<PAGE> 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, 1997
-------------
[ ] 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
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HARTE-HANKS COMMUNICATIONS, 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
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(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, 37,341,604 shares as of July 31, 1997.
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2
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
June 30, 1997
<TABLE>
<CAPTION>
Page
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Part I. Financial Information
Item 1. Interim Condensed Consolidated Financial
Statements (Unaudited)
Condensed Consolidated Balance Sheets - 3
June 30, 1997 and December 31, 1996
Consolidated Statements of Operations - 4
Three months ended June 30, 1997 and 1996
Consolidated Statements of Operations - 5
Six months ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows - 6
Six months ended June 30, 1997 and 1996
Consolidated Statement of Stockholders' Equity 7
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 16
</TABLE>
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3
Harte-Hanks Communications, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share and share amounts)
- -------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash ............................................... $ 14,156 $ 12,017
Accounts receivable, net ........................... 99,394 107,559
Inventory .......................................... 12,175 13,720
Prepaid expenses ................................... 8,492 9,445
Current deferred income tax benefit ................ 6,981 6,204
Other current assets ............................... 7,075 4,202
------------ ------------
Total current assets ............................. 148,273 153,147
Net assets of discontinued operations ................ 207,436 210,769
Property, plant and equipment, net ................... 77,458 72,195
Goodwill, net ........................................ 144,740 142,053
Other assets ......................................... 3,313 4,442
------------ ------------
Total assets ..................................... $ 581,220 $ 582,606
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ................................... $ 39,969 $ 40,573
Accrued payroll and related expenses ............... 17,931 23,116
Customer deposits and unearned revenue ............. 17,317 19,809
Income taxes payable ............................... 7,147 2,748
Other current liabilities .......................... 9,702 11,481
------------ ------------
Total current liabilities ........................ 92,066 97,727
Long term debt ....................................... 192,400 218,005
Other long term liabilities .......................... 16,408 14,182
------------ ------------
Total liabilities ................................ 300,874 329,914
------------ ------------
Stockholders' equity
Common stock, $1 par value, 125,000,000 shares
authorized. 37,830,440 and 36,801,701 shares
issued at June 30, 1997 and December 31, 1996,
respectively ..................................... 37,830 36,802
Additional paid-in capital ......................... 201,921 186,677
Retained earnings .................................. 54,089 29,213
------------ ------------
293,840 252,692
Less treasury stock, 542,308 shares at cost ........ (13,494) --
------------ ------------
Total stockholders' equity ....................... 280,346 252,692
------------ ------------
Total liabilities and stockholders' equity ....... $ 581,220 $ 582,606
============ ============
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
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4
Harte-Hanks Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
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(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1997 1996
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<S> <C> <C>
Operating revenues ................................ $ 150,964 $ 122,285
--------- ---------
Operating expenses
Payroll .......................................... 56,143 43,418
Production and distribution ...................... 56,316 48,122
Advertising, selling, general and
administrative .............................. 13,543 10,456
Depreciation ..................................... 4,072 3,332
Goodwill amortization ............................ 1,125 840
Merger costs ..................................... -- 12,136
--------- ---------
131,199 118,304
--------- ---------
Operating income .................................. 19,765 3,981
--------- ---------
Other expenses (income)
Interest expense ................................. 1,854 1,855
Interest income .................................. (7) (52)
Other, net ....................................... (566) 5
--------- ---------
1,281 1,808
--------- ---------
Income from continuing operations before income
tax expense ...................................... 18,484 2,173
Income tax expense ................................ 7,844 2,762
--------- ---------
Net income (loss) from continuing operations ...... $ 10,640 $ (589)
Net income from discontinued operations,
net of income taxes .............................. $ 5,705 $ 4,495
--------- ---------
Net income ........................................ $ 16,345 $ 3,906
========= =========
Primary:
Earnings per common share
Continuing Operations ........................... $ 0.27 $ (0.02)
Discontinued Operations ......................... $ 0.15 $ 0.12
--------- ---------
Total ........................................ $ 0.42 $ 0.10
========= =========
Weighted average common and common equivalent
shares outstanding .............................. 38,832 38,551
========= =========
Fully diluted:
Earnings per common share
Continuing Operations ........................... $ 0.27 $ (0.02)
Discontinued Operations ......................... $ 0.15 $ 0.12
--------- ---------
Total ........................................ $ 0.42 $ 0.10
========= =========
