1
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, 1998
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- ---- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 1-7120
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HARTE-HANKS, INC. (formerly HARTE-HANKS COMMUNICATIONS, INC.)
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code -- 210/829-9000
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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, 73,299,355 shares as of July 31, 1998.
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HARTE-HANKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
June 30, 1998
Page
Part I. Financial Information
Item 1. Interim Condensed Consolidated Financial
Statements (Unaudited)
Condensed Consolidated Balance Sheets - 3
June 30, 1998 and December 31, 1997
Consolidated Statements of Operations - 4
Three months ended June 30, 1998 and 1997
Consolidated Statements of Operations - 5
Six months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows - 6
Six months ended June 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity - 7
Six months ended June 30, 1998 and 1997
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
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Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share and share amounts)
- -------------------------------------------------------------------------------
(Unaudited)
June 30, December 31,
1998 1997
------------ ------------
Assets
Current assets
Cash and cash equivalents ........................ $ 57,572 $ 83,675
Short-term investments ........................... 170,408 388,145
Accounts receivable, net ......................... 115,681 109,340
Inventory ........................................ 6,107 7,703
Prepaid expenses ................................. 10,246 8,473
Current deferred income tax benefit .............. 11,738 12,518
Other current assets ............................. 2,647 3,285
--------- ---------
Total current assets ........................... 374,399 613,139
Property, plant and equipment, net ................. 88,332 89,351
Goodwill, net ...................................... 244,645 250,363
Other assets ....................................... 7,165 2,070
--------- ---------
Total assets ................................... $ 714,541 $ 954,923
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ................................. $ 52,821 $ 49,918
Accrued payroll and related expenses ............. 19,348 23,097
Customer deposits and unearned revenue ........... 20,122 17,944
Income taxes payable ............................. 4,370 270,440
Other current liabilities ........................ 6,922 9,950
--------- ---------
Total current liabilities ...................... 103,583 371,349
Other long term liabilities ........................ 19,376 17,337
--------- ---------
Total liabilities .............................. 122,959 388,686
--------- ---------
Stockholders' equity
Common stock, $1 par value, 250,000,000 shares
authorized. 75,429,883 and 74,842,982 shares
issued at June 30, 1998 and December 31, 1997,
respectively ................................... 75,430 74,843
Additional paid-in capital ....................... 182,363 177,238
Accumulated other comprehensive income ........... -- (577)
Retained earnings ................................ 390,906 362,000
--------- ---------
648,699 613,504
Less treasury stock: 2,092,708 and 1,648,608
shares at cost at June 30, 1998 and December 31,
1997, respectively ............................. (57,117) (47,267)
--------- ---------
Total stockholders' equity ..................... 591,582 566,237
--------- ---------
Total liabilities and stockholders' equity ..... $ 714,541 $ 954,923
========= =========
See Notes to Interim Condensed Consolidated Financial Statements.
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Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
- -------------------------------------------------------------------------------
(Unaudited)
Three Months Ended June 30,
---------------------------
1998 1997
---- ----
Operating revenues ............................... $ 186,806 $ 150,964
--------- ---------
Operating expenses
Payroll ........................................ 65,422 56,143
Production and distribution .................... 71,896 56,316
Advertising, selling, general and
administrative................................ 15,671 13,543
Depreciation ................................... 5,226 4,072
Goodwill amortization .......................... 1,903 1,125
--------- ---------
160,118 131,199
--------- ---------
Operating income ................................. 26,688 19,765
--------- ---------
Other expenses (income)
Interest expense ............................... 59 1,854
Interest income ................................ (2,766) (7)
Other, net ..................................... 168 (566)
--------- ---------
(2,539) 1,281
--------- ---------
Income from continuing operations before income
taxes .......................................... 29,227 18,484
Income tax expense ............................... 12,217 7,844
--------- ---------
Income from continuing operations ................ 17,010 10,640
Income from discontinued operations,
net of income taxes ............................ -- 5,705
--------- ---------
Net income ....................................... $ 17,010 $ 16,345
========= =========
Basic earnings per common share:
Continuing operations .......................... $ 0.23 $ 0.14
Discontinued operations ........................ -- 0.08
--------- ---------
Basic earnings per common share .............. $ 0.23 $ 0.22
========= =========
Weighted-average common shares outstanding ....... 73,541 74,558
========= =========
Diluted earnings per common share:
Continuing operations .......................... $ 0.22 $ 0.14
Discontinued operations ........................ -- 0.07
--------- ---------
Diluted earnings per common share ............ $ 0.22 $ 0.21
========= =========
Weighted-average common and common equivalent
shares outstanding ........................... 77,212 77,664
========= =========
See Notes to Interim Condensed Consolidated Financial Statements.
