<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 September 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, 67,160,214 shares as of October 31, 2000.
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2
HARTE-HANKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
September 30, 2000
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Interim Condensed Consolidated Financial
Statements (Unaudited)
Condensed Consolidated Balance Sheets - 3
September 30, 2000 and December 31, 1999
Consolidated Statements of Operations - 4
Three months ended September 30, 2000 and 1999
Consolidated Statements of Operations - 5
Nine months ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows - 6
Nine months ended September 30, 2000 and 1999
Consolidated Statements of Stockholders' Equity - 7
Nine months ended September 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 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
Signature 17
</TABLE>
<PAGE> 3
3
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (in thousands, except share amounts)
--------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents ....................... $ 40,585 $ 35,196
Accounts receivable, net ........................ 162,283 154,030
Inventory ....................................... 6,262 7,099
Prepaid expenses ................................ 12,535 12,651
Current deferred income tax asset ............... 7,408 6,848
Other current assets ............................ 4,723 4,309
------------ ------------
Total current assets .......................... 233,796 220,133
Property, plant and equipment, net .................. 110,553 106,250
Goodwill, net ....................................... 408,320 409,791
Other assets ........................................ 20,707 33,253
------------ ------------
Total assets .................................. $ 773,376 $ 769,427
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ................................ $ 45,105 $ 64,812
Accrued payroll and related expenses ............ 27,515 25,511
Customer deposits and unearned revenue .......... 38,074 35,622
Income taxes payable ............................ 8,803 13,667
Other current liabilities ....................... 20,018 14,405
------------ ------------
Total current liabilities ..................... 139,515 154,017
Long-term debt ...................................... 3,288 5,000
Other long-term liabilities ......................... 39,025 32,792
------------ ------------
Total liabilities ............................. 181,828 191,809
------------ ------------
Stockholders' equity
Common stock, $1 par value, 250,000,000 shares
authorized. 76,761,490 and 76,392,063 shares
issued at September 30, 2000 and December 31,
1999, respectively .............................. 76,761 76,392
Additional paid-in capital ........................ 202,001 197,454
Accumulated other comprehensive income (loss) ..... (500) 12,316
Retained earnings ................................. 548,544 493,362
------------ ------------
826,806 779,524
Less treasury stock: 9,616,389 and 8,285,966
shares at cost at September 30, 2000 and
December 31, 1999, respectively ................. (235,258) (201,906)
------------ ------------
Total stockholders' equity ...................... 591,548 577,618
------------ ------------
Total liabilities and stockholders' equity ...... $ 773,376 $ 769,427
============ ============
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 4
4
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Operations (in thousands, except per share amounts)
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating revenues ..................................... $ 243,205 $ 207,632
--------- ---------
Operating expenses
Payroll ........................................... 86,852 74,677
Production and distribution ....................... 86,047 75,336
Advertising, selling, general and administrative .. 23,676 18,681
Depreciation ...................................... 7,394 6,097
Goodwill and intangible amortization .............. 3,836 2,578
--------- ---------
207,805 177,369
--------- ---------
Operating income ....................................... 35,400 30,263
--------- ---------
Other expenses (income)
Interest expense .................................. 275 67
Interest income ................................... (619) (1,554)
Other, net ........................................ 312 280
--------- ---------
(32) (1,207)
--------- ---------
Income before income taxes ............................. 35,432 31,470
Income tax expense ..................................... 14,300 12,867
--------- ---------
Net income ............................................. $ 21,132 $ 18,603
========= =========
Basic:
Earnings per common share ......................... $ 0.31 $ 0.27
========= =========
Weighted-average common shares outstanding ........ 67,519 69,487
========= =========
Diluted:
Earnings per common share ......................... $ 0.30 $ 0.26
========= =========
Weighted-average common and common equivalent
shares outstanding .............................. 69,782 71,715
========= =========
</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>
Nine months ended September 30,
-------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating revenues ..................................... $ 704,955 $ 592,793
--------- ---------
Operating expenses
Payroll ........................................... 260,151 216,045
Production and distribution ....................... 242,761 217,521
