<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the quarterly period ended June 30, 2000
-------------
Transition report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the transition period from to
---------- ----------
Commission File Number 1-7120
------
HARTE-HANKS, INC.
-----------------
(Exact name of registrant as specified in its charter)
Delaware 74-1677284
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Concord Plaza Drive, San Antonio, Texas 78216
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code -- 210/829-9000
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: $1 par value, 67,746,223 shares as of July 31, 2000.
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2
HARTE-HANKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
June 30, 2000
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Interim Condensed Consolidated Financial
Statements (Unaudited)
Condensed Consolidated Balance Sheets - 3
June 30, 2000 and December 31, 1999
Consolidated Statements of Operations - 4
Three months ended June 30, 2000 and 1999
Consolidated Statements of Operations - 5
Six months ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows - 6
Six months ended June 30, 2000 and 1999
Consolidated Statements of Stockholders' Equity - 7
Six months ended June 30, 2000 and 1999
Notes to Interim Condensed Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
Signature 17
</TABLE>
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3
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (in thousands, except per share and share
amounts)
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents ......................... $ 43,974 $ 35,196
Accounts receivable, net .......................... 152,695 154,030
Inventory ......................................... 6,314 7,099
Prepaid expenses .................................. 12,340 12,651
Current deferred income tax asset ................. 6,798 6,848
Other current assets .............................. 5,697 4,309
--------- ------------
Total current assets ............................ 227,818 220,133
Property, plant and equipment, net .................. 112,730 106,250
Goodwill, net ....................................... 412,079 409,791
Other assets ........................................ 24,253 33,253
--------- ------------
Total assets .................................... $ 776,880 $ 769,427
========= ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable .................................. $ 57,629 $ 64,812
Accrued payroll and related expenses .............. 25,789 25,511
Customer deposits and unearned revenue ............ 28,906 35,622
Income taxes payable .............................. 9,916 13,667
Other current liabilities ......................... 16,396 14,405
--------- ------------
Total current liabilities ....................... 138,636 154,017
Long-term debt ...................................... 2,222 5,000
Other long-term liabilities ......................... 37,191 32,792
--------- ------------
Total liabilities ............................... 178,049 191,809
--------- ------------
Stockholders' equity
Common stock, $1 par value, 250,000,000 shares
authorized. 76,691,487 and 76,392,063 shares
issued at June 30, 2000 and December 31, 1999,
respectively .................................... 76,691 76,392
Additional paid-in capital .......................... 200,709 197,454
Accumulated other comprehensive income .............. 3,505 12,316
Retained earnings ................................... 529,095 493,362
--------- ------------
810,000 779,524
Less treasury stock: 8,657,014 and 8,285,966
shares at cost at June 30, 2000 and December 31,
1999, respectively ................................ (211,169) (201,906)
--------- ------------
Total stockholders' equity ........................ 598,831 577,618
--------- ------------
Total liabilities and stockholders' equity ........ $ 776,880 $ 769,427
========= ============
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
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4
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Operating revenues .................................... $ 235,693 $ 197,033
------------ ------------
Operating expenses
Payroll ............................................. 86,231 70,516
Production and distribution ......................... 80,711 72,777
Advertising, selling, general and administrative .... 22,386 14,947
Depreciation ........................................ 6,926 5,907
Goodwill and intangible amortization ................ 3,593 2,445
------------ ------------
199,847 166,592
------------ ------------
Operating income ...................................... 35,846 30,441
------------ ------------
Other expenses (income)
Interest expense .................................... 220 49
Interest income ..................................... (613) (1,751)
Other, net .......................................... 330 257
------------ ------------
(63) (1,445)
------------ ------------
Income before income taxes ............................ 35,909 31,886
Income tax expense .................................... 14,514 13,118
------------ ------------
Net income ............................................ $ 21,395 $ 18,768
============ ============
Basic:
Earnings per common share ........................... $ 0.31 $ 0.27
============ ============
Weighted-average common shares outstanding .......... 68,347 70,519
============ ============
Diluted:
Earnings per common share ........................... $ 0.30 $ 0.26
============ ============
Weighted-average common and common equivalent
shares outstanding ............................... 70,492 72,781
============ ============
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 5
5
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating revenues .................................... $ 461,750 $ 385,161
----------- -----------
Operating expenses
Payroll ............................................. 173,299 141,368
Production and distribution ......................... 156,714 142,185
Advertising, selling, general and administrative .... 44,847 30,994
Depreciation ........................................ 13,656 11,265
Goodwill and intangible amortization ................ 7,237 4,807