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Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
- -------------------------------------------------------------------------------
(Unaudited)
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
Operating revenues ............................... $ 364,479 $ 289,388
--------- ---------
Operating expenses
Payroll ........................................ 132,256 109,821
Production and distribution .................... 139,077 109,410
Advertising, selling, general and
administrative ............................... 32,912 27,653
Depreciation ................................... 10,592 8,041
Goodwill amortization .......................... 3,829 2,205
--------- ---------
318,666 257,130
--------- ---------
Operating income ................................. 45,813 32,258
--------- ---------
Other expenses (income)
Interest expense ............................... 129 3,765
Interest income ................................ (8,381) (50)
Other, net ..................................... 861 (321)
--------- ---------
(7,391) 3,394
--------- ---------
Income from continuing operations before income
taxes .......................................... 53,204 28,864
Income tax expense ............................... 22,089 12,256
--------- ---------
Income from continuing operations ................ 31,115 16,608
Income from discontinued operations,
net of income taxes ............................ -- 9,754
--------- ---------
Net income ....................................... $ 31,115 $ 26,362
========= =========
Basic earnings per common share:
Continuing operations .......................... $ 0.42 $ 0.22
Discontinued operations ........................ -- 0.13
--------- ---------
Basic earnings per common share .............. $ 0.42 $ 0.35
========= =========
Weighted-average common shares outstanding ....... 73,511 74,410
========= =========
Diluted earnings per common share:
Continuing operations .......................... $ 0.40 $ 0.21
Discontinued operations ........................ -- 0.13
--------- ---------
Diluted earnings per common share ............ $ 0.40 $ 0.34
========= =========
Weighted-average common and common equivalent
shares outstanding ............................. 77,170 77,566
========= =========
See Notes to Interim Condensed Consolidated Financial Statements.
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Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
- ----------------------------------------------------------------------------------------
(Unaudited)
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
Operating Activities
Net income .......................................... $ 31,115 $ 26,362
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Income from discontinued operations ............... -- (9,754)
Depreciation ...................................... 10,592 8,041
Goodwill amortization ............................. 3,829 2,205
Amortization of option related compensation ....... 290 406
Deferred income taxes ............................. (601) 1,101
Other, net ........................................ 906 528
Changes in operating assets and liabilities, net of
acquisitions:
(Increase) decrease in accounts receivable, net ..... (6,341) 9,386
Decrease in inventory ............................... 1,596 1,545
Increase in prepaid expenses and other
current assets .................................. (1,135) (1,777)
Increase (decrease) in accounts payable ........... 2,903 (1,384)
Decrease in other accrued expenses
and other liabilities ........................... (5,019) (6,121)
Other, net ........................................ 4,411 6,717
--------- ---------
Net cash provided by continuing operations ..... 42,546 37,255
--------- ---------
Net cash (used in) provided by discontinued
operating activities ............................ (265,650) 16,375
--------- ---------
Net cash (used in) provided by operating
activities .................................... (223,104) 53,630
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Investing Activities
Acquisitions ........................................ (2,275) (5,949)
Purchases of property, plant and equipment .......... (10,419) (15,138)
Proceeds from sale of property, plant and equipment . 117 1,760
Net proceeds from sale of and maturities of
available-for-sale short-term investments ....... 217,293 --
Discontinued operations:
Purchases of property, plant and equipment ........ -- (2,288)
Proceeds from sale of property, plant and
equipment ....................................... -- 16
Payments on film contracts ........................ -- (919)
--------- ---------
Net cash provided by (used in) investing
activities .................................... 204,716 (22,518)
--------- ---------
Financing Activities
Long-term borrowings ................................ -- 193,300
Payments on debt, including current maturities ..... -- (217,665)
Issuance of common stock ............................ 4,344 10,372
Purchase of treasury stock .......................... (9,850) (13,494)
Dividends paid ...................................... (2,209) (1,486)
--------- ---------
Net cash used in financing activities ........... (7,715) (28,973)
--------- ---------
Net (decrease) increase in cash ..................... (26,103) 2,139
Cash and cash equivalents at beginning of year ...... 83,675 12,017
--------- ---------
Cash and cash equivalents at end of period .......... $ 57,572 $ 14,156
========= =========
See Notes to Interim Condensed Consolidated Financial Statements.
