10-Q 1 d00953e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the Securities ----- Exchange Act of 1934 For the quarterly period ended September 30, 2002 ------------------ Transition report pursuant to Section 13 or 15(d) of the Securities ----- Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 1-7120 ------ HARTE-HANKS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 74-1677284 ------------------------------ ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 200 Concord Plaza Drive, San Antonio, Texas 78216 ------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code -- 210/829-9000 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock: $1 par value, 91,027,202 shares as of October 31, 2002. 2 HARTE-HANKS, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT September 30, 2002
Page ---- Part I. Financial Information Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - 3 September 30, 2002 and December 31, 2001 Consolidated Statements of Operations - Three 4 months ended September 30, 2002 and 2001 Consolidated Statements of Operations - Nine 5 months ended September 30, 2002 and 2001 Consolidated Statements of Cash Flows - Nine 6 months ended September 30, 2001 and 2000 Consolidated Statements of Stockholders' Equity 7 and Comprehensive Income - Nine months ended September 30, 2002 and twelve months ended December 31, 2001 Notes to Unaudited Condensed Consolidated 8 Financial Statements Item 2. Management's Discussion and Analysis of Financial 12 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 16 Market Risk Item 4. Controls and Procedures 17 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 17 (a) Exhibits (b) Reports on Form 8-K Signature 18
3 Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except share amounts)
(Unaudited) September 30, December 31, 2002 2001 -------------- -------------- Assets Current assets Cash and cash equivalents ......................... $ 20,130 $ 30,468 Accounts receivable, net .......................... 138,801 138,409 Inventory ......................................... 5,144 5,835 Prepaid expenses .................................. 13,896 13,411 Current deferred income tax asset ................. 8,288 8,378 Other current assets .............................. 6,940 6,306 -------------- -------------- Total current assets ........................... 193,199 202,807 Property, plant and equipment, net ................... 96,780 109,428 Goodwill, net ........................................ 436,776 434,458 Other intangibles, net ............................... 3,417 3,867 Other assets ......................................... 20,046 20,489 -------------- -------------- Total assets ................................... $ 750,218 $ 771,049 ============== ============== Liabilities and Stockholders' Equity Current liabilities Accounts payable .................................. $ 48,268 $ 42,990 Accrued payroll and related expenses .............. 20,589 21,550 Customer deposits and unearned revenue ............ 36,297 38,617 Income taxes payable .............................. 11,556 10,531 Other current liabilities ......................... 7,054 8,086 -------------- -------------- Total current liabilities ...................... 123,764 121,774 Long-term debt ....................................... 10,673 48,312 Other long-term liabilities .......................... 54,008 48,597 -------------- -------------- Total liabilities .............................. 188,445 218,683 -------------- -------------- Stockholders' equity Common stock, $1 par value, 375,000,000 shares authorized 111,421,754 and 109,352,290 shares issued at September 30, 2002 and December 31, 2001, respectively ............................. 111,422 109,352 Additional paid-in capital ........................ 213,384 188,158 Accumulated other comprehensive income (loss) ..... 51 (1,293) Retained earnings ................................. 700,309 640,635 Less treasury stock: 19,787,874 and 16,139,795 shares at cost at September 30, 2002 and December 31, 2001, respectively ................ (463,393) (384,486) -------------- -------------- Total stockholders' equity ..................... 561,773 552,366 -------------- -------------- Total liabilities and stockholders' equity ..... $ 750,218 $ 771,049 ============== ==============
See Notes to Unaudited Condensed Consolidated Financial Statements. 4 Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts) (Unaudited)
Three Months Ended September 30, -------------------------------- 2002 2001 ----------- ----------- Operating revenues ............................................................... $ 226,466 $ 224,130 ----------- ----------- Operating expenses Payroll ................................................................. 80,123 79,232 Production and distribution ............................................. 82,944 77,489 Advertising, selling, general and administrative ........................ 18,744 19,059 Depreciation ............................................................ 7,849 8,072 Goodwill and intangible amortization .................................... 150 4,232 ----------- ----------- 189,810 188,084 ----------- ----------- Operating income ................................................................. 36,656 36,046 ----------- ----------- Other expenses (income) Interest expense ........................................................ 285 637 Interest income ......................................................... (37) (57) Other, net .............................................................. 505 2,303 ----------- ----------- 753 2,883 ----------- ----------- Income before income taxes ....................................................... 35,903 33,163 Income tax expense ............................................................... 13,715 13,250 ----------- ----------- Net income ....................................................................... $ 22,188 $ 19,913 =========== =========== Basic: Earnings per common share ............................................... $ 0.24 $ 0.21 =========== =========== Weighted-average common shares outstanding .............................. 