Advertising, selling, general and administrative .. 68,523 49,675
Depreciation ...................................... 21,050 17,362
Goodwill and intangible amortization .............. 11,073 7,385
--------- ---------
603,558 507,988
--------- ---------
Operating income ....................................... 101,397 84,805
--------- ---------
Other expenses (income)
Interest expense .................................. 749 157
Interest income ................................... (1,644) (5,403)
Other, net ........................................ 1,125 637
--------- ---------
230 (4,609)
--------- ---------
Income before income taxes ............................. 101,167 89,414
Income tax expense ..................................... 40,886 36,709
--------- ---------
Net income ............................................. $ 60,281 $ 52,705
========= =========
Basic:
Earnings per common share ......................... $ 0.89 $ 0.75
========= =========
Weighted-average common shares outstanding ........ 68,043 70,400
========= =========
Diluted:
Earnings per common share ......................... $ 0.86 $ 0.73
========= =========
Weighted-average common and common equivalent
shares outstanding .............................. 70,192 72,700
========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 6
6
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating Activities
Net income ......................................................... $ 60,281 $ 52,705
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation .................................................. 21,050 17,362
Goodwill and intangible amortization .......................... 11,073 7,385
Amortization of option-related compensation ................... 418 494
Deferred income taxes ......................................... 3,878 7,220
Other, net .................................................... 961 224
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable, net .......................... (6,220) (3,274)
Decrease in inventory ......................................... 837 739
Increase in prepaid expenses and other
current assets ........................................... (246) (5,762)
Increase (decrease) in accounts payable ....................... (12,874) 4,237
Increase in other accrued expenses
and other liabilities .................................... 2,524 8,266
Other, net .................................................... (5,406) (2,095)
--------- ---------
Net cash provided by operating activities ................ 76,276 87,501
--------- ---------
Investing Activities
Acquisitions ....................................................... (9,207) (36,051)
Purchases of property, plant and equipment ......................... (26,125) (21,065)
Proceeds from sale of property, plant and equipment ................ 144 488
Net sales and maturities of
available-for-sale investments ................................ 88 136,479
Other .............................................................. -- (3,000)
--------- ---------
Net cash provided by (used in) investing
activities ............................................. (35,100) 76,851
--------- ---------
Financing Activities
Long-term borrowings ............................................... 3,288 --
Repayment of long-term borrowings .................................. (5,000) --
Issuance of common stock ........................................... 4,369 5,916
Purchase of treasury stock ......................................... (33,406) (72,473)
Issuance of treasury stock ......................................... 61 66
Dividends paid ..................................................... (5,099) (4,210)
--------- ---------
Net cash used in financing
activities ............................................. (35,787) (70,701)
--------- ---------
Net increase in cash ............................................... 5,389 93,651
Cash and cash equivalents at beginning of year ..................... 35,196 30,367
--------- ---------
Cash and cash equivalents at end of period ......................... $ 40,585 $ 124,018
========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 7
7
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (in thousands)
--------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
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 ...... 148 3,121 -- -- -- 3,269
Exercise of stock options ...... 379 2,268 -- -- -- 2,647
Tax benefit of options
exercised ................... -- 1,468 -- -- -- 1,468
Dividends paid ($0.06 per
share) ...................... -- -- (4,210) -- -- (4,210)
Treasury stock repurchase ...... -- -- -- (72,473) -- (72,473)
Treasury stock issued .......... -- 20 -- 46 -- 66
Comprehensive income, net of tax:
Net income .................. -- -- 52,705 -- -- 52,705
----------
Total comprehensive income ..... 52,705
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1999 .. $ 76,316 $ 196,575 $ 474,494 $ (186,822) $ -- $ 560,563
========== ========== ========== ========== ========== ==========
Balance at January 1, 2000 ..... $ 76,392 $ 197,454 $ 493,362 $ (201,906) $ 12,316 $ 577,618
Common stock issued-
employee benefit plans ...... 142 2,832 -- -- -- 2,974
Exercise of stock options ...... 227 1,168 -- -- -- 1,395
Tax benefit of options
exercised ................... -- 540 -- -- -- 540
Dividends paid ($0.075 per
share) ...................... -- -- (5,099) -- -- (5,099)
Treasury stock repurchase ...... -- -- -- (33,406) -- (33,406)
