusetts Darmstadt, Germany Dublin, Ireland MARKETING SERVICES Hasselt, Belgium Baltimore, Maryland London, United Kingdom Bellmawr, New Jersey Madrid, Spain Bloomfield, Connecticut Melbourne, Australia Cherry Hill, New Jersey Sao Paulo, Brazil Cincinnati, Ohio Sevres, France Clearwater, Florida Toronto, Canada Deerfield Beach, Florida Uxbridge, United Kingdom
7 COMPETITION Harte-Hanks' direct and interactive marketing business faces competition from other direct marketing companies in each sector, as well as from print and electronic media and other forms of advertising. Harte-Hanks believes that its state-of-the-art CRM capabilities, combined with its national production capability, industry focus and ability to offer a full range of integrated services, enable the Company to compete effectively. SHOPPERS GENERAL Harte-Hanks is the largest publisher of advertising shoppers in North America based on weekly circulation and revenues, and is the only national targeted media company that focuses on shoppers as a core business. Shoppers are weekly advertising publications delivered free by third-class mail to all households in a particular geographic area. Shoppers offer advertisers a targeted, cost-effective local advertising system, with virtually 100% penetration in their area of distribution. Shoppers are particularly effective in large markets with high media fragmentation in which major metropolitan newspapers generally have low penetration. As of December 31, 2001, Shoppers delivered nearly 10 million shopper packages in four major markets each week covering the greater Los Angeles market (Los Angeles County, Orange County, Riverside County, San Bernardino County, Ventura County, and Kern County), the greater San Diego market, Northern California (San Jose, Sacramento and Stockton) and South Florida. (Shopper publications overlap in approximately 220,000 households in South Orange County where both an "early" and "late" edition PennySaver is published each week.) The Company's California publications account for 88% of Shopper's weekly circulation. Harte-Hanks publishes 818 individual shopper editions each week distributed to zones of approximately 12,200 households each. This allows single-location, local advertisers to saturate a single geographic zone, while enabling multiple-location advertisers to saturate multiple zones. This unique delivery system gives large and small advertisers alike a cost-effective way to reach their target markets. The Company believes that its zoning capabilities and production technologies have enabled it to saturate and target areas in a number of ways including, geographic, demographic, lifestyles, behavioral and language. This allows its advertisers to effectively target their customers. The Company's strategy is to increase its share of local advertising in its existing circulation areas, and, over time, to increase circulation through internal expansion into contiguous areas and selective acquisitions. In 2001, Harte-Hanks Shoppers had revenues of $316.0 million, accounting for approximately 34% of the Company's total revenues. During the period 1998 through 2001, over 1.3 million households were added to the Company's shopper circulation through internal expansion. The Company believes that expansions provide increased revenues and operating income as the publications in these new areas mature. The Company now reaches over 8.8 million households in California, or nearly 73% of the state's total. 8 PUBLICATIONS The following table sets forth certain information with respect to shopper publications:
December 31, 2001 --------------------------------- Number of Market Publication Name Circulation Zones - ---------------------------------------- ---------------- --------------- --------------- Greater Los Angeles PennySaver 4,944,000 422 Greater San Diego PennySaver 1,693,500 135 Northern California PennySaver 2,165,000 162 South Florida The Flyer 1,186,500 99 ----------- ------- Total: 9,989,000 818
Shopper publications contain classified and display advertising and are primarily delivered to consumers' homes by third-class saturation mail. The typical shopper publication contains over 40 pages and is 7 by 9-1/2 inches in size. Each edition, or zone, is targeted around a natural neighborhood marketing pattern. Shoppers also serve as a distribution vehicle for multiple ads from national and regional advertisers; "print and deliver" single-sheet inserts designed and printed by the Company; coupon books; preprinted inserts from major retail chains; and a four-color proprietary product, MARQUEE. In addition, Shoppers offer advertising over its internet sites - www.pennysaverusa.com for its California publications and www.theflyer.com for its South Florida publication. The Company has acquired, developed and applied innovative technology and customized equipment in the publication of its shoppers, contributing to efficiency and growth. A proprietary pagination system has made it possible for the hundreds of weekly zoned editions to be designed, built and output to plate-ready negatives in a paperless, digital environment. Automating the production process saves on labor, newsprint and overweight postage. This software also allows for better ad tracking, immediate checks on individual zone and ad status, and more on-time press starts with less manpower. SALES AND MARKETING The Company maintains local sales offices throughout its geographic markets and employs more than 630 commissioned sales representatives who develop both targeted and saturation advertising programs for customers. The sales organization provides service to both national and local advertisers through its telemarketing departments and field sales representatives. Shopper customers vary from individuals with a single item for sale to local neighborhood advertisers to large multi-location advertisers. The core customers continue to be local service businesses and small retailers. The Company is increasingly focusing its marketing efforts on larger national accounts by emphasizing its ability to deliver saturation advertising in defined zones in combination with advertising in the shopper publication. Additional focus is placed on particular industries/categories through the use of sales specialists. These sales specialists are primarily used to target automotive, real estate and employment advertisers. The Company utilizes proprietary sales and marketing systems to enter customer orders directly from the field, instantly checking space availability, ad costs and other pertinent information. These systems efficiently facilitate the placement of advertising into multiple-zoned editions and include built-in error-reducing safeguards which aid in minimizing costly sales adjustments. In addition to allowing advertising information to be entered for immediate publication, these systems feed a relational customer database enabling sales personnel to access 9 customer history by designated variables to facilitate the identification of similar potential customers and to assist with timely follow-up on existing customers. FACILITIES Harte-Hanks shoppers are produced at owned or leased facilities in the markets they serve. The Company has five production facilities - three in Southern California, one in Northern California and one in its Florida market - and 29 sales offices. COMPETITION Harte-Hanks shoppers compete primarily with metropolitan daily newspapers, shared mail packages and other local advertising media. Shoppers also compete in varying degrees for advertisers and readers with magazines, radio, broadcast and cable television, directories, internet sites, other shoppers and other communications media that operate in their markets. The Company believes that its production systems and technology, which enable it to publish separate editions in narrowly targeted zones, allow it to compete effectively, particularly in large markets with high media fragmentation. EMPLOYEES As of December 31, 2001, Harte-Hanks employed 6,894 full-time employees and 625 part-time employees, as follows: direct marketing - 5,007 full-time and 317 part-time employees; shoppers - 1,867 full-time and 307 part-time employees; and corporate office - 20 full-time employees and 1 part-time employee. None of the work force is represented by labor unions. The Company considers its relations with its employees to be good. FACILITIES Harte-Hanks' executive offices are located in San Antonio, Texas and occupy approximately 17,000 square feet in leased premises. The Company's business is conducted in facilities worldwide containing aggregate space of approximately 3.7 million square feet. Approximately 3.5 million square feet are held under leases, which expire at dates through 2014. The balance of the properties, used in the Company's Southern California shopper operations, Westville, New Jersey marketing services operations and Hasselt, Belgium CRM operations, are owned by the Company. ITEM 3. LEGAL PROCEEDINGS The Company from time to time becomes involved in various claims and lawsuits incidental to its businesses. In the opinion of management, after consultation with counsel, any ultimate liability arising out of currently pending claims and lawsuits will not have a material effect on the financial condition or operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 10 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 2001 at page 32. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 2001 at page 31. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 2001 at pages 12 through 17. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's earnings are affected by changes in short-term interest rates as a result of its revolving credit agreements, which bear interest at floating rates. The Company does not believe that it has significant exposure to market risks associated with changing interest rates as of December 31, 2001. The Company does not use derivative financial instruments in its operations. The Company's earnings are also affected by fluctuations in foreign exchange rates as a result of its operations in foreign countries. Due to the level of operations in foreign countries, the impact of fluctuations in foreign exchange rates is not significant to the Company's overall earnings. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following information is set forth in the Company's Annual Report to Stockholders for the year ended December 31, 2001, which is incorporated herein by reference: All Consolidated Financial Statements (pages 18 through 21); all Notes to Consolidated Financial Statements (pages 22 through 30); and the Independent Auditors' Report (page 32). With the exception of the information herein expressly incorporated by reference, the Company's Annual Report to Stockholders for the year ended December 31, 2001 is not deemed filed as part of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. MANAGEMENT Incorporated herein by reference from the information in the Company's definitive proxy statement dated March 28, 2001 for the May 7, 2002 Annual Meeting of Stockholders under the caption "Management -- Directors and Executive Officers." 11 ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the information in the Company's definitive proxy statement dated March 28, 2001 for the May 7, 2002 Annual Meeting of the Stockholders under the caption, "Executive Compensation and Other Information." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the information in the Company's definitive proxy statement dated March 28, 2001 for the May 7, 2002. Annual Meeting of Stockholders under the caption "Security Ownership of Management and Principal Stockholders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements are incorporated by reference from the Company's Annual Report to Stockholders for the year ended December 31, 2001 attached hereto: Consolidated Balance Sheets, December 31, 2001 and 2000 Consolidated Statements of Operations, Years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows, Years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Equity and Comprehensive Income, Years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements Independent Auditors' Report (a)(2) The following accountants' report and financial schedule for years ended December 31, 2001, 2000 and 1999 are submitted herewith: Independent Auditors' Report on 10-K Schedule Schedule II-- Valuation and Qualifying Accounts All other schedules are omitted as the required information is inapplicable 12 (a) (3) EXHIBITS
Exhibit No. Description of Exhibit Page No. - ------- ---------------------- -------- 3(a) Amended and Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 3(b) Second Amended and Restated Bylaws (filed as Exhibit 3(b) to the Company's Form 10-Q for the nine months ended September 30, 2001 and incorporated by reference herein). 3(c) Amendment dated April 30, 1996 to Amended and Restated Certificate of Incorporation (filed as Exhibit 3(c) to the Company's Form 10-Q for the nine months ended September 30, 1996 and incorporated by reference herein). 3(d) Amendment dated May 5, 1998 to Amended and Restated Certificate of Incorporation (filed as Exhibit 3(d) to the Company's Form 10-Q for the six months ended June 30, 1998 and incorporated by reference herein). 3(e) Amended and Restated Certificate of Incorporation as amended through May 5, 1998 (filed as Exhibit 3(e) to the Company's Form 10-Q for the six months ended June 30, 1998 and incorporated by reference herein). 4(a) 364-Day Credit Agreement dated as of November 4, 1999 between Harte-Hanks, Inc. and the Lenders named therein [$100 million] (filed as Exhibit 4(a) to the Company's form 10-Q for the nine months ended September 30, 1999 and incorporated by reference herein). 4(b) Three-Year Credit Agreement dated as of November 4, 1999 between Harte-Hanks, Inc. and the Lenders named therein [$100 million] (filed as Exhibit 4(b) to the Company's form 10-Q for the nine months ended September 30, 1999 and incorporated by reference herein). 4(c) Amendment No. 3 dated October 26, 2001 to 364-Day Credit Agreement [$100 million]. (filed as Exhibit 4(c) to the Company's Form 10-Q for the nine months ended September 30, 2001 and incorporated by reference herein). 4(d) Other long term debt instruments are not being filed pursuant to Section (b) (4) (ii) of Item 601 of Regulation S-K. Copies of such instruments will be furnished to the Commission upon request.
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Exhibit No. Description of Exhibit Page No. - ------- ---------------------- -------- 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). 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 (files 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).