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Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
- -------------------------------------------------------------------------------
(Unaudited)
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
In thousands Stock Capital Earnings Stock Income Equity
----------- ----------- --------- --------- -------------- ------------
Balance at January 1, 1997 ... $ 73,604 $ 149,875 $ 29,213 $ -- $ -- $ 252,692
Common stock issued - employee
benefit plans ............ 154 1,703 -- -- -- 1,857
Exercise of stock options .... 1,902 6,749 -- -- -- 8,651
Tax benefit of options
exercised ................ -- 5,764 -- -- -- 5,764
Dividends paid ($0.02 per
share) ................... -- -- (1,486) -- -- (1,486)
Net income ................... -- -- 26,362 -- -- 26,362
Treasury stock repurchase .... (542) 542 -- (13,494) -- (13,494)
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1997 ..... $ 75,118 $ 164,633 $ 54,089 $ (13,494) $ -- $ 280,346
========= ========= ========= ========= ========= =========
Balance at January 1, 1998 ... $ 74,843 $ 177,238 $ 362,000 $ (47,267) $ (577) $ 566,237
Common stock issued - employee
benefit plans ............ 111 1,982 -- -- -- 2,093
Exercise of stock options .... 476 1,766 -- -- -- 2,242
Tax benefit of options
exercised ................ -- 1,377 -- -- -- 1,377
Dividends paid ($0.03 per
share) ................... -- -- (2,209) -- -- (2,209)
Net income ................... -- -- 31,115 -- -- 31,115
Treasury stock repurchase .... -- -- -- (9,850) -- (9,850)
Change in unrealized loss on
short-term investments
(net of tax) ................. -- -- -- -- 577 577
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1998 ..... $ 75,430 $ 182,363 $ 390,906 $ (57,117) $ -- $ 591,582
========= ========= ========= ========= ========= =========
See Notes to Interim Condensed Consolidated Financial Statements.
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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, 1998 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, 1997.
Certain prior period amounts have been reclassified for comparative purposes.
NOTE B - DISCONTINUED NEWSPAPER AND TELEVISION OPERATIONS
On October 15, 1997, the Company sold its newspaper operations, KENS-TV, the CBS
affiliate in San Antonio, and KENS-AM radio to the E.W. Scripps Company (NYSE:
SSP) for a cash price of $775 million plus approximately $15 million for working
capital.
Because the newspaper and television operations represent entire business
segments that were divested, their results are reported as "discontinued
operations" for January 1, 1997 through October 15, 1997.