Weighted average common and common equivalent
share outstanding ............................... 38,841 38,702
========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
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5
Harte-Hanks Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
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(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1997 1996
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<S> <C> <C>
Operating revenues .............................. $ 289,388 $237,791
--------- --------
Operating expenses
Payroll ........................................ 109,821 86,657
Production and distribution .................... 109,410 95,483
Advertising, selling, general and administrative 27,653 20,675
Depreciation ................................... 8,041 6,465
Goodwill amortization .......................... 2,205 1,745
Merger costs ................................... -- 12,136
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257,130 223,161
--------- --------
Operating income ................................ 32,258 14,630
--------- --------
Other expenses (income)
Interest expense ............................... 3,765 3,648
Interest income ................................ (50) (578)
Other, net ..................................... (321) 549
--------- --------
3,394 3,619
--------- --------
Income from continuing operations before income
tax expense .................................... 28,864 11,011
Income tax expense .............................. 12,256 6,612
--------- --------
Net income from continuing operations ........... $ 16,608 $ 4,399
Net income from discontinued operations,
net of income taxes ............................ $ 9,754 $ 7,824
--------- --------
Net income ...................................... $ 26,362 $ 12,223
========= ========
Primary:
Earnings per common share
Continuing Operations ......................... $ 0.43 $ 0.11
Discontinued Operations ....................... $ 0.25 $ 0.21
--------- --------
Total ....................................... $ 0.68 $ 0.32
========= ========
Weighted average common and common equivalent
shares outstanding ............................ 38,782 38,420
========= ========
Fully diluted:
Earnings per common share
Continuing Operations ........................ $ 0.43 $ 0.11
Discontinued Operations ...................... $ 0.25 $ 0.21
--------- --------
Total ....................................... $ 0.68 $ 0.32
========= ========
Weighted average common and common equivalent
share outstanding ............................ 38,824 38,495
========= ========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
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6
Harte-Hanks Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
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(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------
1997 1996
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<S> <C> <C>
Operating Activities
Net income from continuing operations ............................... $ 16,608 $ 4,399
Add (deduct) non-cash income and expenses:
Depreciation ...................................................... 8,041 6,465
Goodwill amortization ............................................. 2,205 1,745
Amortization of option related compensation ....................... 406 419
Deferred income taxes ............................................. 1,101 (386)
Other, net ........................................................ 528 830
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable, net .............................. 9,386 1,263
Decrease in inventory ............................................. 1,545 2,713
Increase in prepaid expenses and other
current assets .................................................. (1,777) (2,325)
Increase (decrease)in accounts payable ............................ (1,384) 2,003
Decrease in other accrued expenses
and other liabilities ........................................... (6,121) (8,036)
Other, net ........................................................ 6,717 (866)
--------- ---------
Net cash provided by continuing operating activities ............ 37,255 8,224
--------- ---------
Discontinued operations:
Net income ........................................................ 9,754 7,824
Adjustment to derive cash flows from operating activities ......... 6,621 6,493
--------- ---------
Net cash provided by discontinued operating activities .......... 16,375 14,317
--------- ---------
Net operating activities .......................................... 53,630 22,541
--------- ---------
Investing Activities
Purchases of property, plant and equipment .......................... (15,138) (10,421)
Proceeds from the sale of property, plant and equipment ............. 1,760 256
Acquisitions ........................................................ (5,949) (17,139)
--------- ---------
Net cash used in investing activities of continuing
operations ...................................................... (19,327) (27,304)
--------- ---------
Net cash used in investing activities of discontinued
operations ...................................................... (3,191) (2,448)
--------- ---------
Net investing activities .......................................... (22,518) (29,752)
--------- ---------
Financing Activities
Long term debt borrowings ........................................... 193,300 142,000
Payments on long term debt, including current
maturities ........................................................ (217,665) (137,755)
Purchase of treasury stock .......................................... (13,494) --
Issuance of common stock ............................................ 10,372 3,611
Dividends paid ...................................................... (1,486) (1,020)
--------- ---------
Net cash provided by (used in) financing activities ............... (28,973) 6,836
--------- ---------
Net increase(decrease)in cash ....................................... 2,139 (375)