92,115 93,900 =========== =========== Diluted: Earnings per common share ............................................... $ 0.24 $ 0.21 =========== =========== Weighted-average common and common equivalent shares outstanding .................................................... 94,163 96,033 =========== =========== A reconciliation of the effects of the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", on net income and basic and diluted earnings per share is as follows: Net income ....................................................................... $ 22,188 $ 19,913 Add back: Goodwill amortization (net of tax effect) ........................................................ 3,004 ----------- ----------- Adjusted net income .............................................................. $ 22,188 $ 22,917 =========== =========== Basic earnings per common share: Net income ....................................................................... $ 0.24 $ 0.21 Add back: Goodwill amortization (net of tax effect) ........................................................ 0.03 ----------- ----------- Adjusted net income .............................................................. $ 0.24 $ 0.24 =========== =========== Diluted earnings per common share: Net income ....................................................................... $ 0.24 $ 0.21 Add back: Goodwill amortization (net of tax effect) ........................................................ 0.03 ----------- ----------- Adjusted net income .............................................................. $ 0.24 $ 0.24 =========== ===========
SFAS No. 142 is described in Note B of the Notes to Unaudited Condensed Consolidated Financial Statements. See Notes to Unaudited Condensed Consolidated Financial Statements. 5 Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts) (Unaudited)
Nine Months Ended September 30, -------------------------------- 2002 2001 -------------- -------------- Operating revenues ............................................................... $ 669,252 $ 684,904 -------------- -------------- Operating expenses Payroll ................................................................. 241,651 253,722 Production and distribution ............................................. 236,220 230,349 Advertising, selling, general and administrative ........................ 56,511 59,978 Depreciation ............................................................ 24,322 23,769 Goodwill and intangible amortization .................................... 450 12,629 -------------- -------------- 559,154 580,447 -------------- -------------- Operating income ................................................................. 110,098 104,457 -------------- -------------- Other expenses (income) Interest expense ........................................................ 876 2,370 Interest income ......................................................... (158) (271) Other, net .............................................................. 1,367 3,914 -------------- -------------- 2,085 6,013 -------------- -------------- Income before income taxes ....................................................... 108,013 98,444 Income tax expense ............................................................... 41,467 39,332 -------------- -------------- Net income ....................................................................... $ 66,546 $ 59,112 ============== ============== Basic: Earnings per common share ............................................... $ 0.71 $ 0.62 ============== ============== Weighted-average common shares outstanding .............................. 93,270 95,366 ============== ============== Diluted: Earnings per common share ............................................... $ 0.70 $ 0.60 ============== ============== Weighted-average common and common equivalent shares outstanding .................................................... 95,634 97,733 ============== ============== A reconciliation of the effects of the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", on net income and basic and diluted earnings per share is as follows: Net income ....................................................................... $ 66,546 $ 59,112 Add back: Goodwill amortization (net of tax effect) ......................................................... 8,946 -------------- -------------- Adjusted net income .............................................................. $ 66,546 $ 68,058 ============== ============== Basic earnings per common share: Net income ....................................................................... $ 0.71 $ 0.62 Add back: Goodwill amortization (net of tax effect) ......................................................... 0.09 -------------- -------------- Adjusted net income .............................................................. $ 0.71 $ 0.71 ============== ============== Diluted earnings per common share: Net income ....................................................................... $ 0.70 $ 0.60 Add back: Goodwill amortization (net of tax effect) ......................................................... 0.09 -------------- -------------- Adjusted net income .............................................................. $ 0.70 $ 0.70 ============== ==============
SFAS No. 142 is described in Note B of the Notes to Unaudited Condensed Consolidated Financial Statements. See Notes to Unaudited Condensed Consolidated Financial Statements. 6 Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (Unaudited)