NOTE C - INCOME TAXES
The Company's quarterly and six month income tax provision of $12.2 million and
$22.1 million, respectively, was calculated using an effective income tax rate
of approximately 42%. The Company's effective income tax rate is derived by
estimating pretax income and income tax expense for the year ended December 31,
1998. 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 D - EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." This statement requires the
presentation of basic earnings per share (EPS) and diluted EPS for reporting
periods of all public companies ending after December 15, 1997, instead of the
primary and fully diluted EPS previously reported. The new standard requires the
restatement of EPS for all periods presented. EPS is calculated as follows:
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Three Months Ended June 30,
In thousands, except per share amount 1998 1997
- ----------------------------------------------------------------------------------------------------
BASIC EPS
Income from continuing operations .................................... $ 17,010 $ 10,640
Income from discontinued operations .................................. -- 5,705
-------- --------
Net Income ........................................................... $ 17,010 $ 16,345
======== ========
Weighted-average common shares outstanding
used in net earnings per share computations ..................... 73,541 74,558
======== ========
Basic earnings per common share:
Continuing operations ........................................... $ 0.23 $ 0.14
Discontinued operations ......................................... -- 0.08
-------- --------
Net income ...................................................... $ 0.23 $ 0.22
======== ========
DILUTED EPS
Income from continuing operations .................................... $ 17,010 $ 10,640
Income from discontinued operations .................................. -- 5,705
-------- --------
Net Income ........................................................... $ 17,010 $ 16,345
======== ========
Shares used in net earnings per share computations ................... 77,212 77,664
======== ========
Diluted earnings per common share:
Continuing operations ........................................... $ 0.22 $ 0.14
Discontinued operations ......................................... -- 0.07
-------- --------
Net income ...................................................... $ 0.22 $ 0.21
======== ========
Computation of shares used in net earnings per share computations:
Average outstanding common shares .................................... 73,541 74,558
Average common equivalent shares -
dilutive effect of option shares ................................ 3,671 3,106
-------- --------
Shares used in net earnings per share computations ................... 77,212 77,664
======== ========
Six Months Ended June 30,
In thousands, except per share amount 1998 1997
- ----------------------------------------------------------------------------------------------------
BASIC EPS
Income from continuing operations .................................... $ 31,115 $ 16,608
Income from discontinued operations .................................. -- 9,754
-------- --------
Net Income ........................................................... $ 31,115 $ 26,362
======== ========
Weighted-average common shares outstanding
used in net earnings per share computations ..................... 73,511 74,410
======== ========
Basic earnings per common share:
Continuing operations ........................................... $ 0.42 $ 0.22
Discontinued operations ......................................... -- 0.13
-------- --------
Net income ...................................................... $ 0.42 $ 0.35
======== ========
DILUTED EPS
Income from continuing operations .................................... $ 31,115 $ 16,608
Income from discontinued operations .................................. -- 9,754
-------- --------
Net Income ........................................................... $ 31,115 $ 26,362
======== ========
Shares used in net earnings per share computations ................... 77,170 77,566
======== ========
Diluted earnings per common share:
Continuing operations ........................................... $ 0.40 $ 0.21
Discontinued operations ......................................... -- 0.13
-------- --------
Net income ...................................................... $ 0.40 $ 0.34
======== ========
Computation of shares used in net earnings per share computations:
Average outstanding common shares .................................... 73,511 74,410
Average common equivalent shares -
dilutive effect of option shares ................................ 3,659 3,156
-------- --------
Shares used in net earnings per share computations ................... 77,170 77,566
======== ========
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NOTE E - COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income." This statement requires the reporting of comprehensive income and its
components in the financial statements, or in the notes to interim financial
statements, for reporting periods ending after December 15, 1997. Comprehensive
income is defined as the total non-owner changes in equity, which includes net
income and all revenues, expenses, gains and losses that are excluded from net
income under generally accepted accounting principles, but do not result from
investments by owners or distributions to owners. The Company's total
comprehensive income for the second quarter 1998 was $0.6 million greater than
net income, whereas comprehensive income for the second quarter 1997 was equal
to net income. Total comprehensive income for the six months ending June 30 of
1998 was also $0.6 million greater than net income, whereas comprehensive
income was equal to net income for the same period of 1997.