Cash at beginning of year ........................................... 12,017 18,102
--------- ---------
Cash at end of period ............................................... $ 14,156 $ 17,727
========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 7
7
Harte-Hanks Communications, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
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(Unaudited)
<TABLE>
<CAPTION>
Retained
Additional Earnings Total
Common Paid-In (Accumulated Treasury Stockholders'
In thousands Stock Capital Deficit) Stock Equity
- ------------ ------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ............. $36,044 $174,870 $ (9,058) $ -- $ 201,856
Common stock issued-employee benefit
plans ................................ 62 1,144 -- -- 1,206
Exercise of stock options .............. 327 3,203 -- -- 3,530
Tax benefit of options exercised ....... -- 784 -- -- 784
Dividends paid ($ 0.033 per share) ..... -- -- (1,020) -- (1,020)
Net income ............................. -- -- 12,223 -- 12,223
Stock issued in conjunction with
acquisition earnout .................. 58 1,201 -- -- 1,259
------- -------- -------- -------- ---------
Balance at June 30, 1996 ............... $36,491 $181,202 $ 2,145 $ -- $ 219,838
======= ======== ======== ======== =========
Balance at January 1, 1997 ............. $36,802 $186,677 $ 29,213 $ -- $ 252,692
Common stock issued-employee benefit
plans ................................ 42 1,780 -- -- 1,822
Exercise of stock options .............. 986 7,700 -- -- 8,686
Tax benefit of options exercised ....... -- 5,764 -- -- 5,764
Dividends paid ($ 0.04 per share) ...... -- -- (1,486) -- (1,486)
Net income ............................. -- -- 26,362 -- 26,362
Treasury stock purchase ................ -- -- -- (13,494) (13,494)
------- -------- -------- -------- ---------
Balance at June 30, 1997 ............... $37,830 $201,921 $ 54,089 $(13,494) $ 280,346
======= ======== ======== ======== =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
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8
Harte-Hanks Communications, 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 Communications, 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 six months ended June 30, 1997 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, 1996.
Certain prior period amounts have been reclassified for comparative purposes.
NOTE B - DISCONTINUED NEWSPAPER AND TELEVISION OPERATIONS
On May 16, 1997, the Company entered into a definitive agreement to sell to the
E.W. Scripps Company (NYSE: SSP) its newspaper operations and KENS-TV, the CBS
affiliate in San Antonio. The agreement called for a Morris Trust form of
transaction, with an all cash backup agreement to take effect in the event the
Morris Trust transaction was prevented by pending tax legislation. (The
structure of and consideration specified in that Morris Trust transaction is
described in the Company's Form 8-K dated May 22, 1997.) That proposed tax
legislation has been enacted, and as a result, the parties have elected to
proceed on the all cash basis, in which Scripps will acquire the Harte-Hanks
newspaper operations, KENS-TV and KENS-AM directly for a cash price of $775
million. The closing is subject to Federal Communications Commission approval
and other customary conditions.
Because the newspaper and television operations represent entire business
segments that will be divested, their results are reported as "discontinued
operations" for all periods presented.
Summarized operating results for the combined newspaper and television
discontinued operations are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
- ----------------------------------- ------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Revenues $39,619 $37,631 $76,030 $72,736
Income before income tax expense 10,322 8,272 17,725 14,282
Income tax expense 4,617 3,777 7,971 6,458
------- ------- ------- -------
Income from discontinued operations $ 5,705 $ 4,495 $ 9,754 $ 7,824
======= ======= ======= =======
</TABLE>
Summarized balance sheet data for the combined newspaper and television
discontinued operations are as follows:
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9
<TABLE>
<CAPTION>
In thousands JUNE 30, 1997 DECEMBER 31, 1996
- ------------ ------------- -----------------
<S> <C> <C>
Property, plant and equipment $ 40,564 $ 40,713
Goodwill and other intangibles 174,043 177,236
Other assets 1,959 2,497
Deferred income tax liabilities 8,059 8,154
Other liabilities 1,071 1,523
-------- --------
Net assets of discontinued operations $207,436 $210,769
======== ========
</TABLE>
The major components of cash flows for the combined newspaper and television
discontinued operations are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
In thousands JUNE 30, 1997 JUNE 30, 1996
- ------------ ------------- -------------
<S> <C> <C>
Net income from discontinued operations $ 9,754 $ 7,824
Depreciation and goodwill amortization 5,717 5,668
Film amortization 863 694
Other, net 41 131
------- -------
Net cash provided by discontinued
operations 16,375 14,317
------- -------
Purchases of property, plant and equipment (2,288) (1,884)
Payments on film contracts (919) (654)
Other, net 16 90
------- -------
Net cash used in investing activities of
discontinued operations $(3,191) $(2,448)
------- -------
</TABLE>
NOTE C - ACQUISITION
Effective April 30, 1996, DiMark, Inc. ("DiMark") was merged with a
wholly-owned subsidiary of the Company, and each outstanding share of DiMark
common stock was converted into the right to acquire .656 of a share of common
stock of Harte-Hanks. As a result, Harte-Hanks issued approximately 6.1 million
shares of Harte-Hanks common stock to the shareholders of DiMark and DiMark's
outstanding stock options were converted into options to acquire approximately
1.5 million shares of Harte-Hanks common stock. The merger was accounted for on
a pooling-of-interests basis. Accordingly, the Company's financial statements
have been restated to include the results of DiMark for all periods presented.