Treasury stock issued .......... -- 7 -- 54 -- 61
Comprehensive income, net of tax:
Net income .................. -- -- 60,281 -- -- 60,281
Foreign currency
translation adjustment ... -- -- -- -- (1,512) (1,512)
Change in net unrealized
gain (loss) on long-
term investments (net
of tax of $6,087) ........ -- -- -- -- (11,304) (11,304)
----------
Total comprehensive income ..... 47,465
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 2000 .. $ 76,761 $ 202,001 $ 548,544 $ (235,258) $ (500) $ 591,548
========== ========== ========== ========== ========== ==========
</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 nine months ended September 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 nine month income tax provision of $14.3 million and
$40.9 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
September 30,
------------------
In thousands, except per share amount 2000 1999
------- -------
<S> <C> <C>
BASIC EPS
Net Income ...................................................... $21,132 $18,603
======= =======
Weighted-average common shares outstanding
used in earnings per share computations ....................... 67,519 69,487
======= =======
Earnings per common share ....................................... $ 0.31 $ 0.27
======= =======
DILUTED EPS
Net Income ...................................................... $21,132 $18,603
======= =======
Shares used in earnings per share computations .................. 69,782 71,715
======= =======
Earnings per common share ....................................... $ 0.30 $ 0.26
======= =======
Computation of shares used in earnings per share computations:
Average outstanding common shares ............................... 67,519 69,487
Average common equivalent shares -
dilutive effect of option shares .............................. 2,263 2,228
------- -------
Shares used in earnings per share computations .................. 69,782 71,715
======= =======
</TABLE>
<PAGE> 9
9
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
In thousands, except per share amount 2000 1999
------------------------------------- ------- -------
<S> <C> <C>
BASIC EPS
Net Income ...................................................... $60,281 $52,705
======= =======
Weighted-average common shares outstanding
used in earnings per share computations ....................... 68,043 70,400
======= =======
Earnings per common share ....................................... $ 0.89 $ 0.75
======= =======
DILUTED EPS
Net Income ...................................................... $60,281 $52,705
======= =======
Shares used in earnings per share computations .................. 70,192 72,700
======= =======
Earnings per common share ....................................... $ 0.86 $ 0.73
======= =======
Computation of shares used in earnings per share computations:
Average outstanding common shares ............................... 68,043 70,400
Average common equivalent shares -
dilutive effect of option shares .............................. 2,149 2,300
------- -------
Shares used in earnings per share computations .................. 70,192 72,700
======= =======
</TABLE>
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
September 30,
-----------------------
In thousands 2000 1999
------------ --------- ---------
<S> <C> <C>
Operating revenues
Direct Marketing ....................... $ 165,608 $ 137,639
Shoppers ............................... 77,597 69,993
--------- ---------
Total operating revenues ........... $ 243,205 $ 207,632
========= =========
Operating income
Direct Marketing ....................... $ 21,544 $ 18,898
Shoppers ............................... 15,603 13,223
Corporate Activities ................... (1,747) (1,858)
--------- ---------
Total operating income ............. $ 35,400 $ 30,263
========= =========
Income before income taxes
Operating income ....................... $ 35,400 $ 30,263
Interest expense ....................... (275) (67)
Interest income ........................ 619 1,554
Other, net ............................. (312) (280)
--------- ---------
Total income before income taxes ... $ 35,432 $ 31,470
========= =========
</TABLE>
<PAGE> 10
10
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
In thousands 2000 1999
------------ --------- ---------
<S> <C> <C>
Operating revenues
Direct Marketing ....................... $ 481,150 $ 391,588
Shoppers ............................... 223,805 201,235
--------- ---------
Total operating revenues ........... $ 704,955 $ 592,793
========= =========
Operating income
Direct Marketing ....................... $ 65,094 $ 54,706
Shoppers ............................... 42,549 35,766
Corporate Activities ................... (6,246) (5,667)
--------- ---------
Total operating income ............. $ 101,397 $ 84,805
========= =========
Income before income taxes
Operating income ....................... $ 101,397 $ 84,805
Interest expense ....................... (749) (157)
Interest income ........................ 1,644 5,403
Other, net ............................. (1,125) (637)
--------- ---------
Total income before income taxes ... $ 101,167 $ 89,414
========= =========
</TABLE>
NOTE E - COMPREHENSIVE INCOME
The Company's total comprehensive income for the third quarter 2000 was $4.0
million less than net income, whereas comprehensive income for the third quarter
1999 was equal to net income. The majority of the difference in the third
quarter of 2000 was attributable to changes in the fair market value of
available-for-sale investments.