NOTE F - STOCKHOLDERS' EQUITY
On March 16, 1998, the Company effected a two-for-one split of its common stock
in the form of a 100% stock dividend paid to holders of record on March 2, 1998.
All share, per share and common stock amounts have been restated to
retroactively reflect the stock split.
In May 1998, the Company amended its Certificate of Incorporation to increase
its total authorized common stock to 250,000,000 shares. The financial
statements reflect this increase in authorized shares of common stock.
NOTE G - RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on the
timing and amount of revenue recognition when licensing, selling, leasing or
otherwise marketing computer software and is effective for transactions entered
into during fiscal years beginning after December 15, 1997. The adoption of the
provisions of SOP 97-2, which were effective as of January 1, 1998, have not
materially affected the Company's financial condition or results of operations.
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2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
As described in Note B of the Notes to Interim Condensed Consolidated Financial
Statements included herein, on October 15, 1997, the Company sold its newspaper
and television operations. Therefore, the newspaper and television operations
results are excluded from management's discussion and analysis of financial
condition and results of operations below.
Operating results from continuing operations -- direct marketing and shoppers --
were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 1998 JUNE 30, 1997 CHANGE JUNE 30, 1998 JUNE 30, 1997 CHANGE
- ------------ ------------- ------------- ------ ------------- ------------- ------
Revenues $186,806 $150,964 23.7% $364,479 $289,388 25.9%
Operating expenses 160,118 131,199 22.0% 318,666 257,130 23.9%
-------- -------- -------- --------
Operating income $ 26,688 $ 19,765 35.0% $ 45,813 $ 32,258 42.0%
======== ======== ======== ========
Net income $ 17,010 $ 10,200 66.8% $ 31,115 $ 16,168 92.4%
======== ======== ======== ========
Diluted earnings
per share $ 0.22 $ 0.13 69.2% $ 0.40 $ 0.21 90.5%
======== ======== ======== ========
(The results above exclude second quarter 1997 and six months ended June 30,
1997 non-recurring income of $0.8 million, or $0.4 million net of income taxes.
This represents a gain on the sale of stock in another company partially offset
by other non-recurring items. Including this gain, net income was $10.6 million
or 14 cents per share.)
Consolidated revenues grew 23.7% to $186.8 million and operating income grew
35.0% to $26.7 million in the second quarter of 1998 when compared to the second
quarter of 1997. The Company's overall growth resulted from increased business
with both new and existing customers and from the sale of new products and
services. Overall operating expenses compared to 1997 increased 22.0% to $160.1
million.
Net income grew 66.8% to $17.0 million, or 22 cents per share, compared to 13
cents per share on a diluted basis. The net income growth resulted from the
growth in operating income as well as from $2.8 million interest income in the
second quarter of 1998 compared to $1.9 million interest expense (allocated
based upon percentage of net assets) for the same period in 1997.
DIRECT MARKETING
Direct marketing operating results were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 1998 JUNE 30, 1997 CHANGE JUNE 30, 1998 JUNE 30, 1997 CHANGE
- ------------ ------------- ------------- ------ ------------- ------------- ------
Revenues $121,565 $100,413 21.1% $235,992 $194,203 21.5%
Operating expenses 105,001 87,685 19.7% 205,352 170,985 20.1%
-------- -------- -------- --------
Operating income $ 16,564 $ 12,728 30.1% $ 30,640 $ 23,218 32.0%
======== ======== ======== ========
Direct marketing revenues increased $21.2 million, or 21.1%, in the second
quarter of 1998 when compared to 1997. Revenues were lead by database marketing,
which had significant revenue growth for the quarter, followed by response
management and marketing services, both of which experienced good internal
revenue growth. Database marketing revenues increased primarily due to the
growth in database processing and in hardware sales. Database marketing revenues
were also impacted by the November 1997 acquisition of Mercantile Software
Systems, which contributed significantly to the increased hardware sales.