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Exhibit No. Description of Exhibit Page No. - ------- ---------------------- -------- 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 Pension 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). *13 Annual Report to Stockholders (only those portions incorporated by reference into the Form 10-K are filed herewith). 18 *21 Subsidiaries of the Company 41 *23 Consent of KPMG LLP 42
- ---------- *Filed herewith ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) 14(c) Exhibits -- The response to this portion of item 14 is submitted as a separate section of this report on pages 18 to 42. 14(d) Financial Statement Schedule -- The response to this portion of Item 14 is submitted as a separate section of this report on page 17. The agreements set forth above describe the contents of certain exhibits thereunto which are not included. However, such exhibits will be furnished to the Commission upon request. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Harte-Hanks, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARTE-HANKS, INC. By: /s/ Larry Franklin --------------------------------------- Larry Franklin Chairman & Chief Executive Officer By: /s/ Jacques D. Kerrest --------------------------------------- Jacques D. Kerrest Senior Vice President, Finance and Chief Financial Officer Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated. /s/ Houston H. Harte /s/ Christopher M. Harte - ------------------------------------------- --------------------------------- Houston H. Harte, Vice Chairman Christopher M. Harte, Director /s/ Larry Franklin /s/ James L. Johnson - ------------------------------------------- --------------------------------- Larry Franklin, Chairman James L. Johnson, Director /s/ Richard M. Hochhauser /s/ David L. Copeland - ------------------------------------------- --------------------------------- Richard M. Hochhauser, Director David L. Copeland, Director /s/ Dr. Peter T. Flawn /s/ William K. Gayden - ------------------------------------------- --------------------------------- Dr. Peter T. Flawn, Director William K. Gayden, Director 16 INDEPENDENT AUDITORS' REPORT ON 10-K SCHEDULE The Board of Directors and Stockholders Harte-Hanks, Inc.: Under date of January 29, 2002, we reported on the consolidated balance sheets of Harte-Hanks, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, cash flows and stockholders' equity and comprehensive income for each of the years in the three-year period ended December 31, 2001, as contained in the 2001 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as referred to in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP San Antonio, Texas January 29, 2002 17 Harte-Hanks, Inc. and Subsidiaries Financial Statement Schedule Schedule II Valuation and Qualifying Accounts (in thousands)
Additions Balance at Charged to Balance Beginning Costs and at End Description of Year Expenses Deductions of Year - ---------------------------------------- ------------ ------------ ------------ ------------ Allowance for doubtful accounts: Year ended December 31, 2001 $ 4,644 $ 4,442 $ 3,623 $ 5,463 ============ ============ ============ ============ Year ended December 31, 2000 $ 3,751 $ 4,602 $ 3,709 $ 4,644 ============ ============ ============ ============ Year ended December 31, 1999 $ 3,246 $ 1,825 $ 1,320 $ 3,751 ============ ============ ============ ============
EXHIBIT INDEX (a)(1) The following consolidated financial statements are incorporated by reference from the Company's Annual Report to Stockholders for the year ended December 31, 2001 attached hereto: Consolidated Balance Sheets, December 31, 2001 and 2000 Consolidated Statements of Operations, Years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows, Years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Equity and Comprehensive Income, Years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements Independent Auditors' Report (a)(2) The following accountants' report and financial schedule for years ended December 31, 2001, 2000 and 1999 are submitted herewith: Independent Auditors' Report on 10-K Schedule Schedule II-- Valuation and Qualifying Accounts All other schedules are omitted as the required information is inapplicable (a) (3) EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO. - ------- ---------------------- -------- 3(a) Amended and Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 3(b) Second Amended and Restated Bylaws (filed as Exhibit 3(b) to the Company's Form 10-Q for the nine months ended September 30, 2001 and incorporated by reference herein). 3(c) Amendment dated April 30, 1996 to Amended and Restated Certificate of Incorporation (filed as Exhibit 3(c) to the Company's Form 10-Q for the nine months ended September 30, 1996 and incorporated by reference herein). 3(d) Amendment dated May 5, 1998 to Amended and Restated Certificate of Incorporation (filed as Exhibit 3(d) to the Company's Form 10-Q for the six months ended June 30, 1998 and incorporated by reference herein). 3(e) Amended and Restated Certificate of Incorporation as amended through May 5, 1998 (filed as Exhibit 3(e) to the Company's Form 10-Q for the six months ended June 30, 1998 and incorporated by reference herein). 4(a) 364-Day Credit Agreement dated as of November 4, 1999 between Harte-Hanks, Inc. and the Lenders named therein [$100 million] (filed as Exhibit 4(a) to the Company's form 10-Q for the nine months ended September 30, 1999 and incorporated by reference herein). 4(b) Three-Year Credit Agreement dated as of November 4, 1999 between Harte-Hanks, Inc. and the Lenders named therein [$100 million] (filed as Exhibit 4(b) to the Company's form 10-Q for the nine months ended September 30, 1999 and incorporated by reference herein). 4(c) Amendment No. 3 dated October 26, 2001 to 364-Day Credit Agreement [$100 million]. (filed as Exhibit 4(c) to the Company's Form 10-Q for the nine months ended September 30, 2001 and incorporated by reference herein). 4(d) Other long term debt instruments are not being filed pursuant to Section (b) (4) (ii) of Item 601 of Regulation S-K. Copies of such instruments will be furnished to the Commission upon request.
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO. - ------- ---------------------- -------- 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). 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 (files 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).
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO. - ------- ---------------------- -------- 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 Pension 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). *13 Annual Report to Stockholders (only those portions incorporated by reference into the Form 10-K are filed herewith). 18 *21 Subsidiaries of the Company 41 *23 Consent of KPMG LLP 42
- ---------- *Filed herewith EX-13 3 d95098ex13.txt ANNUAL REPORT TO STOCKHOLDERS 18 EXHIBIT 13 FINANCIAL CONTENTS MANAGING TODAY'S CHALLENGES, EXPLORING TOMORROW'S OPPORTUNITIES Throughout our history, our successes can be traced to strong leadership across the Harte-Hanks organization. Given the current economic challenges, strong leaders -- those who provide guidance, motivation and direction -- are more valuable than ever. The breadth and depth of experience the Harte-Hanks team brings to the table is rare. It is what will see us through difficult times and guide us toward a bright future. As a result, every Harte-Hanks employee shares common bonds: we understand clients and their marketplace challenges, we embrace technology, and we commit to winning. NOW MORE THAN EVER, OUR PEOPLE MAKE IT HAPPEN. MANAGEMENT'S DISCUSSION AND ANALYSIS .................... 12 CONSOLIDATED BALANCE SHEETS ............................. 18 CONSOLIDATED STATEMENTS OF OPERATIONS .............................. 19 CONSOLIDATED STATEMENTS OF CASH FLOWS .............................. 20 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME ................... 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ....................... 22 FIVE-YEAR FINANCIAL SUMMARY ................ 31 INDEPENDENT AUDITORS' REPORT ............... 32 CORPORATE INFORMATION ...................... 32 DIRECTORS, OFFICERS AND HARTE-HANKS OPERATIONS ..................... 33
[DAVE CLARK, TIMOTHY SHERMAN, PAUL GAGLIARDI, ELAINE BUCKLEY, RICK CLUFF, GREG SNYDER, HOWARD YOUNG PHOTO] 11 2001 ANNUAL REPORT OVERVIEW MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's overall performance reflects its commitment to its strategy of remaining a market leader in the targeted media industry, introducing new products and entering new markets, investing in technology and people, and increasing shareholder value. Harte-Hanks is an international direct and interactive marketing services company that provides end-to-end customer relationship management (CRM), related marketing services and shopper publications to a wide range of industries serving both consumer and business-to-business markets. The Company's solutions use technology as the enabler to capture, analyze and disseminate customer and prospect data at all points of contact. The Harte-Hanks customer-centric models allow it to be the overall solutions provider for driving traffic to brick-and-mortar locations, Web sites or call/contact centers. A full-service approach -- CRM professional services to implementation to ongoing support; strong product and service brands including Allink(TM), Trillium(TM), nTouch and PennySaver; the use of targeted media from mail to Internet to Web to telephone; end-to-end execution from design and print to personalized mail and e-mail production; and shopper ads that are highly targeted by geography and other cluster groupings that are driven by geography -- supports Harte-Hanks customer-centric beliefs. As of December 31, 2001, the Company's highly targeted advertising shopper publications covered 800 geographic zones and reached nearly 10 million households each week. Harte-Hanks has grown internally by adding new customers and products, cross-selling existing products, entering new markets and expanding its international presence. The Company also used proceeds from the sales of its newspaper and television operations, borrowings against its credit facilities and its excess cash flows to fund several acquisitions in 1999, 2000 and 2001. These acquisitions, as well as several previous acquisitions, have enhanced the Company's growth over the past three years. Harte-Hanks has funded $209.6 million in acquisitions during the period 1999 through 2001. These acquisitions have all been in the Company's direct and interactive marketing segment, which now comprises approximately 66% of the Company's revenues. Harte-Hanks derives its revenues from the sale of direct and interactive marketing and advertising services. As a worldwide business, direct and interactive marketing is affected by general national and international economic trends. Shoppers operate in local markets and are affected by the strength of the local economies. The Company's principal expense items are payroll, postage, transportation and paper. 12 HARTE-HANKS, INC. RESULTS OF OPERATIONS Operating results were as follows:
In thousands 2001 % CHANGE 2000 % CHANGE 1999 ------------ ---------- ---------- ---------- ---------- ---------- Revenues $ 917,928 (4.5) $ 960,773 15.8 $ 829,752 Operating expenses 778,298 (5.4) 822,552 15.6 711,524 ---------- ---------- ---------- Operating income $ 139,630 1.0 $ 138,221 16.9 $ 118,228 ========== ========== ==========
Consolidated revenues declined 4.5% to $917.9 million while operating income grew 1.0% to $139.6 million in 2001 compared to 2000. Overall operating expenses decreased 5.4% to $778.3 million. The Company's overall results reflect revenue and operating income declines in its direct and interactive marketing segment, partially offset by increased revenue and operating income in the shopper segment. Overall growth in 2000 revenues and operating income resulted from acquisitions, increased business from both new and existing customers and from the sale of new products and services. Overall operating expenses increased as a result of the overall revenue growth, including the acquisitions, and the hiring of additional personnel to support the growth. DIRECT MARKETING Direct marketing operating results were as follows:
In thousands 2001 % CHANGE 2000 % CHANGE 1999 ------------ ---------- ---------- ---------- ---------- ---------- Revenues $ 601,901 (9.1) $ 662,044 18.4 $ 559,262 Operating expenses 516,881 (9.4) 570,594 18.8 480,098 ---------- ---------- ---------- Operating income $ 85,020 (7.0) $ 91,450 15.5 $ 79,164 ========== ========== ==========
Direct and interactive marketing revenues decreased $60.1 million, or 9.1%, in 2001 compared to 2000. These results reflect declines in almost all of direct and interactive marketing's vertical markets, including declines in the segment's largest vertical markets, retail, financial services and high-tech/telcom. The overall decline was partially offset by strong growth in revenues from the pharmaceutical and healthcare industries. Both Customer Relationship Management (CRM) and Marketing Services revenues declined from the prior year. CRM experienced revenue declines in data processing, agency, consulting, fulfillment, telesales and brokered customer list business, partially offset by increased software revenue and revenue attributable to 2001 and 2000 acquisitions. Marketing Services experienced revenue declines in its personalized direct mail, targeted mail and logistics operations. Operating expenses decreased $53.7 million, or 9.4%, in 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 economic environment, as well as reduced variable expenses resulting from lower revenue levels. Production and distribution costs decreased $28.4 million due primarily to decreased volumes and better pricing obtained from vendors. Labor costs declined $16.2 million due to lower volumes and staff reductions. General and administrative expense decreased $14.4 million due to employee and professional services expenses. Depreciation expense increased $3.7 million due to new capital investments to support future growth and improve efficiencies. Goodwill and intangible amortization expense increased $1.6 million due to prior year acquisitions. Operating expenses were also impacted by 2001 and 2000 acquisitions. Direct and interactive marketing revenues increased $102.8 million, or 18.4%, in 2000 compared to 1999. CRM experienced significant revenue growth in 2000 due to increased data processing, Internet and fulfillment business with both new and existing customers. Also contributing to the CRM revenue growth was the October 1999 acquisition of ZD Market Intelligence, renamed Harte-Hanks Market Intelligence, and to a much lesser extent the November 2000 acquisition of Information Resource Group and the June 2000 acquisition of Hi-Tech Marketing Limited. The traditional growth oriented business-to-business activities of CRM had significant growth. The high-tech, mutual fund, non-bank finance, telecommunications and healthcare industry sectors contributed significantly to overall CRM revenue growth, offsetting slowdowns in the insurance industry. Marketing Services also experienced good revenue growth in 2000, led by its targeted mail operations. Marketing Services revenues increased due to increased product sales to both new and existing customers, primarily in the non-bank finance, banking and pharmaceutical industry sectors, offsetting slowdowns in the retail industry. The May 1999 acquisition of Direct Marketing Associates, Inc. also contributed to the Marketing Services revenue growth. Overall, revenue growth for direct and interactive marketing increased as a result of increased business with both new and existing customers across several industry sectors including high-tech, non-bank finance, mutual fund, healthcare, banking, telecommunications and pharmaceutical, as well as the acquisitions noted above. Operating expenses rose $90.5 million, or 18.8%, in 2000 compared to 1999 due primarily to revenue growth contributed by acquisitions, which accounted for approximately 58% of this 13 2001 ANNUAL REPORT increase. Excluding these acquisitions, operating expenses increased 8.3%. This remaining increase was due to increased production costs directly associated with increased product volumes, increased payroll costs due to expanded hiring to support revenue growth and increased general and administrative expense from professional and business service fees and employee expenses. Depreciation and amortization expense increased $8.8 million due to goodwill associated with acquisitions and higher levels of capital investment to support growth. SHOPPERS Shopper operating results were as follows:
In thousands 2001 % CHANGE 2000 % CHANGE 1999 ------------ ---------- ---------- ---------- ---------- ---------- Revenues $ 316,027 5.8 $ 298,729 10.4 $ 270,490 Operating expenses 252,629 4.0 243,019 8.7 223,475 ---------- ---------- ---------- Operating income $ 63,398 13.8 $ 55,710 18.5 $ 47,015 ========== ========== ==========
Shopper revenues increased $17.3 million, or 5.8%, in 2001 when compared to 2000. Revenue increases were the result of improved sales in established markets as well as geographic expansions into new neighborhoods in both California and Florida. On a product basis, revenues increased due to growth in distribution products and in-book products, primarily core sales and real estate related advertising. These increases were partially offset by declines in employment advertising, print-and-deliver and coupon book revenues. Shopper operating expenses rose $9.6 million, or 4.0%, in 2001 compared to 2000. The increase in operating expenses was primarily due to increases in production costs of $5.6 million, including increased postage of $3.5 million due to higher postage rates and increased circulation and volumes. Promotion costs also increased $2.9 million, labor costs increased $2.0 million, and insurance costs were up $1.0 million. Shopper revenues increased $28.2 million, or 10.4%, in 2000 when compared to 1999. Revenue increases were the result of improved sales in established markets as well as geographic expansions into new neighborhoods in both California and Florida. On a product basis, revenues increased due to growth in in-book products, primarily employment and automotive related advertising and core sales, and distribution products, primarily pre-printed inserts and four-color glossy flyers. Shoppers also experienced growth from up-selling ads onto its Web site. Shopper operating expenses rose $19.5 million, or 8.7%, in 2000 compared to 1999. The increase in operating expenses was primarily due to increases in labor costs of $6.5 million and additional production costs of $8.8 million, including increased postage of $5.3 million due to increased circulation and insert volume growth. ACQUISITIONS As described in Note B of the "Notes to Consolidated Financial Statements" included herein, the Company made several acquisitions in the past three years. In November 2001, the Company acquired Sales Support Services, Inc. (SSS), a leading business-to-business lead generation, order processing and fulfillment services company to the automotive, energy and other industries. The Company acquired Detroit-based Information Resource Group, a leading provider of business-to-business intelligence solutions to the high-tech, telecommunications and other industries, in November 2000, and Hi-Tech Marketing Limited (HTM), a London based leading pan-European provider of CRM services to the hightech, telecommunications and financial services industries, in June 2000. In October 1999, the Company acquired ZD Market Intelligence, renamed Harte-Hanks Market Intelligence, for $101 million in cash from Ziff-Davis, Inc. Harte-Hanks Market Intelligence is a leading provider of database products and solutions to the high-tech and telecommunications industries in the United States, Canada and Europe. The Company acquired Direct Marketing Associates, Inc. of Baltimore, Maryland, a leading provider of integrated direct marketing services to commercial, government and non-profit organizations, in May 1999, and LYNQS Newmedia of Kansas City, Missouri, a developer of new media applications for the financial services, pharmaceutical and other industries, in June 1999. INTEREST EXPENSE/INTEREST INCOME Interest expense increased $1.4 million in 2001 over 2000 due primarily to higher outstanding debt levels during 2001 of the Company's three-year revolving credit facility, the proceeds of which were used to repurchase the Company's stock and fund the November 2001 acquisition of SSS. Interest relating to the Company's unsecured credit facility obtained for the purpose of constructing a new building in Belgium, and a note payable issued in connection with the Company's June 2000 acquisition of HTM, also contributed to the increase in interest expense during the year. The increase in interest expense in 2001 was partially offset by lower interest rates in 2001 compared to 2000. Total interest expense increased in 2000 when compared to 1999 primarily due to interest, commitment charges and the amortization of financing costs from the two unsecured revolving credit facilities. Interest related to the Company's unsecured credit facility obtained for the purpose of constructing a new building in Belgium, and the note payable issued in connection with the June 2000 acquisition of HTM, also contributed to the increase in interest expense. The Company's debt at December 31, 2001 and 2000 is described in 14 HARTE-HANKS, INC. Note D of the "Notes to Consolidated Financial Statements," included herein. Interest income decreased $1.6 million in 2001 over 2000 due to lower interest rates and lower overall cash balances during the year. Interest income decreased $3.6 million in 2000 over 1999 due to the sale of all of the Company's short-term investments during 1999, the proceeds of which were used to fund acquisitions and repurchase the Company's stock, and lower overall cash balances during the year. OTHER INCOME AND EXPENSE During 2001 the Company realized $2.5 million in losses on the sales of investments that were classified as available for sale and $.9 million on the sales of investments that were accounted for under the cost method. INCOME TAXES Income taxes decreased $2.2 million in 2001 due to lower income levels. Income taxes increased $5.1 million in 2000 due to higher income levels. The effective income tax rate was 39.8%, 40.2%, and 40.6% in 2001, 2000 and 1999, respectively. The effective income tax rate calculated is higher than the federal statutory rate of 35% due to the addition of state taxes and certain expenses recorded for financial reporting purposes (primarily goodwill amortization) that are not deductible for federal income tax purposes. CAPITAL INVESTMENTS Net cash used in investing activities for 2001 included $28.2 million for acquisitions and $26.4 million for capital expenditures. The acquisition investments, which were made in the direct and interactive marketing segment, are discussed under "Acquisitions." The capital expenditures consisted primarily of additional computer capacity, technology, systems, new press equipment and equipment upgrades for the direct and interactive marketing segment to support its growth in all sectors. The Company also invested in facility expansion in its CRM sector. The shopper segment's capital expenditures were primarily related to facility improvements and additional computer and other production equipment. Net cash used in investing activities for 2000 included $43.9 million for acquisitions and $36.5 million for capital expenditures. The acquisition investments, which were made in the direct and interactive marketing segment, are discussed under "Acquisitions." The capital expenditures consisted primarily of the construction of a new building to expand and support the Company's CRM operations in Belgium, additional computer capacity, technology, systems and equipment upgrades for the direct and interactive marketing segment to support its growth in all sectors. The Company also invested in facility expansions in its CRM and Marketing Services sectors. The shopper segment's capital expenditures were primarily related to new press, computer and other production equipment. CRITICAL ACCOUNTING POLICIES Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note A of the "Notes to Consolidated Financial Statements," includes a summary of the significant accounting policies and methods used in the preparation of the Company's Consolidated Financial Statements. The following is a discussion of the more significant accounting policies and methods. REVENUE RECOGNITION -- The Company recognizes revenue at the time the service is rendered or the product is delivered. Payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as the services are performed or the product is delivered. As described below, significant management judgments and estimates must sometimes be made and used in connection with the revenue recognized in any accounting period. For all sales the Company requires either a purchase order, a statement of work signed by the customer, a written contract, or some other form of written authorization from the customer. Direct and interactive marketing revenue is derived from a variety of CRM and marketing services solutions. Revenue from marketing services such as creative and graphics, printing, personalization of communication pieces using laser and inkjet printing, target mail, fulfillment, agency services and transportation logistics are recognized as the work is performed. Revenue is typically based on a set price or rate given to the customer. CRM revenue from the ongoing production and delivery of data is recognized upon completion and delivery of the work and is typically based on a set price or rate. Revenue from time-based subscriptions is based on a set price and is recognized ratably over the term of the subscription. Revenue from database build services may be billed based on hourly rates or at a set price. If billed at a set price, the database build revenue is recognized over the contractual period, using the percentage-of-completion method based on individual costs incurred to date compared with total estimated contract costs. Revenue from market research and analytical services may be billed based on hourly rates or a set price. If billed at a set price, the revenue is recognized over the contractual period, using the percentage-of-completion method based on individual costs incurred to date compared with total estimated contract costs. In other instances, progress toward completion is based on performance milestones specified in the contract where such milestones fairly reflect progress toward contract completion. Revenue related to e-marketing, lead management, multi-channel customer care, inbound and outbound teleservices and technical support is typically billed based on a set price per transaction or service provided. Revenue from these services is recognized as the service or activity is performed. Revenue from software is recognized in accordance with the American Institute of Certified Public Accountants' (AICPA) Statement of Position ("SOP") 97-2 "Software Revenue Recognition," as amended by SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition." SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the vendor- specific objective evidence of fair values of the respective elements. For software sales with multiple elements (for example, undelivered postcontract customer support or "PCS"), the Company allocates revenue to each component of the arrangement using the residual value method based on the fair value of the undelivered elements. This means the Company defers revenue from the software sale equivalent to the fair value of the undelivered elements. The fair value of PCS is based upon separate sales of renewals to other customers or upon renewal rates quoted in the contracts. The fair value of services, such as training and consulting, is based upon separate sales of these services to other customers. 15 2001 ANNUAL REPORT The revenue allocated to PCS is recognized ratably over the term of the support period. Revenue allocated to professional services is recognized as the services are performed. The revenue allocated to software products, including time-based software licenses, is recognized, if collection is probable, upon execution of a licensing agreement and shipment of the software or ratably over the term of the license, depending on the structure and terms of the arrangement. If the licensing agreement is for a term of one year or less and includes PCS, the company recognizes the software and the PCS revenue ratably over the term of the license. The Company applies the provisions of Emerging Issues Task Force Issue No. 00-03 "Application of AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entity's Hardware" to its hosted software service transactions. Revenue under hosted service transactions is typically recognized over the service period unless the customer is able to take possession of the software during the service period. In such situations, revenue is recognized pursuant to SOP 97-2, as described above. Shopper services are considered rendered, and the revenue recognized, when all printing, sorting, labeling and ancillary services have been provided and the mailing material has been received by the United States Postal Service. ALLOWANCE FOR DOUBTFUL ACCOUNTS -- The Company maintains its allowance for doubtful accounts at a balance adequate to reduce accounts receivable to the amount of cash expected to be realized upon collection. The methodology used to determine the minimum allowance balance is based on the Company's prior collection experience and is generally related to the accounts receivable balance in various aging categories. The balance is also influenced by specific customers' financial strength and circumstance. Accounts that are determined to be uncollectible are written off in the period in which they are determined to be uncollectible. Periodic changes to the allowance balance are recorded as increases or decreases to bad debt expense, which is included in the "Advertising, selling, general and administrative" line of the Company's Consolidated Statements of Operations. The Company recorded bad debt expense of $4.4 million, $4.6 million, and $1.