----------- -----------
395,753 330,619
----------- -----------
Operating income ...................................... 65,997 54,542
----------- -----------
Other expenses (income)
Interest expense .................................... 474 90
Interest income ..................................... (1,025) (3,849)
Other, net .......................................... 813 357
----------- -----------
262 (3,402)
----------- -----------
Income before income taxes ............................ 65,735 57,944
Income tax expense .................................... 26,586 23,842
----------- -----------
Net income ............................................ $ 39,149 $ 34,102
=========== ===========
Basic:
Earnings per common share .......................... $ 0.57 $ 0.48
=========== ===========
Weighted-average common shares outstanding .......... 68,305 70,856
=========== ===========
Diluted:
Earnings per common share ........................... $ 0.56 $ 0.47
=========== ===========
Weighted-average common and common equivalent
shares outstanding ................................ 70,397 73,193
=========== ===========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
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6
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating Activities
Net income .............................................. $ 39,149 $ 34,102
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation ......................................... 13,656 11,265
Goodwill and intangible amortization ................. 7,237 4,807
Amortization of option-related compensation .......... 277 329
Deferred income taxes ................................ 3,281 4,725
Other, net ........................................... 361 141
Changes in operating assets and liabilities, net of
acquisitions:
Decrease in accounts receivable, net ................. 2,616 2,388
Decrease in inventory ................................ 785 2,395
Decrease (increase) in prepaid expenses and other
current assets .................................... (1,025) 1,502
Decrease in accounts payable ......................... (460) (2,379)
Decrease in other accrued expenses
and other liabilities ............................. (12,919) (6,523)
Other, net ........................................... (2,427) (1,496)
----------- -----------
Net cash provided by operating activities ......... 50,531 51,256
----------- -----------
Investing Activities
Acquisitions ............................................ (9,147) (33,228)
Purchases of property, plant and equipment .............. (20,429) (13,537)
Proceeds from sale of property, plant and equipment ..... 123 124
Net sales and maturities of
available-for-sale short-term investments ............ -- 48,829
Other ................................................... -- (1,000)
----------- -----------
Net cash provided by (used in) investing
activities ...................................... (29,453) 1,188
----------- -----------
Financing Activities
Long-term borrowings .................................... 2,222 --
Repayment of long-term borrowings ....................... (5,000) --
Issuance of common stock ................................ 3,154 4,758
Purchase of treasury stock .............................. (9,300) (47,271)
Issuance of treasury stock .............................. 40 46
Dividends paid .......................................... (3,416) (2,827)
----------- -----------
Net cash used in financing
activities ...................................... (12,300) (45,294)
----------- -----------
Net increase in cash .................................... 8,778 7,150
Cash and cash equivalents at beginning of year .......... 35,196 30,367
----------- -----------
Cash and cash equivalents at end of period .............. $ 43,974 $ 37,517
=========== ===========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 7
7
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
In thousands Stock Capital Earnings Stock Income Equity
--------- ---------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 ...... $ 75,789 $ 189,698 $ 425,999 $(114,395) $ -- $ 577,091
Common stock issued-
employee benefit plans ....... 103 2,128 -- -- -- 2,231
Exercise of stock options ....... 364 2,163 -- -- -- 2,527
Tax benefit of options
exercised .................... -- 1,370 -- -- -- 1,370
Dividends paid ($0.04 per
share) ....................... -- -- (2,827) -- -- (2,827)
Treasury stock repurchase ....... -- -- -- (47,271) -- (47,271)
Treasury stock issued ........... -- 15 -- 31 -- 46
Comprehensive income, net of
tax:
Net income ................... -- -- 34,102 -- -- 34,102
-------------
Total comprehensive income ...... 34,102
--------- ---------- --------- --------- ------------- -------------
Balance at June 30, 1999 ........ $ 76,256 $ 195,374 $ 457,274 $(161,635) $ -- $ 567,269
========= ========== ========= ========= ============= =============
Balance at January 1, 2000 ...... $ 76,392 $ 197,454 $ 493,362 $(201,906) $ 12,316 $ 577,618
Common stock issued-
employee benefit plans ....... 99 1,922 -- -- -- 2,021
Exercise of stock options ....... 200 933 -- -- -- 1,133
Tax benefit of options
exercised .................... -- 397 -- -- -- 397
Dividends paid ($0.05 per
share) ....................... -- -- (3,416) -- -- (3,416)
Treasury stock repurchase ....... -- -- -- (9,300) -- (9,300)
Treasury stock issued ........... -- 3 -- 37 -- 40
Comprehensive income, net of
tax:
Net income ................... -- -- 39,149 -- -- 39,149
Foreign currency
translation adjustment .... -- -- -- -- (1,030) (1,030)
Change in net unrealized
gain (loss) on long-
term investments (net
of tax of $4,191) ......... -- -- -- -- (7,781) (7,781)
-------------
Total comprehensive income ...... 30,338
--------- ---------- --------- --------- ------------- -------------
Balance at June 30, 2000 ........ $ 76,691 $ 200,709 $ 529,095 $(211,169) $ 3,505 $ 598,831
========= ========== ========= ========= ============= =============
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 8
8
Harte-Hanks, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited Interim Condensed Consolidated Financial Statements
include the accounts of Harte-Hanks, Inc. and subsidiaries (the "Company").
The statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three months and six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31. For further information, refer to the consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K
for the year ended December 31, 1999.
Certain prior period amounts have been reclassified for comparative purposes.
NOTE B - INCOME TAXES
The Company's quarterly and six month income tax provision of $14.5 million and
$26.6 million, respectively, was calculated using an effective income tax rate
of approximately 40.4%. The Company's effective income tax rate is derived by
estimating pretax income and income tax expense for the year ending December 31,
2000. The effective income tax rate calculated is higher than the federal
statutory rate of 35% due to the addition of state taxes and to certain expenses
recorded for financial reporting purposes (primarily goodwill amortization)
which are not deductible for federal income tax purposes.
NOTE C - EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
In thousands, except per share amount 2000 1999
----------- -----------
<S> <C> <C>
BASIC EPS
Net Income ........................................................ $ 21,395 $ 18,768
=========== ===========
Weighted-average common shares outstanding
used in earnings per share computations ......................... 68,347 70,519
=========== ===========
Earnings per common share ......................................... $ 0.31 $ 0.27
=========== ===========
DILUTED EPS
Net Income ........................................................ $ 21,395 $ 18,768
=========== ===========
Shares used in earnings per share computations .................... 70,492 72,781
=========== ===========
Earnings per common share ......................................... $ 0.30 $ 0.26
=========== ===========
Computation of shares used in earnings per share computations:
Average outstanding common shares ................................. 68,347 70,519
Average common equivalent shares -
dilutive effect of option shares ................................ 2,145 2,262
----------- -----------
Shares used in earnings per share computations .................... 70,492 72,781
=========== ===========
</TABLE>
<PAGE> 9
9
<TABLE>
<CAPTION>
Six Months Ended June 30,
In thousands, except per share amount 2000 1999
----------- -----------
<S> <C> <C>
BASIC EPS
Net Income ........................................................ $ 39,149 $ 34,102
=========== ===========
Weighted-average common shares outstanding
used in earnings per share computations ......................... 68,305 70,856
=========== ===========
Earnings per common share ......................................... $ 0.57 $ 0.48
=========== ===========
DILUTED EPS
Net Income ........................................................ $ 39,149 $ 34,102
=========== ===========
Shares used in earnings per share computations .................... 70,397 73,193
=========== ===========
Earnings per common share ......................................... $ 0.56 $ 0.47
=========== ===========
Computation of shares used in earnings per share computations:
Average outstanding common shares ................................. 68,305 70,856
Average common equivalent shares -
dilutive effect of option shares ................................ 2,092 2,337
----------- -----------
Shares used in earnings per share computations .................... 70,397 73,193
=========== ===========
</TABLE>
As of June 30, 2000 the Company had 526,956 antidilutive market price options
outstanding.
NOTE D - BUSINESS SEGMENTS
Harte-Hanks is a highly focused targeted media company with operations in two
segments - direct and interactive marketing and shoppers.