Response management revenues increased due to increased telemarketing and
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internet business with existing customers, new customer gains, the November 1997
acquisition of Tele Support Services and to a lesser extent the May 1997 opening
of the Langhorne, PA call center. Marketing services' revenues, led by its
logistics operations, increased due to increased product sales as well as new
product sales to new and existing customers, primarily in the retail industry.
Operating expenses increased $17.3 million, or 19.7%, in the second quarter of
1998 when compared to 1997. Payroll costs increased $5.3 million due to expanded
hiring to support revenue growth. Also contributing to the increased operating
expenses were additional production costs of $8.5 million due to increased
volumes. General and administrative expense increased $2.3 million due to
increased professional and outside services fees and increased employee expenses
related to growth. Depreciation expense increased $1.0 million due to higher
levels of capital investment to support growth. Operating expenses were also
impacted by the acquisitions noted above.
Direct marketing revenues increased $41.8 million, or 21.5%, in the first six
months of 1998 compared to the first six months of 1997. Database marketing,
response management and marketing services all experienced significant revenue
growth. Overall, revenue growth resulted from increased business with both new
and existing customers, particularly in services provided to the retail,
financial services, high technology and insurance industries.
Operating expenses rose $34.4 million, or 20.1%, in the first half of 1998 when
compared to the first half of 1997. Payroll costs increased $12.3 million due to
expanded hiring to support revenue growth. In addition, production costs
increased $14.5 million due to increased volumes. General and administrative
expense increased $5.0 million due to increased professional and outside
services fees as well as an increased provision for bad debt related to the
increased revenues. Depreciation expense increased $2.1 million due to the
higher levels of capital investment. The acquisitions mentioned above also
contributed to the increased operating expenses.
SHOPPERS
Shopper operating results were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 1998 JUNE 30, 1997 CHANGE JUNE 30, 1998 JUNE 30, 1997 CHANGE
- ------------ ------------- ------------- ------ ------------- ------------- ------
Revenues $ 65,241 $ 50,551 29.1% $128,487 $ 95,185 35.0%
Operating expenses 52,785 41,488 27.2% 108,724 81,922 32.7%
-------- -------- -------- --------
Operating income $ 12,456 $ 9,063 37.4% $ 19,763 $ 13,263 49.0%
======== ======== ======== ========
Shopper revenues increased $14.7 million, or 29.1%, in the second quarter of
1998 as compared to 1997. The increase was primarily due to the September 1997
acquisition of the ABC Shopper Group, which accounted for $16.0 million of the
revenue increase, partially offset by the sale of the Dallas-Fort Worth Shoppers
Guide in April 1998 which resulted in a $1.3 million revenue decrease. The
increased revenues were influenced by increased employment-related in-book
revenues and increased distribution product revenues partially offset by
decreased in-book ROP advertising, automotive and real estate in particular, and
declines in standard print and delivery products. Distribution product revenues
increased due to higher volumes in four color glossy print and deliver products
and preprinted inserts.
Operating expenses increased $11.3 million, or 27.2%, in the second quarter of
1998 when compared to 1997. The acquisition of the ABC Shopper Group accounted
for a $13.9 million increase in operating expenses. The sale of the Dallas-Fort
Worth Shoppers Guide resulted in a $1.3 million reduction in operating expenses.
Excluding the acquisition and divestiture mentioned above, operating costs
declined primarily due to decreased labor costs of $1.2 million which were
influenced by improved
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production efficiencies and staff reductions.
Shopper revenues increased $33.3 million, or 35.0%, in the first six months of
1998 compared to the first six months of 1997. The ABC Shopper Group acquisition
accounted for $32.0 million of this increase while the sale of the Dallas-Fort
Worth Shoppers Guide in April 1998 resulted in a $1.2 million revenue decrease.