Nine Months Ended September 30, ------------------------------ 2002 2001 ------------- ------------- Operating Activities Net income ......................................................... $ 66,546 $ 59,112 Adjustments to reconcile net income to cash provided by operating activities: Depreciation .................................................... 24,322 23,769 Goodwill and intangible amortization ............................ 450 12,629 Amortization of option-related compensation ..................... 75 158 Deferred income taxes ........................................... 6,645 2,918 Other, net ...................................................... 510 4,026 Changes in operating assets and liabilities, net of acquisitions: Decrease (increase) in accounts receivable, net ................. (392) 34,137 Decrease in inventory ........................................... 691 384 Decrease (increase) in prepaid expenses and other current assets ............................................... (1,119) 477 Increase (decrease) in accounts payable ......................... 5,278 (10,348) Increase (decrease) in other accrued expenses and other current liabilities ................................ 1,911 (1,486) Other, net ...................................................... 2,673 242 ------------- ------------- Net cash provided by operating activities .................... 107,590 126,018 ------------- ------------- Investing Activities Acquisitions ....................................................... (3,791) (453) Purchases of property, plant and equipment ......................... (11,903) (23,503) Proceeds from sale of property, plant and equipment ................ 351 682 ------------- ------------- Net cash used in investing activities ........................ (15,343) (23,274) ------------- ------------- Financing Activities Long-term borrowings ............................................... 14,000 242,000 Repayment of long-term borrowings .................................. (52,000) (267,000) Issuance of common stock ........................................... 12,685 7,330 Purchase of treasury stock ......................................... (70,474) (82,336) Issuance of treasury stock ......................................... 76 57 Dividends paid ..................................................... (6,872) (5,701) ------------- ------------- Net cash used in financing activities ................................................. (102,585) (105,650) ------------- ------------- Net decrease in cash ............................................... (10,338) (2,906) Cash and cash equivalents at beginning of year ..................... 30,468 22,928 ------------- ------------- Cash and cash equivalents at end of period ......................... $ 20,130 $ 20,022 ============= =============
See Notes to Unaudited Condensed Consolidated Financial Statements. 7 Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity and Comprehensive Income (in thousands) (2002 Unaudited)
Accumulated Additional Other Total Common Paid-In Retained Treasury Comprehensive Stockholders' Stock Capital Earnings Stock Income (Loss) Equity ------------ ------------- ------------- ------------- ------------- ------------- Balance at January 1, 2001 ..... $ 109,259 $ 169,879 $ 568,512 $ (294,542) $ (2,105) $ 551,003 Common stock issued- employee benefit plans ....... 266 3,187 -- -- -- 3,452 Exercise of stock options for cash and by surrender of shares .......... 1,782 6,716 -- (6,350) -- 2,149 Tax benefit of options exercised .................... -- 6,416 -- -- -- 6,416 Dividends paid ($0.08 per share)- ...................... -- -- (7,561) -- -- (7,561) Treasury stock repurchase ...... (1,955) 1,955 -- (83,664) -- (83,664) Treasury stock issued .......... -- 5 -- 70 -- 75 Comprehensive income, net of tax: Net income ................... -- -- 79,684 -- -- 79,684 Foreign currency translation adjustment .... -- -- -- -- (85) (85) Change in net unrealized gain (loss) on long-term investments, net of reclassification adjustments (net of tax of $481) .............. -- -- -- -- 897 897 ------------- Total comprehensive income ..... 80,496 ------------ ------------- ------------- ------------- ------------- ------------- Balance at December 31, 2001 ... 109,352 188,158 640,635 (384,486) (1,293) 552,366 Common stock issued- employee benefit plans ....... 147 2,294 -- -- -- 2,441 Exercise of stock options for cash and by surrender of shares .......... 2,224 13,309 -- (8,498) -- 7,035 Tax benefit of options exercised .................... -- 9,311 -- -- -- 9,311 Dividends paid ($0.07 per share)- ...................... -- -- (6,872) -- -- (6,872) Treasury stock repurchase ...... (301) 301 -- (70,474) -- (70,474) Treasury stock issued .......... -- 11 -- 65 -- 76 Comprehensive income, net of tax: Net income ................... -- -- 66,546 -- -- 66,546 Foreign currency translation adjustment .... -- -- -- -- 1,344 1,344 ------------- Total comprehensive income ..... 67,890 ------------ ------------- ------------- ------------- ------------- ------------- Balance at September 30, 2002 .. $ 111,422 $ 213,384 $ 700,309 $ (463,393) $ 51 $ 561,773 ============ ============= ============= ============= ============= =============
See Notes to Unaudited Condensed Consolidated Financial Statements. 8 Harte-Hanks, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements NOTE A - BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Harte-Hanks, Inc. and subsidiaries (the "Company"). The statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 2001. Certain prior period amounts have been reclassified for comparative purposes. NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of". The Company does not believe any of its previously recorded intangibles have an indefinite life and such recorded intangibles are amortized over their respective estimated useful lives. The Company adopted the provisions of SFAS No. 141 on July 1, 2001, and the provisions of SFAS No. 142 on January 1, 2002. In connection with the adoption of SFAS No. 141 and 142, the Company evaluated its existing intangible assets and goodwill, and did not find it necessary to make any reclassifications in order to conform to the new criteria in SFAS No. 141 for recognition apart from goodwill. The Company has reassessed the useful lives and residual values of all intangible assets acquired