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. RESERVE FOR WORKERS COMPENSATION, AUTOMOBILE AND GENERAL LIABILITY -- The Company has a $250,000 deductible for worker's compensation, automobile and general liability. The estimate of loss reserves necessary for claims is based on the Company's estimate of claims incurred as of the end of the year. The Company uses detail loss-run claim reports provided by the insurance administrator and applies actuarial development factors to the claim loss balance to determine an appropriate reserve balance. The loss-run claim reports show all claims and an estimate of what the claim will cost. This estimate is provided by the insurance administrator based upon their experience dealing with similar type claims. The Company uses the loss-run claim reports as a basis for its reserve balance. Periodic changes to the reserve are recorded as increases or decreases to insurance expense, which is included in the "Advertising, selling, general and administrative" line of the Company's Consolidated Statement of Operations. GOODWILL -- Goodwill is recorded in purchase business combinations as the excess of the purchase price over the fair value of assets acquired and liabilities assumed. Recorded goodwill is amortized on a straight-line basis over periods of 15 to 40 years. The Company assesses the recoverability of its goodwill by determining whether the recorded goodwill balance can be recovered through projected undiscounted future cash flows over the remaining amortization period. If projected undiscounted future cash flows indicate that unamortized goodwill will not be recovered, an impairment loss is recognized based on projected discounted future cash flows. Cash flow projections are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. This assessment is typically done on an annual basis, but can be done more frequently whenever events or changes in circumstances indicate that the unamortized goodwill balance may not be recoverable. The Company has not recorded an impairment loss in any of the three years ended December 31, 2001. The Company will adopt Statement of Financial Account Standards ("SFAS") No. 142 on January 1, 2002, except that goodwill associated with the November acquisition of SSS was not amortized during 2001 in accordance with SFAS No. 141, "Business Combinations." SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. As a result of the adoption of SFAS No. 142, the Company will cease to amortize $434.4 million of goodwill. The company recorded $16.2 million, $14.8 million and $10.6 million of goodwill amortization expense for the years ended December 31, 2001, 2000 and 1999. In lieu of amortization, the Company is required to perform an initial impairment assessment of its goodwill in 2002 and an annual impairment assessment thereafter. SFAS No. 142 is described in more detail in Note A of the "Notes to Consolidated Financial Statements," included herein. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities for 2001 was $152.9 million. Net cash outflows from investing activities were $53.4 million for 2001, resulting primarily from the acquisitions and capital investments described above. Net cash outflows from financing activities in 2001 were $92.0 million. The cash outflow from financing activities is attributable primarily to the repurchase of stock throughout 2001 totaling $83.7 million. The acquisitions and repurchases of stock in 2001 were funded through the Company's cash flows and borrowings under the Company's credit facilities. Cash provided by operating activities for 2000 was $110.9 million. Net cash outflows from investing activities were $79.5 million for 2000, resulting primarily from the acquisitions and capital investments described above. Net cash outflows from financing activities in 2000 were $43.7 million. The cash outflow from financing activities is attributable primarily to the repurchase of stock throughout 2000 totaling $92.7 million. The acquisitions and repurchases of stock in 2000 were funded through the Company's cash flows and borrowings under the Company's credit facilities. 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. The Company has classified its debt at December 31, 2001 as long-term as it is the Company's intent to refinance all outstanding 16 HARTE-HANKS, INC. 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. Management believes that its credit facilities, together with cash provided by operating activities, will be sufficient to fund operations and anticipated acquisitions and capital expenditures needs for the foreseeable future. As of December 31, 2001, the Company had $155.0 million of unused borrowing capacity under its credit facilities. 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 that could affect the Company's future performance, including its revenues, net income and earnings per share; the risks described below, however, 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 continually to 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 recent threats to the postal system. Overall shopper postage costs are expected to grow moderately as a result of this increase as well as anticipated increases in circulation and insert volumes. Postal rates also influence the demand for the Company's direct and interactive marketing services even though the cost of mailings is borne by the Company's customers and is not directly reflected in the Company's revenues or expenses. PAPER PRICES -- Paper represents a substantial expense in the Company's shopper operations. Fluctuations in paper prices, such as those experienced in recent years, can materially affect the results of the Company's operations. ECONOMIC CONDITIONS -- Changes in national economic conditions, such as events following the September 11, 2001 attacks, can affect levels of advertising expenditures generally, and such changes can affect each of the Company's businesses. In addition, revenues from the Company's shopper business are dependent to a large extent on local advertising expenditures in the markets in which they operate. Such expenditures are substantially affected by the 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. 17 2001 ANNUAL REPORT HARTE-HANKS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS 2001 2000 - ------------------------------------------------ ---------- ---------- ASSETS Current assets Cash and cash equivalents ........................................................... $ 30,468 $ 22,928 Accounts receivable (less allowance for doubtful accounts of $5,463 in 2001 and $4,644 in 2000) ..... 138,409 179,838 Inventory ........................................................................... 5,835 6,260 Prepaid expenses .................................................................... 13,411 14,072 Current deferred income tax asset ................................................... 8,378 7,648 Other current assets ................................................................ 6,306 5,127 ---------- ---------- Total current assets ................................................................ 202,807 235,873 ---------- ---------- Property, plant and equipment Land ................................................................................ 3,325 3,428 Buildings and improvements .......................................................... 31,045 28,374 Software ............................................................................ 45,806 34,966 Equipment and furniture ............................................................. 178,842 171,560 ---------- ---------- 259,018 238,328 Less accumulated depreciation and amortization ...................................... (152,558) (130,544) ---------- ---------- 106,460 107,784 Construction and equipment installations in progress ................................ 2,968 4,281 ---------- ---------- Net property, plant and equipment ............................................... 109,428 112,065 ---------- ---------- Intangible and other assets Goodwill and other intangibles (less accumulated amortization of $83,092 in 2001 and $66,344 in 2000) .......... 438,325 439,148 Other assets ........................................................................ 20,489 20,019 ---------- ---------- Total intangible and other assets ............................................... 458,814 459,167 ---------- ---------- Total assets .................................................................... $ 771,049 $ 807,105 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable .................................................................... $ 42,990 $ 60,069 Accrued payroll and related expenses ................................................ 21,550 31,429 Customer deposits and unearned revenue .............................................. 38,617 42,712 Income taxes payable ................................................................ 10,531 5,135 Other current liabilities ........................................................... 8,086 10,619 ---------- ---------- Total current liabilities ....................................................... 121,774 149,964 Long-term debt ......................................................................... 48,312 65,370 Other long-term liabilities (including deferred income taxes of $29,515 in 2001 and $26,007 in 2000) ............ 48,597 40,768 ---------- ---------- Total liabilities ............................................................... 218,683 256,102 ---------- ---------- Stockholders' equity Common stock, $1 par value, authorized 250,000,000 shares Issued 2001: 78,281,458; 2000: 76,916,339 shares .............................. 78,281 76,916 Additional paid-in capital .......................................................... 219,229 202,222 Accumulated other comprehensive loss ................................................ (1,293) (2,105) Retained earnings ................................................................... 640,635 568,512 Less treasury stock, 2001: 16,139,795; 2000: 12,230,388 shares at cost .............. (384,486) (294,542) ---------- ---------- Total stockholders' equity ...................................................... 552,366 551,003 ---------- ---------- Total liabilities and stockholders' equity ...................................... $ 771,049 $ 807,105 ========== ==========
See Notes to Consolidated Financial Statements 18 HARTE-HANKS, INC. HARTE-HANKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2001 2000 1999 - -------------------------------------- ---------- ---------- ---------- Revenues ................................................... $ 917,928 $ 960,773 $ 829,752 ---------- ---------- ---------- Operating expenses Payroll ................................................ 335,913 350,058 300,336 Production and distribution ............................ 313,639 336,444 306,340 Advertising, selling, general and administrative ....... 79,826 92,330 70,060 Depreciation ........................................... 32,079 28,494 24,126 Goodwill and intangible amortization ................... 16,841 15,226 10,662 ---------- ---------- ---------- 778,298 822,552 711,524 ---------- ---------- ---------- Operating income ........................................... 139,630 138,221 118,228 Other expenses (income) Interest expense ....................................... 3,076 1,678 349 Interest income ........................................ (498) (2,062) (5,662) Other, net ............................................. 4,614 1,746 730 ---------- ---------- ---------- 7,192 1,362 (4,583) ---------- ---------- ---------- Income before income taxes ................................. 132,438 136,859 122,811 Income tax expense ......................................... 52,754 54,973 49,870 ---------- ---------- ---------- Net income ................................................. $ 79,684 $ 81,886 $ 72,941 ========== ========== ========== Basic earnings per common share ............................ $ 1.26 $ 1.21 $ 1.04 ========== ========== ========== Weighted-average common shares outstanding ............. 63,206 67,517 69,914 ========== ========== ========== Diluted earnings per common share .......................... $ 1.23 $ 1.18 $ 1.01 ========== ========== ========== Weighted-average common and common equivalent shares outstanding ................... 64,783 69,653 72,144 ========== ========== ==========
See Notes to Consolidated Financial Statements 19 2001 ANNUAL REPORT HARTE-HANKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------ IN THOUSANDS 2001 2000 1999 - ------------ ---------- ---------- ---------- Cash Flows from Operating Activities Net income ................................................... $ 79,684 $ 81,886 $ 72,941 Adjustments to reconcile net income to net cash provided by operations: Depreciation ............................................ 32,079 28,494 24,126 Goodwill and intangible amortization .................... 16,841 15,226 10,662 Amortization of option-related compensation ............. 206 441 430 Deferred income taxes ................................... 2,470 5,942 10,572 Other, net .............................................. 4,464 424 224 Changes in operating assets and liabilities, net of effects from acquisitions and divestitures: (Increase) decrease in accounts receivable, net ......... 47,578 (22,514) (13,827) (Increase) decrease in inventory ........................ 425 839 (848) Increase in prepaid expenses and other current assets ... (124) (1,848) (2,058) Increase (decrease) in accounts payable ................. (17,054) 1,451 5,597 Increase (decrease) in other accrued expenses and other liabilities ................................ (12,350) 5,095 10,826 Other, net .............................................. (1,278) (4,511) (3,281) ---------- ---------- ---------- Net cash provided by operating activities ........ 152,941 110,925 115,364 ---------- ---------- ---------- Cash Flows from Investing Activities Acquisitions ................................................. (28,230) (43,873) (136,469) Purchases of property, plant and equipment ................... (26,445) (36,465) (28,928) Proceeds from the sale of property, plant and equipment ...... 492 432 976 Net sales and maturities of available-for-sale short-term investments ..................................... -- -- 138,874 Other investing activities ................................... 801 391 (4,005) ---------- ---------- ---------- Net cash used in investing activities ............ (53,382) (79,515) (29,552) ---------- ---------- ---------- Cash Flows from Financing Activities Long-term borrowings ......................................... 282,000 58,494 5,000 Payments on debt ............................................. (292,000) (5,000) -- Issuance of common stock ..................................... 9,131 6,506 7,082 Issuance of treasury stock ................................... 75 81 87 Purchase of treasury stock ................................... (83,664) (92,706) (87,574) Warrants repurchased ......................................... -- (4,317) -- Dividends paid ............................................... (7,561) (6,736) (5,578) ---------- ---------- ---------- Net cash used in financing activities ............ (92,019) (43,678) (80,983) ---------- ---------- ---------- Net increase (decrease) in cash .................................. 7,540 (12,268) 4,829 Cash and cash equivalents at beginning of period ................. 22,928 35,196 30,367 ---------- ---------- ---------- Cash and cash equivalents at end of period ....................... $ 30,468 $ 22,928 $ 35,196 ========== ========== ========== Supplemental Cash Flow Information: Non-cash investing and financing activities: Acquisitions -- debt issued (2000) ........................... $ -- $ 6,876 $ -- ========== ========== ==========
See Notes to Consolidated Financial Statements 20 HARTE-HANKS, INC. HARTE-HANKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