Information about the Company's operations in different industry segments:
<TABLE>
<CAPTION>
Three Months Ended June 30
In thousands 2000 1999
------------ ------------
<S> <C> <C>
Operating revenues
Direct Marketing ........................ $ 159,351 $ 128,985
Shoppers ................................ 76,342 68,048
------------ ------------
Total operating revenues ............ $ 235,693 $ 197,033
============ ============
Operating income
Direct Marketing ........................ $ 22,191 $ 18,524
Shoppers ................................ 15,859 13,758
Corporate Activities .................... (2,204) (1,841)
------------ ------------
Total operating income .............. $ 35,846 $ 30,441
============ ============
Income before income taxes
Operating income ........................ $ 35,846 $ 30,441
Interest expense ........................ (220) (49)
Interest income ......................... 613 1,751
Other, net .............................. (330) (257)
------------ ------------
Total income before income taxes .... $ 35,909 $ 31,886
============ ============
</TABLE>
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10
<TABLE>
<CAPTION>
Six Months Ended June 30,
In thousands 2000 1999
----------- -----------
<S> <C> <C>
Operating revenues
Direct Marketing ........................ $ 315,542 $ 253,919
Shoppers ................................ 146,208 131,242
----------- -----------
Total operating revenues ............ $ 461,750 $ 385,161
=========== ===========
Operating income
Direct Marketing ........................ $ 43,550 $ 35,808
Shoppers ................................ 26,946 22,543
Corporate Activities .................... (4,499) (3,809)
----------- -----------
Total operating income .............. $ 65,997 $ 54,542
=========== ===========
Income before income taxes
Operating income ........................ $ 65,997 $ 54,542
Interest expense ........................ (474) (90)
Interest income ......................... 1,025 3,849
Other, net .............................. (813) (357)
----------- -----------
Total income before income taxes .... $ 65,735 $ 57,944
=========== ===========
</TABLE>
<PAGE> 11
11
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 2000 JUNE 30, 1999 CHANGE JUNE 30, 2000 JUNE 30, 1999 CHANGE
------------ ------------- ------------- ------ ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 235,693 $ 197,033 19.6% $ 461,750 $ 385,161 19.9%
Operating expenses 199,847 166,592 20.0% 395,753 330,619 19.7%
--------- --------- --------- ---------
Operating income $ 35,846 $ 30,441 17.8% $ 65,997 $ 54,542 21.0%
========= ========= ========= =========
Net income $ 21,395 $ 18,768 14.0% $ 39,149 $ 34,102 14.8%
========= ========= ========= =========
Diluted earnings
per share $ 0.30 $ 0.26 15.4% $ 0.56 $ 0.47 19.1%
========= ========= ========= =========
</TABLE>
Consolidated revenues grew 19.6% to $235.7 million and operating income grew
17.8% to $35.8 million in the second quarter of 2000 when compared to the second
quarter of 1999. The Company's overall growth resulted from acquisitions,
increased business with both new and existing customers and from the sale of new
products and services. Overall operating expenses compared to 1999 increased
20.0% to $199.8 million.
Net income grew 14.0% to $21.4 million, or 30 cents per share, compared to 26
cents per share on a diluted basis. The net income growth resulted from the
growth in operating income offset by a decrease of $1.1 million in interest
income.
DIRECT MARKETING
Direct and interactive marketing operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 2000 JUNE 30, 1999 CHANGE JUNE 30, 2000 JUNE 30, 1999 CHANGE
------------ ------------- ------------- ------ ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 159,351 $ 128,985 23.5% $ 315,542 $ 253,919 24.3%
Operating expenses 137,160 110,461 24.2% 271,992 218,111 24.7%
--------- --------- --------- ----------
Operating income $ 22,191 $ 18,524 19.8% $ 43,550 $ 35,808 21.6%
========= ========= ========= ==========
</TABLE>
Direct and interactive marketing revenues increased $30.4 million, or 23.5%, in
the second quarter of 2000 compared to 1999. Revenue increases were lead by
Customer Relationship Management (CRM) which had strong growth for the quarter.
CRM revenues increased due to increased business with existing customers and new
customer gains. CRM increases were also influenced by the October 1999
acquisition of ZD Market Intelligence, renamed Harte-Hanks Market Intelligence.
The traditional growth oriented business-to-business activities of CRM
experienced significant growth for the quarter compared to 1999. The high
technology, retail and mutual fund industry sectors contributed significantly to
overall CRM revenue growth, offsetting continued slowdowns in the insurance and
healthcare industry sectors. Marketing services experienced steady revenue
growth, led by its targeted mail operations. Marketing services' revenues
increased due to increased product sales as well as new product sales to new and
existing customers, primarily in the banking and non-bank finance industry
sectors. The May 1999 acquisition of Direct Marketing Associates, Inc. (DMA)
also contributed to the marketing services revenue increase.
Operating expenses increased $26.7 million, or 24.2%, in the second quarter of
2000 compared to 1999. Payroll costs increased $13.2 million due to expanded
hiring to support future revenue growth. Also contributing to the increased
<PAGE> 12
12
operating expenses were additional production and distribution costs of $5.8
million due to increased volumes. General and administrative expense increased
$5.3 million due to increased employee and professional services expenses.