in purchase business combinations, and did not find it necessary to make any amortization period adjustments. In addition, to the extent an intangible asset was identified as having an indefinite useful life, the Company was required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 prior to July 1, 2002. In connection with the transitional goodwill impairment evaluation, SFAS No. 142 requires the Company to perform an assessment of whether there is an indication that goodwill and equity-method goodwill is impaired as of the date of adoption. The Company identified its reporting units as Customer Relationship Management 9 (CRM), Marketing Services, and Shoppers, and determined the carrying value of each of these reporting units by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company has also estimated the fair value of each of its reporting units using both discounted cash flows and cash flow multiple models. In both of these models, the estimated fair value of each of the reporting units exceeded its carrying amount, indicating that the reporting unit's goodwill and intangibles were not impaired as of the date of adoption. Therefore it was not necessary to perform the second step of the transitional impairment test. Had this second step been necessary, it would have involved comparing the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets and liabilities (recognized and unrecognized) in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of January 1, 2002. Any transitional impairment loss would have been measured as of January 1, 2002 and would have been recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. As of the date of adoption, January 1, 2002, the Company had unamortized goodwill in the amount of $434.5 million and unamortized identifiable intangible assets in the amount of $3.9 million, all of which were subject to the transition provisions of SFAS No. 141 and 142. As of September 30, 2002, the Company had unamortized goodwill in the amount of $436.8 and unamortized identifiable intangible assets were $3.4 million. Amortization expense related to goodwill was $4.1 million and $12.2 for the three months and nine months ended September 30, 2001, respectively. A reconciliation of the effects of the adoption of Statement No. 142 on net income and basic and diluted earnings per share is presented on the face of the Consolidated Statements of Operations. For the purposes of these footnotes, all 2001 numbers have been restated as if SFAS No. 142 had been adopted for the period. NOTE C - INCOME TAXES The Company's quarterly income tax provision of $13.7 million was calculated using an effective income tax rate of approximately 38.2%. The Company's nine month income tax provision of $41.5 million, was calculated using an effective income tax rate of approximately 38.4%. The Company's effective income tax rate is derived by estimating pretax income and income tax expense for the year ending December 31, 2002. The effective income tax rate calculated is higher than the federal statutory rate of 35% due to the addition of state taxes and to certain expenses recorded for financial reporting purposes that are not deductible for federal income tax purposes. NOTE D - STOCK SPLIT In May 2002, the Company effected a three-for-two stock split in the form of a 50% stock dividend payable to holders of record on May 20, 2002. All share, per share and average share information in the Consolidated Financial Statements and the Notes thereto have been restated to reflect the stock split. 10 NOTE E - EARNINGS PER SHARE A reconciliation of basic and diluted earnings per share (EPS) is as follows:
Three Months Ended September 30, In thousands, except per share amounts 2002 2001 ----------- ----------- BASIC EPS Net Income ...................................................... $ 22,188 $ 22,917 =========== =========== Weighted-average common shares outstanding used in earnings per share computations ....................... 92,115 93,900 =========== =========== Earnings per common share ....................................... $ 0.24 $ 0.24 =========== =========== DILUTED EPS Net Income ...................................................... $ 22,188 $ 22,917 =========== =========== Shares used in diluted earnings per share computations .......... 94,163 96,033 =========== =========== Earnings per common share ....................................... $ 0.24 $ 0.24 =========== =========== Computation of shares used in earnings per share computations: Average outstanding common shares ............................... 92,115 93,900 Average common equivalent shares - dilutive effect of option shares .............................. 2,048 2,133 ----------- ----------- Shares used in diluted earnings per share computations .......... 94,163 96,033 =========== ===========
Nine Months Ended September 30, In thousands, except per share amounts 2002 2001 ----------- ----------- BASIC EPS Net Income ...................................................... $ 66,546 $ 68,058 =========== =========== Weighted-average common shares outstanding used in earnings per share computations ....................... 93,270 95,366 =========== =========== Earnings per common share ....................................... $ 0.71 $ 0.71 =========== =========== DILUTED EPS Net Income ...................................................... $ 66,546 $ 68,059 =========== =========== Shares used in diluted earnings per share computations .......... 95,634 97,733 =========== =========== Earnings per common share ....................................... $ 0.70 $ 0.70 =========== =========== Computation of shares used in earnings per share computations: Average outstanding common shares ............................... 93,270 95,366 Average common equivalent shares - dilutive effect of option shares .............................. 2,364 2,367 ----------- ----------- Shares used diluted in earnings per share computations .......... 95,634 97,733 =========== ===========