ACCUMULATED ACCUMULATED ADDITIONAL DEFICIT OTHER TOTAL COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS' IN THOUSANDS STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY - ------------ ---------- ---------- ----------- ---------- ------------- ------------- Balance at January 1, 1999 ......................... $ 75,789 $ 189,698 $ 425,999 $ (114,395) $ -- $ 577,091 Common stock issued -- employee benefit plans ...... 215 4,172 -- -- -- 4,387 Exercise of stock options .......................... 388 2,307 -- -- -- 2,695 Tax benefit of options exercised ................... -- 1,253 -- -- -- 1,253 Dividends paid ($0.08 per share) ................... -- -- (5,578) -- -- (5,578) Treasury stock issued .............................. -- 24 -- 63 -- 87 Treasury stock repurchase .......................... -- -- -- (87,574) -- (87,574) Comprehensive income, net of tax: Net income ..................................... -- -- 72,941 -- -- 72,941 Change in unrealized gain (loss) on long-term investments, net of reclassification adjustments (net of tax of $6,632) ......... -- -- -- -- 12,316 12,316 ---------- Total comprehensive income ......................... 85,257 ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1999 ....................... 76,392 197,454 493,362 (201,906) 12,316 577,618 Common stock issued -- employee benefit plans ...... 196 3,809 -- -- -- 4,005 Exercise of stock options .......................... 328 2,173 -- -- -- 2,501 Tax benefit of options exercised ................... -- 1,581 -- -- -- 1,581 Dividends paid ($0.10 per share) ................... -- -- (6,736) -- -- (6,736) Treasury stock issued .............................. -- 11 -- 70 -- 81 Treasury stock repurchase .......................... -- -- -- (92,706) -- (92,706) Warrants repurchased (net of tax of $1,511) ........ -- (2,806) -- -- -- (2,806) Comprehensive income, net of tax: Net income ..................................... -- -- 81,886 -- -- 81,886 Foreign currency translation adjustment ........ -- -- -- -- (1,208) (1,208) Change in unrealized gain (loss) on long-term investments, net of reclassification adjustments (net of tax of $7,115) ......... -- -- -- -- (13,213) (13,213) ---------- Total comprehensive income ......................... 67,465 ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2000 ....................... 76,916 202,222 568,512 (294,542) (2,105) 551,003 Common stock issued -- employee benefit plans ...... 177 3,275 -- -- -- 3,452 Exercise of stock options .......................... 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 issued .............................. -- 5 -- 70 -- 75 Treasury stock repurchase .......................... -- -- -- (83,664) -- (83,664) Comprehensive income, net of tax: Net income ..................................... -- -- 79,684 -- -- 79,684 Foreign currency translation adjustment ........ -- -- -- -- (85) (85) Change in 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 ========== ========== ========== ========== ========== ==========
See Notes to Consolidated Financial Statements 21 2001 ANNUAL REPORT HARTE-HANKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The accompanying Consolidated Financial Statements present the financial position of Harte-Hanks, Inc. and subsidiaries (the "Company"). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified for comparative purposes. CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES All highly liquid investments with an original maturity of 90 days or less at the time of purchase are considered to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value. The Company considers its investments to be available-for-sale and has recorded its investments at fair value, with the unrealized gain (loss) recognized as a component of accumulated other comprehensive income. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company maintains its allowance for doubtful accounts at a balance adequate to reduce accounts receivable to the amount of cash expected to be realized upon collection. The methodology used to determine the minimum allowance balance is based on the Company's prior collection experience and is generally related to the accounts receivable balance in various aging categories. The balance is also influenced by specific customers' financial strength and circumstance. Accounts that are determined to be uncollectible are written off in the period in which they are determined to be uncollectible. Periodic changes to the allowance balance are recorded as increases or decreases to bad debt expense, which is included in the "Advertising, selling, general and administrative" line of the Company's Consolidated Statements of Operations. The Company recorded bad debt expense of $4.4 million, $4.6 million and $1.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. INVENTORY Inventory, consisting primarily of newsprint and operating supplies, is stated at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated on the basis of cost. Depreciation of buildings and equipment is computed generally on the straight-line method at rates calculated to amortize the cost of the assets over their useful lives. The general ranges of estimated useful lives are: Buildings and improvements 10 to 40 years Equipment and furniture 3 to 20 years Software 3 to 10 years
GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles are stated on the basis of cost, adjusted as discussed below. Goodwill is amortized on a straight-line basis over 15 to 40 year periods. Other intangibles are amortized on a straight-line basis over a period of 5 to 10 years. The Company assesses the recoverability of its goodwill and other intangibles by determining whether the amortization of the intangible balance over its remaining life can be recovered through projected undiscounted future cash flows over the remaining amortization period. If projected undiscounted future cash flows indicate that an unamortized intangible will not be recovered, an impairment loss is recognized based on projected discounted future cash flows. Cash flow projections are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. At December 31, 2001 and 2000 the Company's goodwill balance was $434.4 million, net of $82.0 million of accumulated amortization, and $434.7 million, net of $65.7 million of accumulated amortization, respectively. INCOME TAXES Income taxes are calculated using the asset and liability method required by Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred income taxes are recognized for the tax consequences resulting from "timing differences" by applying enacted statutory tax rates applicable to future years. These "timing differences" are associated with differences between the financial and the tax basis of existing assets and liabilities. Under SFAS No. 109, a statutory change in tax rates will be recognized immediately in deferred taxes and income. EARNINGS PER SHARE Basic earnings per common share are based upon the weighted-average number of common shares outstanding. Diluted earnings per common share are based upon the weighted-average number of common shares outstanding and dilutive common stock equivalents from the assumed exercise of stock options using the treasury stock method. REVENUE RECOGNITION The Company recognizes revenue at the time the service is rendered or the product is delivered. Payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as the services are performed. Direct and interactive marketing revenue from the production and delivery of data is recognized upon completion and shipment of the work. Revenue from database subscriptions is recognized ratably over the term of the subscription. Service revenue from time-and-materials services is recognized as the services are provided. Revenue from certain service contracts is recognized over the contractual period, using the percentage-of-completion method based on individual costs incurred to date compared with total estimated contract costs. In other instances, progress toward completion is based on performance milestones specified in the contract where such milestones fairly reflect progress toward contract completion. Revenue from software is recognized in accordance with the American Institute of Certified Public Accountants' (AICPA) Statement of Position ("SOP") 97-2 "Software Revenue Recognition," as amended by SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition". SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the vendor- specific objective evidence of fair values of the respective elements. In accordance with SOP 97-2, the Company has analyzed all of the elements included in its multiple-element arrangements and determined that it has Company-specific objective evidence of fair value 22 HARTE-HANKS, INC. to allocate revenue to the license and postcontract customer support (PCS) component of its software license arrangements. The revenue allocated to software products, including time-based software licenses, is recognized upon execution of a licensing agreement and shipment of the software or ratably over the term of the license, depending on the structure and terms of the arrangement. The revenue allocated to PCS is recognized ratably over the term of the support. Revenue allocated to professional services is recognized as the services are performed. Shopper services are considered rendered when all printing, sorting, labeling and ancillary services have been provided and the mailing material has been received by the United States Postal Service. RESERVE FOR WORKERS COMPENSATION, AUTOMOBILE AND GENERAL LIABILITY The Company has a $250,000 deductible for worker's compensation, automobile and general liability. The estimate of loss reserves necessary for claims is based on the Company's estimate of claims incurred as of the end of the year. The Company uses detail loss-run claim reports provided by the insurance administrator and applies actuarial development factors to the claim loss balance to determine an appropriate reserve balance. The loss-run claim reports show all claims and an estimate of what the claim will cost. This estimate is provided by the insurance administrator based upon their experience dealing with similar type claims. The Company uses the loss-run claim reports as a basis for its reserve balance. Periodic changes to the reserve are recorded as increases or decreases to insurance expense, which is included in the "Advertising, selling, general and administrative" line of the Company's Consolidated Statement of Operations. RECENT ACCOUNTING PRONOUNCEMENT 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, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be 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 adopted the provisions of SFAS No. 141 on July 1, 2001. The Company is required to adopt the provisions of SFAS No. 142 effective January 1, 2002, except that goodwill and intangible assets that were acquired in a business combination completed after June 30, 2001, and were determined to have an indefinite useful life, will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 were continued to be amortized during the period July 1, 2001 through December 31, 2001. SFAS No. 141 requires, upon adoption of SFAS No. 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, SFAS No. 142 will require the Company to perform an assessment of whether there is an indication that goodwill and equity-method goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of 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 the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. As of the date of adoption, the Company has unamortized goodwill in the amount of $434.4 million and unamortized identifiable intangible assets in the amount of $3.9 million, all of which will be subject to the transition provisions of SFAS No. 141 and 142. Amortization expense related to goodwill was $16.2 million, $14.8 million and $10.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. 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. NOTE B -- ACQUISITIONS/DIVESTITURES In November 2001, the Company acquired Sales Support Services, Inc. (SSS), a leading business-to-business lead generation, order processing and fulfillment services company to the automotive, energy and other industries. The total cost of the transaction was approximately $21.9 million, which was paid in cash and with the assumption of SSS's debt. Goodwill recognized in this transaction amounted to approximately $16.4 million, and was assigned to the direct and interactive marketing segment. In November 2000, the Company acquired Detroit-based Information Resource Group, a leading provider of business-to-business intelligence solutions to the high-tech, telecommunications and other industries. 23 2001 ANNUAL REPORT In June 2000, the Company acquired the UK based Hi-Tech Marketing Limited (HTM), a leading pan-European provider of CRM services to the high-tech, telecommunications and financial services industries. In October 1999, the Company acquired ZD Market Intelligence, renamed Harte-Hanks Market Intelligence, for $101 million cash from Ziff-Davis, Inc. Harte-Hanks Market Intelligence is a leading provider of database products and solutions to the high-tech and telecommunications industries in the United States, Canada and Europe. In June 1999, the Company acquired LYNQS Newmedia of Kansas City, Missouri, a developer of new media applications for the financial services, pharmaceutical and other industries. In May 1999, the Company acquired Direct Marketing Associates, Inc. of Baltimore, Maryland, a leading provider of integrated direct marketing services to commercial, government and non-profit organizations. The total cash outlay in 2001 for acquisitions was $28.2 million. In addition, the Company held back $1.0 million of the purchase price related to its November acquisition of SSS pending the final settlement of the acquired company's working capital amount. The total cash outlay in 2000 for acquisitions was $43.9 million. In addition, the Company incurred $6.9 million in notes payable for its June 2000 acquisition of HTM. The total cash outlay in 1999 for acquisitions was $136.5 million. The operating results of the acquired companies have been included in the accompanying Consolidated Financial Statements from the date of acquisition under the purchase method of accounting. The Company has not disclosed proforma amounts including the operating results of SSS as they are not considered material to the Company as a whole. NOTE C -- INVESTMENTS SHORT-TERM INVESTMENTS In 1999 the Company sold all of its short-term investments and at December 31, 2001, 2000 and 1999 held no such investments. The gross realized gains and losses on the sale of short-term available-for-sale securities were immaterial for the year ended December 31, 1999. LONG-TERM INVESTMENTS The Company made equity investments totaling $0.7 million and $4.0 million in 2000 and 1999, respectively. These investments were classified as other assets. All such investments for which fair value was readily determinable were considered to be available-for-sale and were recorded at fair value. The related unrealized gains and losses were reported as a separate component of accumulated other comprehensive income. All other equity investments were recorded at cost. Long-term investments for which the fair value was readily determinable at December 31, 2000 and 1999 consisted of the following:
December 31, 2000 GROSS ORIGINAL UNREALIZED FAIR In thousands COST GAIN (LOSS) VALUE ------------ ---------- ----------- ---------- Equity securities ............ $ 3,150 $ (1,380) $ 1,770 ---------- ---------- ---------- Total ........................ $ 3,150 $ (1,380) $ 1,770 ========== ========== ==========
The Company sold all of these equity investments in 2001 and 2000, and owns no equity investments at December 31, 2001. Proceeds from the sale of long-term investments were $0.8 million and $1.1 million in 2001 and 2000, respectively. Gross realized losses included in 2001 income were $3.4 million and gross realized gains included in 2000 income were $0.5 million. Gross gains and losses were determined using the average cost method. NOTE D -- LONG-TERM DEBT LONG-TERM DEBT CONSISTS OF THE FOLLOWING:
December 31, In thousands 2001 2000 ------------ ---------- ---------- Revolving loan commitment, various interest rates (effective rate of 2.36% at December 31, 2001), due November 4, 2002 .................. $ 45,000 $ 55,000 Revolving loan commitment, various interest rates (effective rate of 3.60% at December 31, 2001), $2.2 million due December 16, 2002, remaining $1.1 million due July 20, 2003 ..................... 3,312 3,493 Acquisition note payable, various interest rates ........................ -- 6,877 Less current maturities .................... -- -- ---------- ---------- $ 48,312 $ 65,370 ========== ==========