Depreciation and amortization expense increased $2.1 million due to goodwill
associated with acquisitions and higher levels of capital investment to support
growth. Operating expenses were also impacted by the acquisitions noted above.
Direct and interactive marketing revenues increased $61.6 million, or 24.3%, in
the first six months of 2000 compared to the first six months of 1999. Both CRM
and marketing services experienced strong revenue growth in the first six months
of 2000. Overall, revenue growth resulted from increased business with both new
and existing customers, particularly customers in the high technology, non-bank
finance and retail industries, and the acquisitions noted above.
Operating expenses rose $53.9 million, or 24.7%, in the first half of 2000
compared to the first half of 1999. Payroll costs increased $27.3 million due to
expanded hiring to support revenue growth. In addition, production costs
increased $11.1 million due to increased volumes. General and administrative
expense increased $10.4 million due to increased employee and professional
services expenses. Depreciation and amortization expense increased $4.6 million
due to goodwill associated with acquisitions and higher levels of capital
investment to support growth. The acquisitions mentioned above also contributed
to the increased operating expenses.
SHOPPERS
Shopper operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 2000 JUNE 30, 1999 CHANGE JUNE 30, 2000 JUNE 30, 1999 CHANGE
------------ ------------- ------------- ------ ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 76,342 $ 68,048 12.2% $ 146,208 $ 131,242 11.4%
Operating expenses 60,483 54,290 11.4% 119,262 108,699 9.7%
--------- --------- --------- ----------
Operating income $ 15,859 $ 13,758 15.3% $ 26,946 $ 22,543 19.5%
========= ========= ========= ==========
</TABLE>
Shopper revenues increased $8.3 million, or 12.2%, in the second quarter of 2000
compared to 1999. Revenue increases were the result of improved sales in
established markets as well as new year-over-year geographic expansions into new
neighborhoods, primarily in California. From a product-line perspective,
Shoppers had growth in both its in-book products, primarily core sales,
employment and automotive related advertising, and its distribution products,
primarily 4-color glossy heatset flyers and preprinted inserts. Shoppers also
continued to experience success in up-selling ads onto its web-site. In the
quarter, Shoppers experienced slowdowns in its real-estate and personals
advertising segments.
Operating expenses increased $6.2 million, or 11.4%, in the second quarter of
2000 compared to 1999. The increase in operating expenses was primarily due to
increases in labor costs of $2.4 million and additional production costs of $2.0
million, including increased postage of $1.4 million due to increased volumes.
Shopper revenues increased $15.0 million, or 11.4%, in the first six months of
2000 compared to the first six months of 1999. Revenue increases were the result
of improved sales in established markets as well as new year-over-year
geographic expansions into new neighborhoods, primarily in California. From a
product-line perspective, Shoppers had growth in both its in-book products,
primarily core sales, employment and automotive related advertising and its
distribution products, primarily 4-color glossy heatset flyers and preprinted
inserts. Shoppers also continued to experience success in up-selling ads onto
its web-site. In the first half of 2000, Shoppers experienced slowdown in its
personals advertising segments.
Operating expenses increased $10.6, or 9.7%, in the first half of 2000 compared
to the first half of 1999. The increase in operating expenses was primarily due
<PAGE> 13
13
to increases in labor costs of $4.1 million and additional production costs of
$3.2 million, including increased postage of $2.1 million due to increased
volumes.
Other Income and Expense
The Company realized a loss of approximately $0.4 million in the first half of
2000 on the disposal of certain fixed assets. In addition, the Company wrote off
approximately $0.2 million of other assets in the first half of 2000.
Interest Expense/Interest Income
Interest income decreased $1.1 million in the second quarter of 2000 and $2.8
million in the first six months of 2000 over the same periods in 1999. The
decrease in the first six months of 2000 over the same period in 1999 was due to
larger cash and investment balances in the first half of 1999. The Company sold
substantially all of its short-term investments throughout 1999 in order to fund
acquisitions and repurchase the Company's stock.
Interest expense increased $0.2 million in the second quarter of 2000 and $0.4
million in the first six months of 2000 over the same periods in 1999. The
increase was primarily due to amortization of financing costs and commitment
charges relating to the unsecured revolving credit facilities the Company
obtained in November 1999.