11 NOTE F - BUSINESS SEGMENTS Harte-Hanks is a highly focused targeted media company with operations in two segments - direct and interactive marketing and shoppers. Information about the Company's operations in different business segments:
Three Months Ended September 30 In thousands 2002 2001 --------------- --------------- Operating revenues Direct Marketing ....................... $ 140,872 $ 143,474 Shoppers ............................... 85,594 80,656 --------------- --------------- Total operating revenues ........... $ 226,466 $ 224,130 =============== =============== Operating Income Direct Marketing ....................... $ 17,921 $ 23,688 Shoppers ............................... 20,658 18,615 Corporate Activities ................... (1,923) (2,175) --------------- --------------- Total operating income ............. $ 36,656 $ 40,128 =============== =============== Income before income taxes Operating income ....................... $ 36,656 $ 40,128 Interest expense ....................... (285) (637) Interest income ........................ 37 57 Other, net ............................. (505) (2,303) --------------- --------------- Total income before income taxes ... $ 35,903 $ 37,245 =============== ===============
Nine Months Ended September 30 In thousands 2002 2001 --------------- --------------- Operating revenues Direct Marketing ....................... $ 419,425 $ 449,021 Shoppers ............................... 249,827 235,883 --------------- --------------- Total operating revenues ........... $ 669,252 $ 684,904 =============== =============== Operating Income Direct Marketing ....................... $ 60,082 $ 72,505 Shoppers ............................... 56,208 50,865 Corporate Activities ................... (6,192) (6,734) --------------- --------------- Total operating income ............. $ 110,098 $ 116,636 =============== =============== Income before income taxes Operating income ....................... $ 110,098 $ 116,636 Interest expense ....................... (876) (2,370) Interest income ........................ 158 271 Other, net ............................. (1,367) (3,914) --------------- --------------- Total income before income taxes ... $ 108,013 $ 110,623 =============== ===============
12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For the purposes of the Management's Discussion and Analysis section of this report, all 2001 numbers have been restated as if SFAS No. 142 had been adopted for the period. RESULTS OF OPERATIONS Operating results were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED In thousands SEPT. 30, 2002 SEPT. 30, 2001 CHANGE SEPT. 30, 2002 SEPT. 30, 2001 CHANGE -------------- -------------- ------ -------------- -------------- ------ Revenues $ 226,466 $ 224,130 1.0% $ 669,252 $ 684,904 -2.3% Operating expenses 189,810 184,002 3.2% 559,154 568,268 -1.6% ----------- ---------- ----------- ---------- Operating income $ 36,656 $ 40,128 -8.7% $ 110,098 $ 116,636 -5.6% =========== ========== =========== ========== Net income $ 22,188 $ 22,917 -3.2% $ 66,546 $ 68,058 -2.2% =========== ========== =========== ========== Diluted earnings per share $ 0.24 $ 0.24 0.0% $ 0.70 $ 0.70 0.0% =========== ========== =========== ==========
Consolidated revenues increased 1.0% to $226.5 million and operating income declined 8.7% to $36.7 million in the third quarter of 2002 when compared to the third quarter of 2001. Overall third quarter operating expenses increased 3.2% to $189.8 million compared to 2001. Net income decreased 3.2% to $22.2 million in the third quarter of 2002 when compared to the third quarter of 2001. Diluted earnings of 24 cents per share was flat compared to 2001. The net income decrease resulted from $3.5 million in lower operating income, partially offset by a $0.3 million decrease in net interest expense and a $1.8 million decrease in other non-operating expenses. DIRECT MARKETING Direct and interactive marketing operating results were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED In thousands SEPT. 30, 2002 SEPT. 30, 2001 CHANGE SEPT. 30, 2002 SEPT. 30, 2001 CHANGE -------------- -------------- ------ -------------- -------------- ------ Revenues $ 140,872 $ 143,474 -1.8% $ 419,425 $ 449,021 -6.6% Operating expenses 122,951 119,786 2.6% 359,343 376,516 -4.6% ----------- ---------- ----------- ---------- Operating income $ 17,921 $ 23,688 -24.3% $ 60,082 $ 72,505 -17.1% =========== ========== =========== ==========
Direct and interactive marketing revenues decreased $2.6 million, or 1.8%, in the third quarter of 2002 compared to 2001. These results reflect revenue declines in most of the company's largest vertical markets including financial services, retail and pharmaceutical/healthcare. Revenues from the high-tech/telecom industry sector were flat compared to 2001. The segment's select markets group had increased revenues, primarily from the automotive and energy sectors, that were attributable to the November 2001 acquisition of Sales Support Services, Inc. Customer Relationship Management (CRM) revenues were up slightly compared to the prior year. CRM experienced revenue increases in agency business, teleservices, outsourced work and fulfillment, partially offset by declines in consulting services, internet services, software services and data sales. CRM revenues were also affected by the acquisition noted above. Marketing Services revenues declined from the prior year. Marketing Services experienced revenue declines in its personalized direct mail, logistics and telesales businesses, partially offset by increased revenues from its print operations. Operating expenses increased $3.2 million, or 2.6%, in the third quarter of 2002 compared to 2001. Labor costs decreased $1.3 million due to lower volumes and 13 staff reductions. Production and distribution costs increased $4.0 million, primarily due to increased outsourced costs resulting from the type and relative mix of services performed, higher job printing costs, and higher temporary labor costs, partially offset by lower transportation costs and