Cash payments for interest were $3.4 million, $1.3 million and $0.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. CREDIT FACILITIES On November 4, 1999 the Company obtained two unsecured revolving credit facilities. 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 unless the Company requests and is granted another 364-day extension. Commitment fees on the total credit and interest rates for drawn amounts are determined according to a grid based on the Company's total debt to earnings ratio. Commitment fees range from .08% to .125% for the 364-day facility, and .1% to .15% for the three-year facility. Interest rates on drawn amounts range from EUROLIBOR plus .4% to EUROLIBOR plus .75%. These credit facilities contain both affirmative and negative covenants and the Company has been in compliance with these covenants since obtaining the credit facilities in 1999. As of December 31, 2001, the Company had $55 million and $100 million of unused borrowing capacity under its Three-Year Credit Agreement and 364-Day Credit Agreement, respectively. It is the Company's intent to obtain additional credit facilities at comparable amounts and terms at the time these two facilities expire. On November 29, 1999 the Company obtained an unsecured credit facility in the amount of 2.5 million Euros for the purpose of financing the construction of a new building in Hasselt, Belgium. This facility was increased to 3.7 million Euros on July 18, 2000. All borrowings under the original facility amount are to be repaid by December 16, 2002 and any remaining outstanding amounts are to be repaid by July 20, 2003. The Company pays a commitment fee of .1% on the undrawn portion of the commitment. Interest rates on drawn 24 HARTE-HANKS, INC. amounts are at EURIBOR plus .15%. As of December 21, 2001, the Company had no unused borrowing capacity under this credit facility. It is the Company's intent to repay this note with borrowings under the additional credit facilities the Company intends to obtain at the expiration of its three-year and 364-day revolving credit facilities. ACQUISITION NOTE PAYABLE In June 2000, the Company issued a note payable of 4.6 million British Pounds in connection with an acquisition. Interest on this note was at LIBOR minus .75%. This note payable was due upon demand, and was paid during 2001 using borrowings obtained from the Company's three-year revolving credit facility. NOTE E -- INCOME TAXES The components of income tax expense (benefit) are as follows:
Year Ended December 31, In thousands 2001 2000 1999 ------------ ---------- ---------- ---------- Current Federal .................. $ 43,010 $ 40,502 $ 32,099 State and local .......... 6,776 6,679 6,079 Foreign .................. 498 1,850 1,120 ---------- ---------- ---------- Total current ...... $ 50,284 $ 49,031 $ 39,298 ========== ========== ========== Deferred Federal .................. $ 2,716 $ 5,321 $ 8,564 State and local .......... (246) 621 2,008 ---------- ---------- ---------- Total deferred ..... $ 2,470 $ 5,942 $ 10,572 ========== ========== ==========
The differences between total income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes were as follows:
Year Ended December 31, In thousands 2001 2000 1999 ------------ --------------- --------------- --------------- Computed expected income tax expense .................... $ 46,353 35% $ 47,900 35% $ 42,984 35% Net effect of state income taxes ............... 4,368 3% 4,857 4% 5,256 4% Effect of goodwill amortization ............... 1,607 1% 1,633 1% 1,344 1% Effect of non-taxable investment income ..................... -- 0% -- 0% (50) 0% Change in the beginning of the year balance of the valuation allowance .................. (124) 0% (112) 0% -- 0% Other, net ................... 550 0% 695 0% 336 0% -------- ---- -------- ---- -------- ---- Income tax expense for the period ............. $ 52,754 40% $ 54,973 40% $ 49,870 41% ======== ==== ======== ==== ======== ====
Total income tax expense (benefit) was allocated as follows:
Year Ended December 31, In thousands 2001 2000 1999 ------------ ---------- ---------- ---------- Results of operations ........ $ 52,754 $ 54,973 $ 49,870 Stockholders' equity ......... (5,935) (10,207) 5,379 ---------- ---------- ---------- Total ........................ $ 46,819 $ 44,766 $ 55,249 ========== ========== ==========
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
December 31, In thousands 2001 2000 ------------ ---------- ---------- Deferred tax assets: Deferred compensation and retirement plans ............. $ 1,336 $ 2,430 Accrued expenses not deductible until paid ............ 4,327 2,979 Accounts receivable, net ............ 1,674 1,264 Other, net .......................... 162 806 State net operating loss carryforwards .................... 759 455 Capital loss carryforward ........... 492 -- ---------- ---------- Total gross deferred tax assets ............... 8,750 7,934 Less valuation allowance ............ (897) (455) ---------- ---------- Net deferred tax assets .......... 7,853 7,479 ---------- ---------- Deferred tax liabilities: Property, plant and equipment ....... (12,878) (13,646) Goodwill ............................ (15,474) (11,626) State income tax .................... (638) (566) ---------- ---------- Total gross deferred tax liabilities .......... (28,990) (25,838) ---------- ---------- Net deferred tax liabilities ..... $ (21,137) $ (18,359) ========== ==========
The valuation allowance for deferred tax assets as of January 1, 2000 was $475,000. The valuation allowance at December 31, 2001 relates to state net operating losses of $405,000 and capital losses of $492,000, which are not expected to be realized. The entire valuation allowance at December 31, 2000 related to state net operating losses that are not expected to be realized. The net deferred tax asset (liability) is recorded both as a current deferred income tax asset and as other long-term liabilities based upon the classification of the related timing difference. Cash payments for income taxes were $38.0 million, $47.8 million and $39.1 million in 2001, 2000 and 1999, respectively. 25 2001 ANNUAL REPORT NOTE F -- EMPLOYEE BENEFIT PLANS Prior to January 1, 1999, the Company maintained a defined benefit pension plan for which most of its employees were eligible. In conjunction with significant enhancements to the Company's 401(k) plan, the Company elected to freeze benefits under this defined benefit pension plan as of December 31, 1998. In 1994, the Company adopted a non-qualified, supplemental pension plan covering certain employees, which provides for incremental pension payments so that total pension payments equal those amounts that would have been payable from the Company's principal pension plan if it were not for limitations imposed by income tax regulation. The benefits under this supplemental pension plan will continue to accrue as if the principal pension plan had not been frozen. The status of the Company's defined benefit pension plans at year-end was as follows:
Year ended December 31, In thousands 2001 2000 ------------ ---------- ---------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year ............... $ 85,369 $ 68,685 Service cost ........................... 543 338 Interest cost .......................... 6,045 5,373 Actuarial loss (gain) .................. (1,512) 15,729 Benefits paid .......................... (4,453) (4,756) ---------- ---------- Benefit obligation at end of year ...... 85,992 85,369 ---------- ---------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year ............... 90,356 101,679 Actual return on plan assets ........... (6,662) (6,567) Benefits paid .......................... (4,453) (4,756) ---------- ---------- Fair value of plan assets at end of year ..................... 79,241 90,356 ---------- ---------- Funded status .......................... (6,751) 4,987 Unrecognized actuarial loss ............ 17,825 3,919 Unrecognized prior service cost ........ 620 684 ---------- ---------- Net amount recognized .................. $ 11,694 $ 9,590 ========== ==========
The Company's non-qualified pension plan has an accumulated benefit obligation in excess of its assets of $8.4 million at December 31, 2001. The weighted-average assumptions used for measurement of the defined pension plans were as follows:
December 31, 2001 2000 1999 -------- -------- -------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate ..................... 7.40% 7.50% 8.00% Expected return on plan assets .................. 9.00% 10.00% 10.00% Rate of compensation increase ........................ 4.00% 4.00% 4.00%
Net pension cost for both plans included the following components:
December 31, In thousands 2001 2000 1999 ------------ ---------- ---------- ---------- COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME) Service cost .................... $ 543 $ 338 $ 365 Interest cost ................... 6,045 5,373 5,215 Expected return on plan assets ............... (8,820) (9,951) (8,351) Amortization of prior service cost ........... 65 65 65 Recognized actuarial loss (gain) .................. 64 (1,575) 151 ---------- ---------- ---------- Net periodic benefit income ..... $ (2,103) $ (5,750) $ (2,555) ========== ========== ==========
Prior to January 1, 1999, the Company also sponsored several 401(k) plans to provide employees with additional income upon retirement. The Company generally matched a portion of employees' voluntary before-tax contributions. Employees were fully vested in their own contributions and generally vested in the Company's matching contributions upon three years of service. Effective January 1, 1999, changes were made that combined all 401(k) plans and allowed for immediate vesting of enhanced Company matching contributions. Total 401(k) expense recognized by the Company in 2001, 2000 and 1999 was $6.3 million, $6.2 million and $5.1 million, respectively. The 1994 Employee Stock Purchase Plan provides for a total of 2,000,000 shares to be sold to participating employees at 85% of the fair market value at specified quarterly investment dates. Shares available for sale totaled 276,367 at December 31, 2001. NOTE G -- STOCKHOLDERS' EQUITY In January 2002, the Company announced an increase in the regular quarterly dividend from 3 cents per share to 3.5 cents per share, payable March 15, 2002 to holders of record on March 1, 2002. During 2001 the Company repurchased 3.6 million shares of its common stock for $83.7 million under its stock repurchase program. In addition, the Company received .3 million shares of its common stock, with an estimated market value of $6.3 million, in exchange for proceeds related to stock option exercises. In September 2001, the Company authorized an increase of four million shares in the 26 HARTE-HANKS, INC. Company's stock repurchase program. As of December 31, 2001 the Company has repurchased 17.7 million shares since the beginning of its stock repurchase program in January 1997. During this period the Company has also received .3 million shares in exchange for proceeds related to stock option exercises. Under this program, the Company has authorization to repurchase an additional 4.9 million shares. NOTE H -- STOCK OPTION PLANS 1984 PLAN In 1984, the Company adopted a Stock Option Plan ("1984 Plan") pursuant to which it issued to officers and key employees options to purchase shares of common stock at prices equal to the market price on the grant date. Market price was determined by the Board of Directors for purposes of granting stock options and making repurchase offers. Options granted under the 1984 Plan became exercisable five years after date of grant. There were no remaining options outstanding under the 1984 Plan at December 31, 2001. At December 31, 2000 and 1999, options to purchase 126,000 shares and 216,000 shares, respectively, were outstanding under the 1984 Plan. No additional options will be granted under the 1984 Plan. 1991 PLAN The Company adopted the 1991 Stock Option Plan ("1991 Plan") pursuant to which it may issue to officers and key employees options to purchase up to 8,000,000 shares of common stock. Options have been granted at prices equal to the market price on the grant date ("market price options") and at prices below market price ("performance options"). As of December 31, 2001, 2000 and 1999, market price options to purchase 6,033,187 shares, 6,597,025 shares and 5,873,475 shares, respectively, were outstanding with exercise prices ranging from $3.33 to $26.19 per share at December 31, 2001. Market price options granted prior to January 1998 become exercisable after the fifth anniversary of their date of grant. Beginning January 1998, market price options generally become exercisable in 25% increments on the second, third, fourth and fifth anniversaries of their date of grant. The weighted-average exercise price for outstanding market price options and exercisable market price options at December 31, 2001 was $16.49 and $10.86, respectively. The weighted-average remaining life for outstanding market price options was 5.94 years. At December 31, 2001, 2000 and 1999, performance options to purchase 501,250 shares, 716,600 shares and 739,400 shares, respectively, were outstanding with exercise prices ranging from $0.33 to $2.00 per share at December 31, 2001. Performance options become exercisable in whole or in part after three years, and the extent to which they become exercisable at that time depends upon the extent to which the Company achieves certain goals established at the time the options are granted. That portion of the performance options which does not become exercisable at an earlier date becomes exercisable after the ninth anniversary of the date of grant. Compensation expense of $0.2 million, $0.4 million and $0.4 million was recognized for the performance options for the years ended December 31, 2001, 2000 and 1999, respectively. The weighted-average exercise price for outstanding options and exercisable options at December 31, 2001 was $0.61 and $0.49, respectively. The weighted-average remaining life for outstanding performance options was 2.80 years. The Company did not grant any performance options during 2001 or 2000. DIMARK In connection with the DiMark merger, DiMark's outstanding stock options were converted into options to acquire approximately 3.0 million shares of Harte-Hanks common stock. There were no outstanding DiMark options as of December 31, 2001 and 2000. As of December 31, 1999, there were 54,792 DiMark options outstanding. The following summarizes all stock option plans activity during 2001, 2000 and 1999:
WEIGHTED NUMBER AVERAGE OF SHARES OPTION PRICE ---------- ------------ Options outstanding at January 1, 1999 ........ 6,306,914 $ 9.72 Granted ...................... 1,575,350 22.29 Exercised .................... (388,097) 6.76 Cancelled .................... (610,500) 17.88 ---------- Options outstanding at December 31, 1999 ...... 6,883,667 12.04 Granted ...................... 1,163,600 22.01 Exercised .................... (327,992) 7.37 Cancelled .................... (279,650) 20.20 ---------- Options outstanding at December 31, 2000 ...... 7,439,625 13.50 GRANTED ...................... 821,100 22.21 EXERCISED .................... (1,188,288) 7.26 CANCELLED .................... (538,000) 21.29 ---------- OPTIONS OUTSTANDING AT DECEMBER 31, 2001 ...... 6,534,437 $ 17.73 ========== EXERCISABLE AT DECEMBER 31, 2001 ......... 2,908,561 $ 9.30 ==========
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting For Stock-Based Compensation." Accordingly, no compensation expense has been recognized for options granted where the exercise price is equal to the market price of the underlying stock at the date of grant. For options issued with an exercise price below the market price of the underlying stock on the date of grant, the Company recognizes compensation expense under the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, as permitted under SFAS No. 123. Had compensation expense for the Company's options been determined based on the fair value at the grant date for awards since January 1, 1995, consistent with the provisions of SFAS No. 123, the Company's net income and diluted earnings per share would have been reduced to the pro forma amounts indicated below.