The combined financial results include reclassifications to conform with
financial statement preparation. Merger expenses related to the transaction
were $12.1 million ($8.7 million, net of income taxes). Combined and separate
results of the Company and DiMark during the reporting period preceding the
merger were as follows:
THREE MONTHS ENDED
MARCH 31, 1996
<TABLE>
<CAPTION>
In thousands HARTE-HANKS DIMARK ADJUSTMENTS COMBINED
- ------------------------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C>
Revenues from
continuing operations $89,794 $27,377 $(1,665) $115,506
Net Income from
continuing operations 3,066 1,932 -- 4,998
</TABLE>
Adjustments consist of elimination of DiMark's postage costs from revenues
and cost of sales to conform to Harte-Hanks' accounting classification.
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NOTE D - INCOME TAXES
The Company's quarterly income tax provision of $7.8 million for continuing
operations was calculated using an effective income tax rate of 42.4%. The
Company's effective income tax rate is derived by estimating pretax income and
income tax expense for the year ended December 31, 1997. 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 E - NEW ACCOUNTING PRONOUNCEMENT
In March 1997, the FASB issued Statement of Financial Accounting Standards No.
128, "Earnings per Share," which specifies the computing, presentation and
disclosure requirements for earnings per share. SFAS 128 is effective for all
periods ending after December 15, 1997 and requires retroactive restatement of
prior periods EPS. The statement replaces the "primary EPS" calculation with a
"basic EPS" and redefines the "dilutive EPS" computation. The Company will
implement the statement in the required period.
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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 May 16, 1997, the Company entered into a
definitive agreement to sell 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 1997 JUNE 30, 1996 CHANGE JUNE 30, 1997 JUNE 30, 1996 CHANGE
- ---------------------- ------------- ------------- ------ ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $150,964 $122,285 23.5% $289,388 $237,791 21.7%
Operating expenses 131,199 106,168 23.6% 257,130 211,025 21.8%
-------- -------- -------- --------
Operating income $ 19,765 $ 16,117 22.6% $ 32,258 $ 26,766 20.5%
======== ======== ======== ========
Net income $ 10,200 $ 8,118 25.6% $ 16,168 $ 13,106 23.4%
======== ======== ======== ========
Fully diluted earnings
per share $ 0.26 $ 0.21 23.8% $ 0.42 $ 0.34 23.5%
======== ======== ======== ========
</TABLE>
(The results above exclude the 1997 one-time investment gain -- discussed under
"Other Income and Expense" -- and the 1996 one-time merger costs -- discussed
in Note C of the Notes to Interim Condensed Consolidated Financial Statements
included herein. Including these items, net income was $10.6 million, or 27
cents per share, in the second quarter of 1997 compared to a net loss of $0.6
million, or 2 cents per share, in 1996. On the same basis, net income for first
six months of 1997 was $16.6 million, or 43 cents per share, compared to $4.4
million, or 11 cents per share, for the six months ended June 30, 1996.)
Consolidated revenues from continuing operations grew 23.5% to $151 million and
operating income grew 22.6% to $19.8 million in the second quarter of 1997 when
compared to the second quarter of 1996. 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 1996
increased 23.6% to $131.2 million.
Net income from continuing operations grew 25.6% to $10.2 million, or 26 cents
per share, compared to 21 cents per share on a fully diluted basis.