decreased volumes. General and administrative expense increased $0.6 million due to increased professional services, royalties, insurance and employee expenses. The prior year acquisition noted above also contributed to the overall increase in operating expenses. Direct and interactive marketing revenues decreased $29.6 million, or 6.6%, in the first nine months of 2002 compared to the first nine months of 2001. Both CRM and Marketing Services revenues declined from the prior year. These results reflect declines in all of the segment's largest vertical markets - retail, financial services, high-tech/telecom and pharmaceutical/healthcare. These revenue declines were partially offset by increased revenues from the segment's select markets group, primarily the automotive and energy sectors, and revenues attributable to the November 2001 acquisition of Sales Support Services, Inc. Operating expenses decreased $17.2 million, or 4.6%, in the first nine months of 2002 compared to the first nine months of 2001. The overall decrease in operating expenses was primarily due to the Company's efforts to manage its cost structure in response to the decline in revenues, as well as reduced variable expenses resulting from lower revenue levels. Partially offsetting this decrease were increased operating expenses related to the prior year acquisition noted above. Labor costs decreased $17.5 million due to lower volumes and staff reductions. Production and distribution costs increased $2.6 million due primarily to increased transportation costs, partially offset by decreased outsourced costs. General and administrative expense decreased $3.0 million due to decreased professional services, bad debt and employee expenses. SHOPPERS Shopper operating results were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED In thousands SEPT. 30, 2002 SEPT. 30, 2001 CHANGE SEPT. 30, 2002 SEPT. 30, 2001 CHANGE -------------- -------------- ------ -------------- -------------- ------ Revenues $ 85,594 $ 80,656 6.1% $ 249,827 $ 235,883 5.9% Operating expenses 64,936 62,041 4.7% 193,619 185,018 4.6% ----------- ---------- ----------- ---------- Operating income $ 20,658 $ 18,615 11.0% $ 56,208 $ 50,865 10.5% =========== ========== =========== ==========
Shopper revenues increased $4.9 million, or 6.1%, in the third quarter of 2002 compared to 2001. Revenue increases were the result of improved sales in established markets as well as new year-over-year geographic expansions into new neighborhoods, primarily in California. From a product-line perspective, Shoppers had growth in both ROP (in-book advertising) and its distribution products. These increases were partially offset by declines in employment related advertising. Operating expenses increased $2.9 million, or 4.7%, in the third quarter of 2002 compared to 2001. Labor costs increased $2.1 million during the quarter due to higher volumes. Production costs increased $1.5 million, including additional postage of $1.5 million due to increased volumes and higher postage rates. Partially offsetting these increased production costs were decreased paper costs due to lower rates for both newsprint and job paper. General and administrative costs decreased $0.6 million due to lower bad debt expense. Shopper revenues increased $13.9 million, or 5.9%, in the first nine months of 2002 compared to the first nine months of 2001. Revenue increases were the result of improved sales in established markets as well as new year-over-year geographic expansions into new neighborhoods, primarily in California. From a product-line perspective, Shoppers had growth in both ROP and its distribution 14 products. These increases were partially offset by declines in employment related advertising and coupon book. Operating expenses increased $8.6 million, or 4.6%, in the first nine months of 2002 compared to the first nine months of 2001. Labor costs increased $5.4 million during the quarter due to higher volumes. Production costs increased $3.3 million, including additional postage of $3.7 million due to increased volumes and higher postage rates. Partially offsetting these increased production costs were decreased paper costs of $1.0 million due to lower rates for both newsprint and job paper. General and administrative costs were flat compared 2001 as increases in facilities, promotion and insurance costs were offset by lower bad debt expense in the first nine months of 2002. Other Income and Expense Other net expense for the third quarter and first nine months of 2002 primarily consists of bank charges and stockholders expenses. In the third quarter and first nine months of 2001 the Company recorded losses of approximately $2.0 million and $3.7 million, respectively, on the write-down of investments. The Company sold all of its remaining equity investments in the fourth quarter of 2001 and has not held any such investments during 2002. Interest Expense/Interest Income Interest expense decreased $0.4 million in the third quarter of 2002 and $1.5 million in the first nine months of 2002 over the same periods in 2001. The increase was due primarily to lower debt levels and lower interest rates in the first nine months of 2002. Interest income was flat in the third quarter of 2002 and decreased $0.1 million in the first nine months of 2002 compared to the same periods in 2001. These results were due to lower cash and investment balances and lower interest rates in the first nine months of 2002. Income Taxes The Company's income tax expense decreased $0.6 million in the third quarter of 2002 and $1.1 million in the first nine months of 2002 compared to the same periods in 2001. These changes were due primarily to the changes in pre-tax income levels. The effective tax rate was 38.2% for the third quarter of 2002 compared to 38.5% for the third quarter of 2001. The effective tax rate was 38.4% for the first nine months of 2002 compared to 38.5% for the first nine months of 2001. Liquidity and Capital Resources Cash provided by operating activities for the nine months ended