Excluding the effects of the acquisition and the divestiture discussed above,
revenues grew 2.3% due to growth in preprinted inserts, four-color glossy print
and deliver products, in-book employment related advertising and improved trade
sales. Gains in these categories were partially offset by declines in standard
print and deliver products and in automotive and real estate related in-book
advertising.
Operating expenses rose $26.8 million, or 32.7%, in the first half of 1998 when
compared to the first half of 1997. The acquisition of the ABC Shopper Group
accounted for a $28.5 million increase in operating costs. The sale of the
Dallas-Fort Worth Shoppers Guide resulted in a $1.2 million reduction in
operating expenses. Excluding the acquisition and divestiture mentioned above,
operating costs declined primarily due to decreased labor costs of $1.3 million
which were influenced by improved production efficiencies, staff reductions and
lower fringe benefit costs.
Other Income and Expense
The company realized a loss of approximately $0.4 million in the first quarter
1998 on the sale of equity securities that were held in its short-term
investment portfolio.
Interest Expense/Interest Income
Total Company interest income and expense were allocated to continuing and
discontinued operations based on percentage of net assets through October 15,
1997. The percentage allocated to continuing operations was approximately 58%
for the second quarter and first six months of 1997.
Interest expense decreased $1.8 million in the second quarter of 1998 and $3.6
million in the first six months of 1998 over the same periods in 1997 due to the
extinguishment of debt with the proceeds from the October 15, 1997 sale of the
Company's newspaper and television operations.
Interest income increased $2.8 million in the second quarter of 1998 and $8.3
million in the first six months of 1998 over the same periods in 1997 due to the
short-term investment of the proceeds from the sale of newspaper and television
operations, after debt extinguishment, operational fundings and income tax
payments.
Income Taxes
The Company's income tax expense increased $4.4 million in the second quarter
and $9.8 million in first six months of 1998, when compared to the second
quarter and first six months of 1997. This increase was due primarily to the
higher pre-tax income levels. The effective tax rate was 41.8% for the second
quarter and 41.5% for the first six months of 1998 compared to 42.4% and 42.5%,
respectively for the same periods of 1997.
Liquidity and Capital Resources
Cash used in operating activities for the six months ended June 30, 1998 was
$223.1 million. The cash outflow from operating activities related primarily to
the first quarter 1998 payment of $265.7 million in income taxes, resulting from
the gain on the October 15, 1997 sale of newspaper and television operations.
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Net cash inflows from investing activities were $204.7 million for the first
half of 1998 compared to net cash outflows of $22.5 million for the first half
of 1997. The increase of cash inflows from investing activities was primarily
attributable to sales and maturities of marketable securities totaling $217.3
million, the proceeds of which were used to help fund the Company's tax payments
made in the first quarter of 1998. Net cash outflows from financing activities
were $7.7 million compared to $29.0 million in 1997. The decrease in cash
outflows from financing activities from 1997 is attributed primarily to the
extinguishment of debt in October 1997.
Capital resources were available from and provided through the Company's
unsecured credit facility through October 15, 1997. All borrowings under the
revolving credit facility were to be repaid by December 31, 2001. However, these
outstanding borrowings ($306.3 million) were retired on October 15, 1997, funded
primarily through the proceeds received from the sale of the Company's newspaper
and television operations as described in Note B of the Notes to Interim
Condensed Consolidated Financial Statements included herein.
Management believes that the proceeds from the Company's sale of newspaper and
television operations remaining after the retirement of debt and the payment of
income taxes related to the sale, together with cash provided from operating
activities, will be sufficient to fund operations and anticipated capital
service needs for the foreseeable future.
Divestiture
On May 1, 1998, the Company sold three of its smallest shopper publications,
located in Dallas, TX, Wichita, KS and Springfield, MO, to Central States
Publishing, LLC.
Recent Developments
On July 30, 1998, the Company signed a definitive agreement to acquire
Cornerstone Integrated Services of Austin, Texas, a leading provider of
technical and marketing support to the high-tech industry. The transaction
closed on August 3, 1998.