DIRECT MARKETING
Direct marketing operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 1997 JUNE 30, 1996 CHANGE JUNE 30, 1997 JUNE 30, 1996 CHANGE
- ------------------ ------------- ------------- ------ ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $100,413 $73,349 36.9% $194,203 $145,861 33.1%
Operating expenses 87,685 62,893 39.4% 170,985 126,406 35.3%
-------- ------- -------- --------
Operating income $ 12,728 $10,456 21.7% $ 23,218 $ 19,455 19.3%
======== ======== ======== ========
</TABLE>
<PAGE> 12
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Direct marketing revenues increased $27.1 million, or 36.9%, in the second
quarter of 1997 when compared to 1996. Response management/teleservices,
database marketing, and marketing services all experienced significant revenue
growth. Response management/teleservices revenues increased due to new customer
gains, particularly in the high technology industry; increased business with
existing customers; and, to a lesser extent, two acquisitions in May and August
1996. The Company acquired Inquiry Handling Service, a Los Angeles based
response management company that serves the high technology and electronics
industries, in May and Lead Management Group, a Boston based response
management, telemarketing and fulfillment company that serves the high
technology industry, in August. Database marketing revenues increased primarily
due to higher sales of software products; increased database processing
volumes; and, to a lesser extent, the acquisition of Information for Marketing,
a London based database marketing service provider. Marketing services
revenues, including logistics operations, increased due to higher product sales
as well as new product sales to new and existing retail industry customers.
Lastly, revenues increased due to the November 1996 acquisition of Marketing
Communications Inc., a Kansas City based integrated database marketing company
that serves the pharmaceutical industry and others.
Operating expenses increased $24.8 million, or 39.4%, in the second quarter of
1997 when compared to 1996. Payroll costs increased $12.0 million due to
expanded hiring to support revenue growth. Also contributing to increased
operating expenses were additional production costs of $9.1 million due to
increased volumes. Depreciation expense increased $0.8 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 $48.3 million, or 33.1%, in the first six
months of 1997 as compared to the comparable 1996 period. Response
management/teleservices, database marketing, and logistics operations
experienced significant revenue growth. Overall, revenue growth resulted from
increased business with both new and existing customers, particularly in
services provided to the retail, high technology, financial services,
healthcare, and insurance industries, and from acquisitions.
Operating expenses rose $44.6 million, or 35.3%, in the first half of 1997 when
compared to the same period in 1996. Payroll costs increased $21.4 million due
to expanded hiring to support revenue growth. In addition, production costs
increased $16.2 million due to increased volumes. Depreciation expense
increased $1.6 million due to higher levels of capital investment to support
growth. The acquisitions noted above also impacted operating expense growth.
SHOPPERS
Shopper operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 1997 JUNE 30, 1996 CHANGE JUNE 30, 1997 JUNE 30, 1996 CHANGE
- ------------------ ------------- ------------- ------ ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $50,551 $48,936 3.3% $ 95,185 $ 91,930 3.5%
Operating expenses 41,488 41,550 (0.2)% 81,922 81,213 0.9%
------- ------- ------- -------
Operating income $ 9,063 $ 7,386 22.7% $ 13,263 $ 10,717 23.8%
======= ======= ======== ========
</TABLE>
Shopper revenues increased $1.6 million, or 3.3%, in the second quarter of 1997
as compared to 1996. The increase was attributable to higher in-book
advertising revenue as well as increased preprint insert volumes. Display
advertising
<PAGE> 13
13
revenues increased due to growth in the Company's core business accounts and
average volume buy per customer, as well as increased in-column display
advertisements.
Operating expenses were flat in the second quarter of 1997 when compared to
1996. Payroll costs increased $0.3 million due to operating investments in
sales staffing as well as increased revenue volumes. Additionally, general and
administrative expense increased $0.6 million due to higher promotion costs.
These expense increases were offset by decreased production and distribution
costs, mainly due to lower paper costs. Paper costs decreased $1.0 million due
to lower paper prices, slightly offset by higher distribution volumes.
Shopper revenues increased $3.3 million, or 3.5%, in the first six months of
1997 as compared to the first six months of 1996. The increase was attributable
to higher in-book advertising revenue, primarily from display advertising, as
well as increased revenue from insert products.
Year-to-date operating expenses increased $0.7 million, or 0.9%, in 1997 when
compared to the same period in 1996. Payroll costs increased $1.3 million
primarily due to increased revenue volumes and the impact of favorable
operating income results on performance related plans. Additionally, general
and administrative expense increased $1.8 million due to higher promotion costs
as well as a higher provision for bad debt related to the higher revenues.