September 30, 2002 was $107.6 million, compared to $126.0 million for the nine months ended September 30, 2001. The decrease in 2002 primarily relates to collections of a lower accounts receivable balance at December 31, 2001 than at December 31, 2000. Net cash outflows from investing activities were $15.3 million for the first nine months of 2002 compared to net cash outflows of $23.3 million for the first nine months of 2001. The decrease in 2002 primarily relates to lower capital expenditures in 2002 than in 2001. Net cash outflows from financing activities were $102.6 million in 2002 compared to net cash outflows of $105.7 million in 2001. The cash outflows in 2002 and 2001 are attributable primarily to the repurchase of the Company's stock and net repayments of borrowings. As of September 30, 2002, capital resources were 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 15 November 4, 1999. All borrowings under the $100 million revolving Three-Year Credit Agreement were 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 were to be repaid by October 25, 2002. As of September 30, 2002, the Company had $193 million of unused borrowing capacity under these two credit facilities. On October 18, 2002 the Company replaced these two credit facilities with an unsecured $125 million variable rate revolving loan commitment with a three year term. All borrowings under the two $100 million revolving credit agreements were paid off as of October 18, 2002. On that same date the Company borrowed $10 million under the new $125 million revolving Three-Year Credit Agreement. All borrowings under the $125 million revolving Three-Year Credit Agreement are to be repaid by October 17, 2005. Management believes that its credit facilities, together with cash provided from operating activities, will be sufficient to fund operations and anticipated acquisitions and capital expenditures needs for the foreseeable future. The Company has classified its debt at September 30, 2002 as long-term as it was the Company's intent to refinance all outstanding balances under its credit facilities at the time they expired. The Company was able to obtain a replacement credit facility at comparable terms and at an amount adequate to cover outstanding borrowings at September 30, 2002 as described above. Factors That May Affect Future Results and Financial Condition From time to time, in both written reports and oral statements by senior management, the Company may express its expectations regarding its future performance. These "forward-looking statements" are inherently uncertain, and investors should realize that events could turn out to be other than what senior management expected. Set forth below are some key factors which could affect the Company's future performance, including its revenues, net income and earnings per share; however, the risks described below are not the only ones the Company faces. Additional risks and uncertainties that are not presently known, or that the Company currently considers immaterial, could also impair the Company's business operations. Legislation -- There could be a material adverse impact on the Company's direct and interactive marketing business due to the enactment of legislation or industry regulations arising from public concern over consumer privacy issues. Restrictions or prohibitions could be placed upon the collection and use of information that is currently legally available. Data Suppliers - There could be a material adverse impact on the Company's direct and interactive marketing business if owners of the data the Company uses were to withdraw the data. Data providers could withdraw their data if there is a competitive reason to do so or if legislation is passed restricting the use of the data. Acquisitions -- In recent years the Company has made a number of acquisitions in its direct and interactive marketing segment, and it expects to pursue additional acquisition opportunities. Acquisition activities, even if not consummated, require substantial amounts of management time and can distract from normal operations. In addition, there can be no assurance that the synergies and other objectives sought in acquisitions will be achieved. Competition -- Direct and interactive marketing is a rapidly evolving business, subject to periodic technological advancements, high turnover of customer personnel who make buying decisions, and changing customer needs and preferences. Consequently, the Company's direct and interactive marketing business faces competition in both of its sectors -- CRM and Marketing Services. The Company's shopper business competes for advertising, as well as for readers, with other 16 print and electronic media. Competition comes from local and regional newspapers, magazines, radio, broadcast and cable television, shoppers and other communications media that operate in the Company's markets. The extent and nature of such competition are, in large part, determined by the location and demographics of the markets targeted by a particular advertiser, and the number of media alternatives in those markets. Failure to continually improve the Company's current processes and to develop new products and services could result in the loss of the Company's customers to current or future competitors. In addition, failure to gain market acceptance of new products and services could adversely affect the Company's growth. Qualified Personnel -- The Company believes that its future prospects will depend in large part upon its ability to attract, train and retain highly skilled technical, client services and administrative personnel. While dependent on employment levels and general economic conditions, qualified personnel historically have been in great demand and from time to time and 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. Standard postage rates increased at the beginning of the third quarter of 2002. Future postage rates may also be impacted by the USPS's response to the threats to the postal service that occurred last year. Overall