In thousands Year ended December 31, except per share amounts 2001 2000 1999 ---------- ---------- ---------- Net income -- as reported ....... $ 79,684 $ 81,866 $ 72,941 Net income -- pro forma ......... 75,446 77,245 68,923 Diluted earnings per share -- as reported ..... 1.23 1.18 1.01 Diluted earnings per share -- pro forma ....... 1.16 1.11 0.95
27 2001 ANNUAL REPORT The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2001, 2000 and 1999:
Year ended December 31, 2001 2000 1999 ---------- ---------- ---------- Expected dividend yield ...... 0.5% 0.4% 0.3% Expected stock price volatility ......... 21.0% 23.0% 22.0% Risk free interest rate ...... 6.0% 6.0% 6.0% Expected life of options ..... 3-10 years 3-10 years 3-10 years
The weighted-average fair value of market price options granted during 2001, 2000 and 1999 was $8.02, $9.66 and $9.24, respectively. The weighted-average fair value of performance options granted during 1999 was $22.54. The Company did not grant any performance options during 2001 or 2000. NOTE I -- FAIR VALUE OF FINANCIAL INSTRUMENTS Because of their maturities and/or variable interest rates, certain financial instruments of the Company have fair values approximating their carrying values. These instruments include revolving credit agreements, accounts receivable, trade payables, and miscellaneous notes receivable and payable. The Company's equity securities that have a readily determinable fair value are recorded at fair value. (See Note C.) NOTE J -- COMMITMENTS AND CONTINGENCIES At December 31, 2001, the Company had outstanding letters of credit in the amount of $8.4 million. These letters of credit exist to support the Company's insurance programs relating to worker's compensation, automobile and general liability, and leases. NOTE K -- LEASES The Company leases certain real estate and equipment under various operating leases. Most of the leases contain renewal options for varying periods of time. The total rent expense applicable to operating leases was $28.5 million, $26.3 million and $23.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. The future minimum rental commitments for all non-cancelable operating leases with terms in excess of one year as of December 31, 2001 are as follows:
In thousands ------------ 2002 ........................ $ 26,696 2003 ........................ 21,313 2004 ........................ 15,344 2005 ........................ 11,170 2006 ........................ 6,913 After 2006 .................. 23,538 ---------- $ 104,974 ==========
NOTE L -- EARNINGS PER SHARE A reconciliation of basic and diluted earnings per share (EPS) is as follows:
In thousands Year ended December 31, except per share amounts 2001 2000 1999 ------------------------ ---------- ---------- ---------- BASIC EPS Net income ................................. $ 79,684 $ 81,886 $ 72,941 ========== ========== ========== Weighted-average common shares outstanding used in earnings per share computations ......................... 63,206 67,517 69,914 ========== ========== ========== Earnings per share ......................... $ 1.26 $ 1.21 $ 1.04 ========== ========== ========== DILUTED EPS Net income ................................. $ 79,684 $ 81,886 $ 72,941 ========== ========== ========== Shares used in diluted earnings per share computations ............... 64,783 69,653 72,144 ========== ========== ========== Earnings per share ......................... $ 1.23 $ 1.18 $ 1.01 ========== ========== ========== COMPUTATION OF SHARES USED IN EARNINGS PER SHARE COMPUTATIONS Average outstanding common shares ........................ 63,206 67,517 69,914 Average common equivalent shares -- dilutive effect of option shares ..................... 1,577 2,136 2,230 ---------- ---------- ---------- Shares used in diluted earnings per share computations ............... 64,783 69,653 72,144 ========== ========== ==========
As of December 31, 2001 the Company had 363,798 antidilutive market price options outstanding, which have been excluded from the EPS calculations 28 HARTE-HANKS, INC. NOTE M -- SELECTED QUARTERLY DATA (UNAUDITED)
2001 Quarter Ended 2000 QUARTER ENDED In thousands, ------------------------------------------------- ------------------------------------------------- except per share amounts December 31 September 30 June 30 March 31 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 - ------------------------ ------------ ------------ -------- -------- ------------ ------------ -------- -------- Revenues .................... $ 233,024 $ 224,130 $228,654 $232,120 $ 255,818 $ 243,205 $235,693 $226,057 Operating income ............ 35,173 36,046 36,559 31,852 36,824 35,400 35,846 30,151 Net income .................. 20,572 19,913 20,836 18,363 21,605 21,132 21,395 17,754 Basic earnings per share .... 0.33 0.32 0.33 0.28 0.33 0.31 0.31 0.26 Diluted earnings per share .. 0.32 0.31 0.32 0.28 0.32 0.30 0.30 0.25
NOTE N -- BUSINESS SEGMENTS Harte-Hanks is a highly focused targeted media company with operations in two segments - direct and interactive marketing and shoppers. The Company's direct and interactive marketing segment offers a complete range of specialized, coordinated and integrated direct marketing services from a single source. CRM and Marketing Services are provided in the direct and interactive marketing segment. CRM revenues were $380.8 million, $419.5 million and $335.5 million in 2001, 2000 and 1999, respectively. Marketing Services' revenues were $221.1 million, $242.5 million and $223.8 million in 2001, 2000 and 1999, respectively. The Company utilizes advanced technologies to enable its customers to identify, reach and influence specific consumers or businesses. The Company's direct and interactive marketing capabilities also strengthen the relationship between its clients and their customers. The Company constructs and updates business-to-business and business-to-consumer databases; accesses the data through flexible hosting capabilities and analyzes it to help make it relevant; applies the knowledge by putting the data to work via multi-channel programs; and, executes those programs through marketing services delivery campaigns. The Company's direct and interactive marketing customers include many of America's largest retailers; financial companies including banks, financing companies, mutual funds and insurance companies; high-tech and telecommunications companies; and pharmaceutical companies and healthcare organizations. Direct and interactive marketing customers also include a growing number of customers in such selected markets as automotive, utilities, consumer packaged goods, hospitality, publishing, business services, energy and government/not-for-profit. The segment's client base is both domestic and international. The Company's shoppers segment produces weekly advertising publications primarily delivered free by third-class mail to all households in a particular geographic area. Shoppers offer advertisers a targeted, cost-effective local advertising system, with virtually 100% penetration in their area of distribution. Shoppers are particularly effective in large markets with high media fragmentation in which major metropolitan newspapers generally have low penetration. Included in Corporate Activities are general corporate expenses. Assets of Corporate Activities include unallocated cash and investments and deferred income taxes. Information as to the operations of Harte-Hanks in different business segments is set forth below based on the nature of the products and services offered. Harte-Hanks evaluates performance based on several factors, of which the primary financial measures are segment revenues and operating income. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies (Note A). The operating results of Harte-Hanks Direct Marketing include the acquisition of Sales Support Services, Inc. in November 2001. 29 2001 ANNUAL REPORT NOTE N -- BUSINESS SEGMENTS (CONTINUED) Information about the Company's operations in different industry segments:
YEAR ENDED DECEMBER 31, ---------------------------------------- IN THOUSANDS 2001 2000 1999 ------------ ---------- ---------- ---------- Revenues Direct Marketing .................................. $ 601,901 $ 662,044 $ 559,262 Shoppers .......................................... 316,027 298,729 270,490 ---------- ---------- ---------- Total Revenues .............................. $ 917,928 $ 960,773 $ 829,752 ========== ========== ========== Operating income Direct Marketing .................................. $ 85,020 $ 91,450 $ 79,164 Shoppers .......................................... 63,398 55,710 47,015 Corporate Activities .............................. (8,788) (8,939) (7,951) ---------- ---------- ---------- Total operating income ...................... $ 139,630 $ 138,221 $ 118,228 ========== ========== ========== Income before income taxes Operating income .................................. $ 139,630 $ 138,221 $ 118,228 Interest expense .................................. (3,076) (1,678) (349) Interest income ................................... 498 2,062 5,662 Other, net ........................................ (4,614) (1,746) (730) ---------- ---------- ---------- Total income before income taxes ............ $ 132,438 $ 136,859 $ 122,811 ========== ========== ========== Depreciation Direct Marketing .................................. $ 26,769 $ 23,022 $ 18,804 Shoppers .......................................... 5,235 5,393 5,235 Corporate Activities .............................. 75 79 87 ---------- ---------- ---------- Total depreciation .......................... $ 32,079 $ 28,494 $ 24,126 ========== ========== ========== Goodwill and intangible amortization Direct Marketing .................................. $ 12,769 $ 11,156 $ 6,593 Shoppers .......................................... 4,072 4,070 4,069 ---------- ---------- ---------- Total goodwill and intangible amortization .. $ 16,841 $ 15,226 $ 10,662 ========== ========== ========== Total assets Direct Marketing .................................. $ 536,270 $ 589,552 Shoppers .......................................... 179,748 187,905 Corporate Activities .............................. 55,031 29,648 ---------- ---------- Total assets ................................ $ 771,049 $ 807,105 ========== ========== Capital expenditures Direct Marketing .................................. $ 22,354 $ 34,030 $ 24,450 Shoppers .......................................... 4,085 2,408 4,434 Corporate Activities .............................. 6 27 44 ---------- ---------- ---------- Total capital expenditures .................. $ 26,445 $ 36,465 $ 28,928 ========== ========== ==========
Information about the Company's operations in different geographic areas:
YEAR ENDED DECEMBER 31, ---------------------------------------- In thousands 2001 2000 1999 ------------ ---------- ---------- ---------- Revenues(a) United States ..................................... $ 880,642 $ 917,160 $ 800,700 Other countries ................................... 37,286 43,613 29,052 ---------- ---------- ---------- Total revenues .............................. $ 917,928 $ 960,773 $ 829,752 ========== ========== ========== Long-lived assets(b) United States ..................................... $ 101,785 $ 104,507 Other countries ................................... 7,643 7,558 ---------- ---------- Total long-lived assets ..................... $ 109,428 $ 112,065 ========== ==========
(a) Geographic revenues are based on the location of the customer. (b) Long-lived assets are based on physical location. 30 HARTE-HANKS, INC. FIVE-YEAR FINANCIAL SUMMARY