These expense increases were partially offset by decreased paper costs of $2.5
million, due primarily to lower paper prices, and decreased printing and
postage expenses. Offload printing costs decreased $0.3 million due to lower
rates. And, postage costs decreased $0.4 million due to lower postal rates from
the June 1996 postal reclassification, partially offset by increased postage
costs due to expansion, internal circulation growth and increased distribution
volumes.
Other Income and Expense
On May 16, 1997, the Company sold its 40 percent interest in SiteSpecific, an
Internet-related company that was acquired by CKS Group, Inc. This transaction
resulted in a gain of approximately $1.8 million in the second quarter of 1997.
This investment gain was partially offset by reserves of $1.0 million for
possible costs associated with a previous newspaper sale and the abandonment of
minor equipment.
Interest Expense/Interest Income
Total interest income and expense was allocated to continuing and discontinued
operations based on percentage of assets. The percentage allocated to
continuing operations was approximately 58% for the first half of 1997 and 53%
for the first half of 1996.
Interest income and expense for continuing operations was relatively flat in
the second quarter of 1997 when compared to 1996.
Income Taxes
The Company's income tax expense for continuing operations increased $5.1
million in the second quarter of 1997 when compared to the second quarter of
1996. This increase was due to the higher income levels and the absence of the
1996 merger related costs. The effective tax rate for continuing operations was
42.4% for the second quarter of 1997 and 43.3% for the second quarter of 1996,
excluding the merger costs.
<PAGE> 14
14
Liquidity and Capital Resources
Cash provided from operating activities by continuing operations for the six
months ended June 30, 1997 was $37.2 million, as compared to $8.2 million for
the six months ended June 30, 1996. Net cash outflows for investing activities
of continuing operations were $19.3 million as compared to outflows of $27.3
million in 1996.
Capital resources are available from and provided through the Company's
unsecured credit facility. All borrowings under the revolving credit facility
are to be repaid by December 31, 2001. Management believes that its credit
facility, together with cash provided from operating activities, will be
sufficient to fund operations and anticipated capital and debt service
requirements for the foreseeable future. As of June 30, 1997, the Company had
$134 million of unused borrowing capacity under its credit facility, of which
$6.4 million was reserved to serve as backup for the Company's short-term
borrowing facilities.
Recent Development
On July 29, 1997, the Company signed a definitive agreement with ABC, Inc., an
indirect subsidiary of The Walt Disney Company, to acquire the ABC Shoppers
Group. The cash transaction is valued at approximately $104 million, and the
closing is subject to customary conditions.
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 business, and it expects to pursue additional
acquisition opportunities in its direct marketing and shopper businesses.
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 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 shopper, newspaper and television businesses compete for
advertising as well as for readers and viewers 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 to the number of media alternatives in
those markets.
<PAGE> 15
15
Newsprint Prices -- Newsprint represents a substantial expense in the Company's
shopper and newspaper operations. In recent years newsprint prices have
fluctuated widely, and such fluctuations can materially affect the results of
the Company's operations.
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 May 1998, although there can be no assurance
postal rates will not increase prior to that time. 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.
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,
newspaper and television businesses 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 marketing revenues are dependent on national and
international economics.
<PAGE> 16
16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on May 6, 1997. At the
meeting the stockholders were requested to vote on the following:
1. To elect David L. Copeland, Dr. Peter T. Flawn and Christopher M. Harte
as Class I directors for a three-year term. The result of the vote was as
follows:
<TABLE>
For Withheld
---------- ---------
<S> <C> <C>
David L. Copeland 32,615,177 128,940
Dr. Peter T. Flawn 32,601,772 142,345
Christopher M. Harte 32,613,687 130,430
</TABLE>
The names of each director whose term of office continued are: Houston H.
Harte, Larry Franklin, Edward H. Harte, Richard M. Hochhauser and James L.
Johnson.
2. To approve an amendment to the Harte-Hanks Communications, Inc. 1994
Employee Stock Purchase Plan to increase the aggregate number of shares of
Harte-Hanks Common Stock that may be issued under such Plan from 450,000
to 1,000,000. The result of the vote was as follows:
<TABLE>
For Against Abstentions
---------- ------- -----------
<S> <C> <C>
32,302,650 298,758 142,709
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See index to Exhibits on Page 16.