shopper postage costs are expected to grow moderately as a result of this increase as well as anticipated increases in circulation and insert volumes. Postal rates also influence the demand for the Company's direct and interactive marketing services even though the cost of mailings is borne by the Company's customers and is not directly reflected in the Company's revenues or expenses. Paper Prices -- Paper represents a substantial expense in the Company's shopper operations. In recent years newsprint prices have fluctuated widely, and such fluctuations can materially affect the results of the Company's operations. Economic Conditions -- Changes in national economic conditions can affect levels of advertising expenditures generally, and such changes can affect each of the Company's businesses. In addition, revenues from the Company's shopper business are dependent to a large extent on local advertising expenditures in the markets in which they operate. Such expenditures are substantially affected by the strength of the local economies in those markets. Direct and interactive marketing revenues are dependent on national and international economics. Interest Rates - Interest rate movements in Europe and the United States can affect the amount of interest the Company pays related to its debt and the amount it earns on cash equivalents. The Company's primary interest rate exposure is to interest rate fluctuations in Europe, specifically EUROLIBOR rates due to their impact on interest related to the Company's $125 million credit facility. The Company also has exposure to interest rate fluctuations in the United States, specifically money market, commercial paper and overnight time deposit rates as these affect the Company's earnings on its excess cash. Item 3. 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 September 30, 2002. The Company does not use derivative financial instruments in its operations. The Company's earnings are also affected by fluctuations in foreign exchange 17 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 4. Controls and Procedures Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that the design and operation of these disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. No significant changes were made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See index to Exhibits on Page 22. (b) No Form 8-K was filed during the three months ended September 30, 2002. 18 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HARTE-HANKS, INC. November 13, 2002 /s/ Richard M. Hochhauser ----------------- --------------------------------------- Date Richard M. Hochhauser President and Chief Executive Officer I, Richard M. Hochhauser, President and Chief Executive Officer of Harte-Hanks, Inc. (the "Company") hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal 19 controls which would adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness. November 13, 2002 /s/ Richard M. Hochhauser ----------------- --------------------------------------- Date Richard M. Hochhauser President and Chief Executive Officer 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HARTE-HANKS, INC. November 13, 2002 /s/ Jacques D. Kerrest ----------------- ----------------------------------- Date Jacques D. Kerrest Senior Vice President, Finance and Chief Financial Officer I, Jacques D. Kerrest, Senior Vice President, Finance and Chief Financial Officer of Harte-Hanks, Inc. (the "Company") hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal 21 controls which would adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness. November 13, 2002 /s/ Jacques D. Kerrest ----------------- ------------------------------------ Date Jacques D. Kerrest Senior Vice President, Finance and Chief Financial Officer 22
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). 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 (filed as Exhibit 10(f) to the Company's Form 10-K for the year ended December 31, 2000 and incorporated by reference herein).
23
Exhibit No. Description of Exhibit Page No. --- ---------------------- -------- 10(g) Harte-Hanks, Inc. Amended and Restated Restoration Pension Plan dated as of January 1, 2000 (filed as Exhibit 10(f) to the Company's Form 10-K for the year ended December 31, 1999 and Incorporated by reference herein). 10(h) Harte-Hanks Communications, Inc. 1996 Incentive Compensation Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the nine months ended September 30, 1996 and incorporated by reference herein). 10(i) Harte-Hanks, Inc. Amended and Restated 1991 Stock Option Plan (filed as Exhibit 10(h) to the Company's Form 10-Q for the six months ended June 30, 2000 and incorporated by reference herein). 10(j) Harte-Hanks, Inc. 1998 Director Stock Plan (filed as Exhibit 10(h) to the Company's Form 10-Q for the six months ended June 30, 1998 and incorporated by reference herein). 10(k) Harte-Hanks, Inc. Deferred Compensation Plan (filed as Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1998 and incorporated by reference herein). 10(l) Amendment One to Harte-Hanks, Inc. Amended and Restated Restoration Plan dated December 18, 2000 (filed as Exhibit 10(l) to the Company's Form 10-K for the year ended December 31, 2000 and incorporated by reference herein). 10(m) Agreement between Harte-Hanks, Inc. and Larry Franklin regarding role of Chairman of the Board of Directors of Harte-Hanks, Inc. dated as of April 1, 2002 (filed as Exhibit 10(m) to the Company's Form 10-Q for the three months ended March 31, 2002 and incorporated by reference herein). *10(n) Three-Year Credit Agreement dated as of October 18, 2002 between 24 Harte-Hanks, Inc. and the Lenders named therein for a $125 million revolving credit facility. *21 Subsidiaries of the Company. 85 *99(a) Certification of Chief Executive Officer pursuant to 18 U.S.C 86 Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *99(b) Certification of Chief Financial Officer pursuant to 18 U.S.C 87 Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
--------------------- *Filed herewith