<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 NINE MONTHS ENDED
In thousands SEPT. 30, 2000 SEPT. 30, 1999 CHANGE SEPT. 30, 2000 SEPT. 30, 1999 CHANGE
------------ -------------- -------------- ------ -------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 243,205 $ 207,632 17.1% $ 704,955 $ 592,793 18.9%
Operating expenses 207,805 177,369 17.2% 603,558 507,988 18.8%
----------- ---------- ----------- ----------
Operating income $ 35,400 $ 30,263 17.0% $ 101,397 $ 84,805 19.6%
=========== ========== =========== ==========
Net income $ 21,132 $ 18,603 13.6% $ 60,281 $ 52,705 14.4%
=========== ========== =========== ==========
Diluted earnings
per share $ 0.30 $ 0.26 15.4% $ 0.86 $ 0.73 17.8%
=========== ========== =========== ==========
</TABLE>
Consolidated revenues grew 17.1% to $243.2 million and operating income grew
17.0% to $35.4 million in the third quarter of 2000 when compared to the third
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
17.2% to $207.8 million.
Net income grew 13.6% to $21.1 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, partially offset by a decrease of $0.9 million in
interest income.
DIRECT MARKETING
Direct and interactive marketing operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 2000 SEPT. 30, 1999 CHANGE SEPT. 30, 2000 SEPT. 30, 1999 CHANGE
------------ -------------- -------------- ------ -------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 165,608 $ 137,639 20.3% $ 481,150 $ 391,558 22.9%
Operating expenses 144,064 118,741 21.3% 416,056 336,852 23.5%
----------- ---------- ----------- ----------
Operating income $ 21,544 $ 18,898 14.0% $ 65,094 $ 54,706 19.0%
=========== ========== =========== ==========
</TABLE>
Direct and interactive marketing revenues increased $28.0 million, or 20.3%, in
the third 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, mutual fund and healthcare industry sectors contributed
significantly to overall CRM revenue growth, offsetting continued slowdowns in
the insurance industry. Marketing services experienced increased revenues from
the banking, automotive and mutual fund industry sectors, offset by a slowdown
in the retail industry sector. Fourth quarter results could be affected by
continued softness in the retail industry, the largest industry sector served by
direct and interactive marketing.
Operating expenses increased $25.3 million, or 21.3%, in the third quarter of
2000 compared to 1999. Payroll costs increased $11.2 million due to expanded
hiring to support future revenue growth. Also contributing to the increased
operating expenses were additional production costs of $7.0 million due to
<PAGE> 12
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increased volumes. General and administrative expense increased $4.2 million due
to increased employee expenses and professional and business services fees.
Depreciation and amortization expense increased $2.5 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 $89.6 million, or 22.9%, in
the first nine months of 2000 compared to the first nine months of 1999. Both
CRM and marketing services experienced strong revenue growth in the first nine
months of 2000. Overall, revenue growth resulted from increased business with
both new and existing customers, particularly customers in the high-technology,
mutual fund and non-bank finance industries, and the acquisition noted above.
Operating expenses rose $79.2 million, or 23.5%, in the first nine months of
2000 compared to the first nine months of 1999. Payroll costs increased $38.5
million due to expanded hiring to support revenue growth. In addition,
production costs increased $18.1 million due to increased volumes. General and
administrative expense increased $14.6 million primarily due to increased
employee expenses and professional and business services fees. Depreciation and
amortization expense increased $7.2 million due to goodwill associated with
acquisitions and higher levels of capital investment to support growth. The
acquisition mentioned above also contributed to the increased operating
expenses.
SHOPPERS
Shopper operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 2000 SEPT. 30, 1999 CHANGE SEPT. 30, 2000 SEPT. 30, 1999 CHANGE
------------ -------------- -------------- ------ -------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 77,597 $ 69,993 10.9% $ 223,805 $ 201,235 11.2%
Operating expenses 61,994 56,770 9.2% 181,256 165,469 9.5%
----------- ---------- ----------- ----------
Operating income $ 15,603 $ 13,223 18.0% $ 42,549 $ 35,766 19.0%
=========== ========== =========== ==========
</TABLE>
Shopper revenues increased $7.6 million, or 10.9%, in the third 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 in both California and Florida. From a product-line perspective,
Shoppers had growth in both its in-book products, primarily core sales and
employment and automotive related advertising, and its distribution products,
primarily preprinted inserts and 4-color glossy heatset flyers. Shoppers also
experienced continued success in up-selling ads onto its web-site. In the
quarter, Shoppers experienced softness in its real-estate and personals
advertising sectors.