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2001 2000 1999 1998 1997 -------------------------------------- ---------- ---------- ---------- ---------- ---------- Statement of Operations Data Revenues ....................................... $ 917,928 $ 960,773 $ 829,752 $ 748,546 $ 638,349 Operating expenses Payroll, production and distribution ....... 649,552 686,502 606,676 553,529 479,742 Selling, general and administrative ........ 79,826 92,330 70,060 64,082 59,054 Depreciation ............................... 32,079 28,494 24,126 21,087 17,327 Goodwill and intangible amortization ....... 16,841 15,226 10,662 7,890 5,134 ---------- ---------- ---------- ---------- ---------- Total operating expenses ............ 778,298 822,552 711,524 646,588 561,257 ---------- ---------- ---------- ---------- ---------- Operating income ................................... 139,630 138,221 118,228 101,958 77,092 Interest expense, net .............................. 2,578 (384) (5,313) (13,281) 1,777 Income from continuing operations(a) ............... 79,684 81,886 72,941 68,371(b) 44,271(c) Income from continuing operations after extraordinary items, net of taxes ........ 79,684 81,886 72,941 68,371 43,396(d) Earnings from continuing operations per common share -- diluted .................... 1.23 1.18 1.01 0.90(b) 0.57(c) Earnings from continuing operations after extra- ordinary items per common share -- diluted ..... 1.23 1.18 1.01 0.90(b) 0.56(d) Cash dividends per common share .................... 0.12 0.10 0.08 0.06 0.04 Weighted-average common and common equivalent shares outstanding -- diluted ....... 64,783 69,653 72,144 76,057 77,000 Segment Data Revenues Direct Marketing ........................... $ 601,901 $ 662,044 $ 559,262 $ 493,898 $ 425,489 Shoppers ................................... 316,027 298,729 270,490 254,648 212,860 ---------- ---------- ---------- ---------- ---------- Total revenues ............................. $ 917,928 $ 960,773 $ 829,752 $ 748,546 $ 638,349 ========== ========== ========== ========== ========== Operating income Direct Marketing ........................... $ 85,020 $ 91,450 $ 79,164 $ 69,648 $ 54,360 Shoppers ................................... 63,398 55,710 47,015 40,507 31,089 General corporate .......................... (8,788) (8,939) (7,951) (8,197) (8,357) ---------- ---------- ---------- ---------- ---------- Total operating income ..................... $ 139,630 $ 138,221 $ 118,228 $ 101,958 $ 77,092 ========== ========== ========== ========== ========== Other Data Operating cash flow(e) ......................... $ 188,550 $ 181,941 $ 153,016 $ 130,935 $ 99,553 Capital expenditures ........................... 26,445 36,465 28,928 24,443 28,396 Balance Sheet Data (at end of period) Property, plant and equipment, net ............. $ 109,428 $ 112,065 $ 106,250 $ 92,274 $ 89,351 Goodwill and other intangibles, net ............ 438,325 439,148 409,791 290,831 250,363 Total assets ................................... 771,049 807,105 769,427 715,213 954,923 Total long term debt ........................... 48,312 65,370 5,000 -- -- Total stockholders' equity ..................... 552,366 551,003 577,618 577,091 566,237
(a) Represents income and earnings from continuing operations per common share before extraordinary items. (b) Includes non-recurring pension gain of $1.3 million, or two cents per share, net of $0.8 million income tax expense. Excluding this gain, earnings were $0.88 per share. (c) Includes non-recurring income of $0.4 million, or one-half cent per share, net of $0.4 million income tax expense related to the sale of stock in another company partially offset by other non-recurring items. Excluding this income, earnings were $0.57 per share. (d) Includes extraordinary loss from the early extinguishment of debt of $0.9 million, net of $0.6 million income tax benefit. (e) Operating cash flow is defined as operating income plus depreciation and goodwill and intangible amortization. Operating cash flow is not intended to represent cash flow or any other measure of performance in accordance with accounting principles generally accepted in the United States of America. 31 2001 ANNUAL REPORT INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS HARTE-HANKS, INC.: We have audited the accompanying consolidated balance sheets of Harte-Hanks, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, cash flows, and stockholders' equity and comprehensive income for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harte-Hanks, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP San Antonio, Texas January 29, 2002 CORPORATE INFORMATION COMMON STOCK The Company's common stock is listed on the New York Stock Exchange (symbol: HHS). The quarterly stock price ranges for 2001 and 2000 were as follows:
2001 2000 HIGH LOW HIGH LOW ----- ----- ----- ----- First Quarter ........ 24.09 21.28 26.75 19.63 Second Quarter ....... 25.88 21.36 25.94 21.00 Third Quarter ........ 24.90 20.50 27.88 24.38 Fourth Quarter ....... 28.92 20.45 28.44 21.50
In 2001, quarterly dividends were paid at the rate of 3 cents per share. In 2000, quarterly dividends were paid at the rate of 2.5 cents per share. There are approximately 2,700 holders of record. TRANSFER AGENT AND REGISTRAR EquiServe Trust Company, N.A. PO Box 43010 Providence, RI 02940-3010 ANNUAL MEETING OF STOCKHOLDERS The annual meeting of stockholders will be held at 10:00 a.m. on May 7, 2002, at 200 Concord Plaza Drive, First Floor, San Antonio, Texas. FORM 10-K ANNUAL REPORT A copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K may be obtained, without charge, upon written request to: Dean Blythe, Secretary Harte-Hanks, Inc. P. O. Box 269 San Antonio, Texas 78291-0269 32 HARTE-HANKS, INC.
DIRECTORS OFFICERS DAVID L. COPELAND LARRY FRANKLIN DEAN BLYTHE President, SIPCO, Inc. Chairman and Vice President, Legal Chief Executive Officer DR. PETER T. FLAWN KATHY CALTA President Emeritus RICHARD HOCHHAUSER Vice President, Direct Marketing The University of Texas at Austin President and Chairman, Audit Committee Chief Operating Officer BILL CARMAN Vice President, Shoppers LARRY FRANKLIN CRAIG COMBEST Chairman and Chief Executive Officer Senior Vice President, JAMES DAVIS Direct Marketing Vice President, Direct Marketing CHRISTOPHER M. HARTE Private Investor DONALD CREWS BILL GOLDBERG Senior Vice President, Vice President, Direct Marketing HOUSTON H. HARTE Legal and Secretary Vice Chairman SPENCER JOYNER, JR. CHARLES DALL'ACQUA Vice President, Direct Marketing RICHARD HOCHHAUSER Senior Vice President, Direct Marketing President and Chief Operating Officer FEDERICO ORTIZ PETER GORMAN Vice President, Tax JAMES L. JOHNSON Senior Vice President, Shoppers Chairman Emeritus, TANN TUELLER GTE Corporation JACQUES KERREST Vice President, Direct Marketing Chairman, Compensation Committee Senior Vice President, Finance and Chief Financial Officer JESSICA HUFF WILLIAM K. GAYDEN Controller and Chairman and Chief Executive Officer, GARY SKIDMORE Chief Accounting Officer Merit Energy Company Senior Vice President, Direct Marketing
CORPORATE OFFICE SAN ANTONIO, TEXAS http://www.harte-hanks.com DIRECT MARKETING CRM MARKETING SERVICES Madrid, Spain Melbourne, Australia Austin, Texas Baltimore, Maryland Sao Paulo, Brazil Billerica, Massachusetts Bellmawr, New Jersey Sevres, France Clearwater, Florida Bloomfield, Connecticut Toronto, Canada Fort Worth, Texas Cherry Hill, New Jersey Uxbridge, United Kingdom Glen Burnie, Maryland Cincinnati, Ohio La Jolla, California Clearwater, Florida SHOPPERS Lake Katrine, New York Deerfield Beach, Florida Lake Mary, Florida Forty Fort, Pennsylvania THE FLYER Monroe Township, New Jersey Fullerton, California New York, New York Grand Prairie, Texas South Florida Ontario, California Jacksonville, Florida http://www.theflyer.com River Edge, New Jersey Langhorne, Pennsylvania San Diego, California Memphis, Tennessee PENNYSAVER Sterling Heights, Michigan Shawnee, Kansas Valencia, California Westville, New Jersey Northern California West Bridgewater, Massachusetts NATIONAL SALES HEADQUARTERS Southern California -- Greater Los Angeles Area Cincinnati, Ohio Southern California -- INTERNATIONAL OFFICES Greater San Diego Area Darmstadt, Germany http://www.pennysaverusa.com Dublin, Ireland Hasselt, Belgium London, United Kingdom
EX-21 4 d95098ex21.txt SUBSIDIARIES OF THE COMPANY 41 EXHIBIT 21 SUBSIDIARIES OF HARTE-HANKS, INC. As of December 31, 2001
Jurisdiction of Name of Entity Organization % Owned - -------------- ------------ ------- DiMark, Inc. New Jersey 100% Direct Market Concepts, Inc. Florida 100% DMK, Inc. Delaware 100%(2) The Flyer Publishing Corporation Florida 100% Harte-Hanks CRM Services UK Limited England 100% Harte-Hanks Data Services LLC Maryland 100% Harte-Hanks Data Technologies LLC Delaware 100% Harte-Hanks Delaware, Inc. Delaware 100% Harte-Hanks Direct, Inc. Delaware 100%(1) Harte-Hanks Direct Marketing/Baltimore, Inc. Maryland 100% Harte-Hanks Direct Marketing/Cincinnati, Inc. Ohio 100% Harte-Hanks Direct Marketing/Dallas, Inc. Delaware 100% Harte-Hanks Direct Marketing/Fullerton, Inc. California 100% Harte-Hanks Direct Marketing/Kansas City, Inc. Missouri 100% Harte-Hanks do Brazil Consultoria e Servicos Ltda. Brazil 100%(3) Harte-Hanks IRG, Inc. Michigan 100% Harte-Hanks Limited England 100%(3) Harte-Hanks Market Intelligence, Inc. California 100% Harte-Hanks Market Intelligence Espana LLC Colorado 100% Harte-Hanks Market Intelligence Europe B.V. Netherlands 100% Harte-Hanks Market Intelligence GmbH Germany 100%(4) Harte-Hanks Market Intelligence Limited Ireland 100%(4) Harte-Hanks Market Intelligence Limited England 100%(4) Harte-Hanks Market Intelligence SAS France 100%(4) Harte-Hanks Market Research, Inc. New Jersey 100% Harte-Hanks Partnership, Ltd. Texas 100%(5) Harte-Hanks Pty. Limited Australia 100%(3) Harte-Hanks Response Management/Austin L.P. Delaware 100%(6) Harte-Hanks Response Management/Boston, Inc. Massachusetts 100% Harte-Hanks Response Management Call Centers, Inc. Delaware 100% Harte-Hanks Response Management Europe Belgium 100% Harte-Hanks Shoppers, Inc. California 100% Harte-Hanks Stock Plan, Inc. Delaware 100% H&R Communications, Inc. New Jersey 100%(2) HTS, Inc. Connecticut 100% Information for Marketing Limited (shell corporation) England 100%(7) Mars Graphic Services, Inc. New Jersey 100%(8) NSO, Inc. Ohio 100% Printing Management Systems, Inc. Delaware 100% PRO Direct Response Corp. New Jersey 100%(2) Sales Support Services, Inc. New Jersey 100%(9) Sales Support Services of Texas, Inc. Delaware 100%(10) salessupport.com, Inc. Delaware 100%(10) Southern Comprint Co. California 100% Spectral Resources, Inc. New York 100%
(1) Owned by Mars Graphic Services, Inc. (2) Owned by Harte-Hanks Direct, Inc. (3) Owned by Harte-Hanks Data Technologies LLC (4) Owned by Harte-Hanks Market Intelligence Europe B.V. (5) 99.5% Owned by Harte-Hanks Delaware, Inc. .5% Owned by Harte-Hanks , Inc. (6) 99% Owned by Harte-Hanks Stock Plan, Inc. 1% Owned by Harte-Hanks Response Management Call Centers, Inc. (7) Owned by Harte-Hanks Limited (8) Owned by DiMark, Inc. (9) Owned by Harte-Hanks Delaware, Inc. (10) Sales Support Services, Inc. EX-23 5 d95098ex23.txt CONSENT OF KPMG LLP 42 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Harte-Hanks, Inc.: We consent to incorporation by reference in the registration statements (No. 333-63105, No. 33-51723, No. 33-54303, No. 333-03045 and No. 333-30995) on Form S-8 of Harte-Hanks, Inc. of (i) our report dated January 29, 2002 relating to the consolidated balance sheets of Harte-Hanks, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, cash flows and stockholders' equity and comprehensive income for each of the years in the three-year period ended December 31, 2001, which report appears in the 2001 annual report to stockholders which is incorporated by reference in the December 31, 2001 annual report on Form 10-K of Harte-Hanks, Inc. and (ii) our report dated January 29, 2002, relating to the related financial statement schedule as of and for each of the years in the three-year period ended December 31, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of the Company. /s/ KPMG LLP San Antonio, Texas March 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----