Income Taxes
The Company's income tax expense increased $1.4 million in the second quarter of
2000 and $2.7 million in the first six months of 2000 compared to the same
periods in 1999. This increase was due primarily to the higher pre-tax income
levels. The effective tax rate was 40.4% for the second quarter of 2000 and the
first six months of 2000 compared to 41.1% for the same periods in 1999.
Liquidity and Capital Resources
Cash provided by operating activities for the six months ended June 30, 2000 was
$50.5 million. Net cash outflows from investing activities were $29.5 million
for the first six months of 2000 compared to net cash inflows of $1.1 million
for the first six months of 1999. The cash outflows in 2000 primarily relate to
purchases of fixed assets. The cash inflows from investing activities in 1999
were primarily attributable to sales and maturities of marketable securities
totaling $48.8 million, the proceeds of which were used to fund acquisitions and
to repurchase the Company's stock. Net cash outflows from financing activities
were $12.3 million in 2000 compared to net cash outflows of $45.3 million in
1999. The cash outflow from financing activities in both 2000 and 1999 is
attributable primarily to the repurchase of the Company's stock.
Capital resources are also available from and provided through the Company's two
unsecured credit facilities. These credit facilities, two $100 million variable
rate, revolving loan commitments, were put in place on November 4, 1999. All
borrowings under the $100 million revolving 364-Day Credit Agreement are to be
repaid by November 3, 2000 unless the Company requests and is granted a 364-day
extension. All borrowings under the $100 million revolving Three-Year Credit
Agreement are to be repaid by November 4, 2002. As of June 30, 2000, the Company
had $200 million of unused borrowing capacity under these two credit facilities.
In addition, capital resources are available to the Company through an unsecured
credit facility obtained for the purpose of financing the construction of a new
building in Belgium. This credit facility, a $2.5 million variable rate,
revolving loan commitment was put in place on November 29, 1999 and has no
stated maturity. $0.3 million of unused borrowing capacity is available from
this credit facility as of June 30, 2000. Management believes that its credit
facilities, together with cash provided from operating activities, will be
sufficient to fund operations and anticipated acquisitions and capital service
needs for the foreseeable future.
<PAGE> 14
14
Acquisitions
In June, 2000, the Company acquired the UK based Hi-Tech Marketing Limited, a
leading pan-European provider of CRM services to the technology,
telecommunications and financial services industries.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB No. 101").
SAB No. 101 summarizes the SEC's staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. The Company
understands that the SEC staff is preparing a document to address significant
implementation issues related to SAB No. 101. To the extent that SAB No. 101
ultimately changes revenue recognition practices, the Company will adopt SAB No.
101 no later than the fourth quarter of fiscal year 2000 through a cumulative
effect adjustment. Any cumulative effect adjustment will be computed as of
January 1, 2000. The Company cannot determine the potential impact that SAB No.
101 may have on its consolidated financial position or results of operations at
this time.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION: AN INTERPRETATION OF APB OPINION NO.
25. Among other issues, Interpretation No. 44 clarifies the application of
Accounting Principles Board Opinion No. 25 (APB No. 25) regarding (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
options in a business combination. The provisions of Interpretation No. 44
affecting the Company are to be applied on a prospective basis effective July 1,
2000.
Factors That May Affect Future Results and Financial Condition
From time to time, in both written reports and oral statements by senior
management, the Company may express its expectations regarding its future
performance. These "forward-looking statements" are inherently uncertain, and
investors should realize that events could turn out to be other than what senior
management expected. Set forth below are some key factors which could affect the
Company's future performance, including its revenues, net income and earnings
per share; however, the risks described below are not the only ones the Company
faces. Additional risks and uncertainties that are not presently known, or that
the Company currently considers immaterial, could also impair the Company's
business operations.
Legislation -- There could be a material adverse impact on the Company's direct
and interactive marketing business due to the enactment of legislation or
industry regulations arising from public concern over consumer privacy issues.
Restrictions or prohibitions could be placed upon the collection and use of
information that is currently legally available.
Data Suppliers -- The Company could suffer a material adverse effect if owners
of the data the Company uses were to withdraw the data. Data providers could
withdraw their data if there is a competitive reason to do so or if legislation
is passed restricting the use of the data.
Acquisitions -- In recent years the Company has made a number of acquisitions in
its direct and interactive marketing and shopper businesses, and it expects to
pursue additional acquisition opportunities. Acquisition activities, even if not
consummated, require substantial amounts of management time and can distract
from
<PAGE> 15
15
normal operations. In addition, there can be no assurance that the synergies and
other objectives sought in acquisitions will be achieved.