Operating expenses increased $5.2 million, or 9.2%, in the third quarter of 2000
compared to 1999. The increase in operating expenses was primarily due to
increases in payroll costs of $1.4 million, increases in postage of $1.8 million
due to increased volumes, and increases in paper costs of $1.0 million due to
increased volumes and rate increases in newsprint and job paper.
Shopper revenues increased $22.6 million, or 11.2%, in the first nine months of
2000 compared to the first nine 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 in both California and Florida.
From a product-line perspective, Shoppers had growth in both its in-book
products, primarily employment and automotive related advertising and core
sales, and its distribution products, primarily 4-color glossy heatset flyers
and pre-printed inserts. Shoppers also experienced growth from up-selling ads
<PAGE> 13
13
onto its web-site. In the first nine months of 2000, Shoppers experienced
slowdowns in its real-estate and personals advertising sectors.
Operating expenses increased $15.8 million, or 9.5%, in the first nine months of
2000 compared to the first nine months of 1999. The increase in operating
expenses was primarily due to increases in payroll costs of $5.5 million,
increases in postage of $3.9 million due to increased volumes, and increases in
paper costs of $1.6 due to increased volumes and paper rates.
Other Income and Expense
The Company realized a loss of approximately $1.0 million in the first nine
months of 2000 on the disposal of certain fixed assets. In addition, the Company
wrote off approximately $0.4 million of other assets in the first nine months of
2000. These expenses were partially offset by a $0.4 million gain in the third
quarter of 2000 on the sale of equity securities that were held in its
investment portfolio.
Interest Expense/Interest Income
Interest income decreased $0.9 million in the third quarter of 2000 and $3.8
million in the first nine months of 2000 when compared to the same periods in
1999. The decrease in the first nine months of 2000 when compared to the same
period in 1999 was due to larger cash and investment balances in the first nine
months 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.
Income Taxes
The Company's income tax expense increased $1.4 million in the third quarter of
2000 and $4.2 million in the first nine 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 third quarter and the first
nine months of 2000 compared to 40.9% for the third quarter of 1999 and 41.1%
for the first nine months of 1999.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended September 30,
2000 was $76.3 million. Net cash outflows from investing activities were $35.1
million for the first nine months of 2000 compared to net cash inflows of $76.9
million for the first nine 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 $136.5 million, the proceeds of which were used to fund
acquisitions and to repurchase the Company's stock. Net cash outflows from
financing activities were $35.8 million in 2000 compared to net cash outflows of
$70.7 million in 1999. The cash outflows from financing activities in 2000 and
1999 are attributable primarily to the repurchase of the Company's stock of
$33.4 million and $72.5 million in the first nine months of 2000 and 1999,
respectively.
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 Three-Year Credit Agreement are to
be repaid by November 4, 2002. On November 2, 2000 the Company was granted a
364-day extension to its $100 million revolving 364-Day Credit Agreement. All
borrowings under the 364-Day Credit Agreement are to be repaid by November 1,
2001. As of September 30, 2000, the Company had $200
<PAGE> 14
14
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 $3.3 million variable rate,
revolving loan commitment was put in place on November 29, 1999 and has no
stated maturity. No unused borrowing capacity is available from this credit
facility as of September 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.
Recent Developments
On November 1, 2000, the Company acquired Detroit-based Information Resources
Group, a leading provider of business-to-business intelligence solutions to the
technology, communications and other industries. The Company utilized its
existing cash and cash equivalents to fund this acquisition.
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. To the extent that
SAB No. 101 ultimately changes revenue recognition practices, the Company will
adopt SAB No. 101 in 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 have been applied on a prospective basis effective July 1,
2000. Through September 30, 2000 the provisions of Interpretation No 44 have had
no effect on the Company's results of operations.
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
<PAGE> 15
15
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 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 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
September 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.
November 13, 2000 /s/ Jacques D. Kerrest
----------------- ----------------------------------
Date Jacques D. Kerrest
Senior Vice President, Finance and
Chief Financial Officer
<PAGE> 18
18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
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<S> <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
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<S> <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) Amendment No. 2 dated October 30, 2000 to 364-Day Credit Agreement
[$100 million].
4(d) Other long term debt instruments are not being filed pursuant to
Section (b)(4)(iii) 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. 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 (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).
</TABLE>
<PAGE> 20
20
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
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<S> <C>
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.
*21 Subsidiaries of the Company.
*27 Financial Data Schedule.
</TABLE>
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* Filed herewith