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.
Acquisitions -- In recent years the Company has made a number of acquisitions in
its direct 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 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 marketing business faces competition in each
of its three sectors -- response management/teleservices, database marketing,
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,
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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.
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 July 1995, and
the next increase is expected in 1999. Postal rates also influence the demand
for the Company's direct 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. In addition, revenues from the Company's shopper business
is 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 marketing revenues are
dependent on national and international economics.
Year 2000 Issue -- The Year 2000 issue is a result of computer programs being
written using two digits rather than four to define the applicable year. The
Company has conducted a comprehensive review of its computer systems to identify
those that could be affected by the Year 2000 issue and has developed an
implementation plan to resolve the issue. The Company is utilizing both internal
and external resources to correct or reprogram, and test the systems for the
year 2000 compliance. It is anticipated that all reprogramming efforts will be
complete by December 31, 1998, allowing adequate time for testing. The Company
is also in the process of obtaining confirmations, from primary processing
vendors and customers, that plans are being developed to address processing of
transactions in the year 2000. The Company does not expect the amounts required
to be expensed over the next eighteen months to have a material effect on its
financial position or results of operations.
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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 5, 1998. At the
meeting the stockholders were requested to vote on the following:
1. To elect Larry Franklin and James L. Johnson as Class II directors for
a three-year term. The result of the vote was as follows:
For Withheld
---------- --------
Larry Franklin 55,222,507 177,048
James L. Johnson 55,222,507 177,048
The names of each director whose term of office continued are: David L.
Copeland, Dr. Peter T. Flawn, Christopher M. Harte, Houston H. Harte
and Richard M. Hochhauser.
2. To approve an amendment to the Company's Certificate of Incorporation
to change the name of the Company to "Harte-Hanks, Inc." The result of
the vote was as follows:
For Against Abstentions
---------- ------- -----------
55,355,837 17,271 26,447
3. To approve an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of common stock from
125,000,000 to 250,000,000. The result of the vote was as follows:
For Against Abstentions
---------- ------- -----------
54,799,965 568,516 31,074
4. To approve the adoption of the Company's 1998 Director Stock Plan.
The result of the vote was as follows:
For Against Abstentions
---------- ------- -----------
54,904,051 388,399 107,105
5. To approve amendments to the Company's 1991 Stock Option Plan. The
result of the vote was as follows:
For Against Abstentions
---------- ------- -----------
54,071,120 1,215,050 113,385
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See index to Exhibits on Page 14.
(b) No Form 8-K has been filed during the three months ended
June 30, 1998.
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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 13, 1998 /s/ Jacques D. Kerrest
--------------- -------------------------------------
Date Jacques D. Kerrest
Senior Vice President, Finance and
Chief Financial and Accounting Officer
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EXHIBIT INDEX
Exhibit
No. Description of Exhibit
- ------- ----------------------
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 six months ended June 30, 1996 and
incorporated by reference herein).
*3(d) Amendment dated May 5, 1998 to Amended and Restated
Certificate of Incorporation.
*3(e) Amended and Restated Certificate of Incorporation as
amended through May 5, 1998.
4(a) 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.
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EXHIBIT INDEX
Exhibit
No. Description of Exhibit
- ------- ----------------------
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) Harte-Hanks, Inc. Pension Restoration Plan (filed as Exhibit
10(j) to the Company's Registration Statement No. 33-69202 and
incorporated by reference herein).
10(f) Harte-Hanks Communications, Inc. 1996 Incentive Compensation
Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the
six months ended June 30, 1996 and incorporated by reference
herein).
*10(g) Harte-Hanks, Inc. Amended and Restated 1991 Stock Option Plan.
*10(h) Harte-Hanks, Inc. 1998 Director Stock Plan.
*11 Statement Regarding Computation of Net Income (Loss) Per Common
Share
*21 Subsidiaries of the Company.
*27 Financial Data Schedule.
- -----------------
*Filed herewith