Competition -- Direct and interactive marketing is a rapidly evolving business,
subject to periodic technological advancements, high turnover of customer
personnel who make buying decisions, and changing customer needs and
preferences. Consequently, the Company's direct and interactive marketing
business faces competition in both of its sectors - CRM and marketing services.
The Company's shopper business competes for advertising, as well as for readers,
with other print and electronic media. Competition comes from local and regional
newspapers, magazines, radio, broadcast and cable television, shoppers and other
communications media that operate in the Company's markets. The extent and
nature of such competition are, in large part, determined by the location and
demographics of the markets targeted by a particular advertiser, and the number
of media alternatives in those markets. Failure to continually improve the
Company's current processes and to develop new products and services could
result in loss of the Company's customers to current or future competitors. In
addition, failure to gain market acceptance of new products and services could
adversely affect the Company's growth.
Qualified Personnel - The Company believes that its future prospects will depend
in large part upon its ability to attract, train and retain highly skilled
technical, client services and administrative personnel. Qualified personnel are
in great demand and are likely to remain a limited resource for the foreseeable
future.
Postal Rates -- The Company's shoppers are delivered by standard mail, and
postage is the second largest expense, behind payroll, in the Company's shopper
business. The present standard postage rates went into effect in January 1999,
and a rate increase is expected in 2001. Postal rates also influence the demand
for the Company's direct and interactive marketing services even though the cost
of mailings is borne by the Company's customers and is not directly reflected in
the Company's revenues or expenses.
Newsprint Prices -- Newsprint represents a substantial expense in the Company's
shopper operations. In recent years newsprint prices have fluctuated widely, and
such fluctuations can materially affect the results of the Company's operations.
Economic Conditions -- Changes in national economic conditions can affect levels
of advertising expenditures generally, and such changes can affect each of the
Company's businesses. Revenues from the Company's shopper business are dependent
to a large extent on local advertising expenditures in the markets in which they
operate. Such expenditures are substantially affected by the strength of the
local economies in those markets. Direct and interactive marketing revenues are
dependent on national and international economics.
<PAGE> 16
16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on May 2, 2000. At the
meeting the stockholders were requested to vote on the following:
a) To elect David L. Copeland, Dr. Peter T. Flawn and Christopher M. Harte
as Class I directors for a three-year term. The result of the vote was
as follows:
<TABLE>
<CAPTION>
For Withheld
----------- ----------
<S> <C> <C>
David L. Copeland 48,195,471 404,362
Dr. Peter T. Flawn 48,185,962 413,871
Christopher M. Harte 48,193,743 406,090
</TABLE>
The names of each director whose term of office continued are: Larry
Franklin, Houston H. Harte, Richard M. Hochhauser and James L. Johnson.
b) To approve an amendment to the Company's stock option plan that
increases by three million the number of shares of common stock that
may be issued under the plan. The result of the vote was as follows
<TABLE>
<CAPTION>
For Against Abstain
----------- ----------- ---------
<S> <C> <C>
42,393,869 5,601,822 604,142
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See index to Exhibits on Page 18.
(b) No Form 8-K has been filed during the three months ended June
30, 2000.
<PAGE> 17
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
HARTE-HANKS, INC.
August 11, 2000 /s/ Jacques D. Kerrest
--------------- -------------------------------
Date Jacques D. Kerrest
Senior Vice President, Finance and
Chief Financial Officer
<PAGE> 18
18
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
------- ---------------------- --------
<S> <C> <C>
2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a) to the
Company's Registration Statement No. 33-69202 and incorporated by
reference herein).
2(b) Agreement and Plan of Merger dated as of February 4, 1996 among
Harte-Hanks Communications, Inc., HHD Acquisition Corp. and DiMark,
Inc. (filed as Appendix A to the Company's Registration Statement No.
333-02047 and incorporated by reference herein).
2(c) Agreement and Plan of Merger and Reorganization, dated as of May 16,
1997, by and between The E.W. Scripps Company and Harte-Hanks
Communications, Inc. (filed as Exhibit 2.1 to the Company's Form 8-K
dated May 22, 1997 and incorporated by reference herein).
2(d) Acquisition Agreement, dated as of May 16, 1997, by and between The
E.W. Scripps Company and Harte-Hanks Communications, Inc. (filed as
Exhibit 2.2 to the Company's Form 8-K dated May 22, 1997 and
incorporated by reference herein).
2(e) Stock Purchase Agreement dated as of July 26, 1997 between ABC, Inc.
and Harte-Hanks Communications, Inc. (filed as Exhibit 2(e) to the
Company's Form 10-Q for the nine months ended September 30, 1997 and
incorporated by reference herein).
3(a) Amended and Restated Certificate of Incorporation (filed as Exhibit
3(a) to the Company's Form 10-K for the year ended December 31, 1993
and incorporated by reference herein).
3(b) Amended and Restated Bylaws (filed as Exhibit 3(b) to the Company's
Registration Statement No. 33-69202 and incorporated by reference
herein).
3(c) Amendment dated April 30, 1996 to Amended and Restated Certificate of
Incorporation (filed as Exhibit 3(c) to the Company's Form 10-Q for the
nine months ended September 30, 1996 and incorporated by reference
herein).
3(d) Amendment dated May 5, 1998 to Amended and Restated Certificate of
Incorporation (filed as Exhibit 3(d) to the Company's Form 10-Q for the
six months ended June 30, 1998 and incorporated by reference herein).
3(e) Amended and Restated Certificate of Incorporation as amended through
May 5, 1998 (filed as Exhibit 3(e) to the Company's Form 10-Q for the
six months ended June 30, 1998 and incorporated by reference herein).
4(a) 364-Day Credit Agreement dated as of November 4, 1999 between
Harte-Hanks, Inc. and the Lenders named therein [$100 million] (filed
as Exhibit 4(a) to the Company's form 10-Q for the nine months ended
September 30, 1999 and incorporated by reference herein).
</TABLE>
<PAGE> 19
19
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
------- ---------------------- --------
<S> <C> <C>
4(b) Three-Year Credit Agreement dated as of November 4, 1999 between
Harte-Hanks, Inc. and the Lenders named therein [$100 million] (filed
as Exhibit 4(b) to the Company's form 10-Q for the nine months ended
September 30, 1999 and incorporated by reference herein).
4(c) Other long term debt instruments are not being filed pursuant to
Section (b)(4)(ii) of Item 601 of Regulation S-K. Copies of such
instruments will be furnished to the Commission upon request.
10(a) 1984 Stock Option Plan (filed as Exhibit 10(d) to the Company's Form
10-K for the year ended December 31, 1984 and incorporated herein by
reference).
10(b) Registration Rights Agreement dated as of September 11, 1984 among HHC
Holding Inc. and its stockholders (filed as Exhibit 10(b) to the
Company's Form 10-K for the year ended December 31, 1993 and
incorporated by reference herein).
10(c) Severance Agreement between Harte-Hanks Communications, Inc. and Larry
Franklin, dated as of July 23, 1993 (filed as Exhibit 10(f) to the
Company's Registration Statement No. 33-69202 and incorporated by
reference herein).
10(d) Form of Severance Agreement between Harte-Hanks Communications, Inc.
and certain Executive Officers of the Company, dated as of July 7 or
December 28,1997 (filed as Exhibit 10(f) to the Company's Form 10-K for
the year ended December 31, 1997 and incorporated by reference herein).
10(e) Form of Severance Agreement between Harte-Hanks, Inc. and Richard M.
Hochhauser dated as of January 25, 2000 (filed as Exhibit 10(e) to the
Company's Form 10-K for the year ended December 31, 1999 and
incorporated by reference herein).
10(f) Harte-Hanks, Inc. Amended and Restated Restoration Pension Plan dated
as of January 1, 2000 (filed as Exhibit 10(f) to the Company's Form
10-K for the year ended December 31, 1999 and Incorporated by reference
herein).
10(g) Harte-Hanks Communications, Inc. 1996 Incentive Compensation Plan
(filed as Exhibit 10(p) to the Company's Form 10-Q for the nine months
ended September 30, 1996 and incorporated by reference herein).
*10(h) Harte-Hanks, Inc. Amended and Restated 1991 Stock Option Plan. 20
10(i) Harte-Hanks, Inc. 1998 Director Stock Plan (filed as Exhibit 10(h) to
the Company's Form 10-Q for the six months ended June 30, 1998 and
incorporated by reference herein).
10(j) Harte-Hanks, Inc. Deferred Compensation Plan (filed as Exhibit 10(i) to
the Company's Form 10-K for the year ended December 31, 1998 and
incorporate by reference herein).
*11 Statement Regarding Computation of Net Income (Loss) Per Common Share. 27
*21 Subsidiaries of the Company. 28
*27 Financial Data Schedule. 29
</TABLE>
----------
*Filed herewith