(b) A Form 8-K (in response to item 5 thereof) was filed dated May 22,
1997.
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 COMMUNICATIONS, INC.
August 13, 1997 /s/ Jacques D. Kerrest
- ---------------- ---------------------------
Date Jacques D. Kerrest
Senior Vice President,
Finance and Chief Financial
and Accounting Officer
<PAGE> 17
17
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ----- ------------------------------------------------------------------- --------
<S> <C> <C>
2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a)
to the Company's Registration Statement No. 33-69202 and
incorporated by reference herein).
2(b) Agreement and Plan of Merger dated as of February 4,
1996 among Harte-Hanks Communications, Inc., HHD
Acquisition Corp. and DiMark, Inc. (filed as Appendix
A to the Company's Registration Statement No. 333-2047
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).
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) Amended and Restated Certificate of Incorporation as amended through
April 30, 1996 (filed as Exhibit 3(d) to the Company's Form 10-Q for
the six months ended June 30, 1996 and incorporated by reference
herein).
</TABLE>
<PAGE> 18
18
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ----- ------------------------------------------------------------------- --------
<S> <C> <C>
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.
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) HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit
10(i) to the Company's Form 10-K for the year ended
December 31, 1991 and incorporated by reference herein).
10(d) Amendment to HHC Holding Inc. 1991 Stock Option Plan (filed as
Exhibit 10(j) to the Company's Form 10-K for the year ended December
31, 1992 and incorporated by reference herein).
10(e) Third Amended and Restated Loan Agreement dated May 19, 1993 among
the Company, The Toronto-Dominion Bank, NationsBank of Texas, N.A.,
Fleet Bank (formerly National Westminster Bank USA), Corestates
Bank, N.A., The Bank of Nova Scotia, CIBC, Inc. and National Bank of
Canada; and Toronto-Dominion (Texas), Inc., as agent (filed as
Exhibit 10(j) to the Company's 10-Q for the quarter ended June 30,
1993 and incorporated by reference herein).
10(f) 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(g) Form of Severance Agreement between Harte-Hanks
Communications, Inc. and certain Executive Officers of the
Company, dated as of July 23, 1993 (filed as Exhibit 10(h)
to the Company's Registration Statement No. 33-69202
and incorporated by reference herein).
</TABLE>
<PAGE> 19
19
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- ----------------------------------------------------------------- --------
<S> <C> <C>
10(h) Amendment No. 2 to HHC Holding Inc. 1991 Stock Option Plan
(filed as Exhibit 10(1) to the Company's Registration Statement
No. 33-69202 and incorporated by reference herein).
10(i) Harte-Hanks Communications, Inc. Pension Restoration Plan
(filed as Exhibit 10(j) to the Company's Registration Statement
No. 33-69202 and incorporated by reference herein).
10(j) First Amendment, dated as of November 3, 1993 to Third Amended
and Restated Loan Agreement dated May 19, 1993 among the
Company, The Toronto-Dominion Bank, NationsBank of Texas,
N.A., Fleet Bank (formerly National Westminster Bank USA),
The First National Bank of Boston, Bank of Hawaii, Corestates
Bank, N.A., The Bank of Nova Scotia, CIBC, Inc., and National
Bank of Canada; and Toronto-Dominion (Texas), Inc., as agent
(filed as Exhibit 10(k) to the Company's Form 10-Q for the
quarter ended September 30, 1993 and incorporated by reference
herein).
10(k) Second Amendment to Third Amended and Restated Loan Agreement
dated as of February 2, 1995 among the Company, NationsBank of
Texas, N.A., Fleet Bank (formerly National Westminster Bank USA),
The Bank of Nova Scotia, Bank of Boston, N.A. (formerly known as
The First National Bank of Boston), Bank of Hawaii, The Bank of
Tokyo-Mitsubishi, Ltd., Dallas Agency, Corestates Bank, N.A. and
CIBC, Inc. and Toronto-Dominion (Texas), Inc. in its Individual
Capacity and as Agent (filed as Exhibit 10(n) to the Company's
Form 10-Q for the quarter ended March 31, 1995 and incorporated by
reference herein).
10(l) Amendment No. 3 to Harte-Hanks Communications (formerly HHC
Holding Inc.) 1991 Stock Option Plan (filed as Exhibit 10(o) to the
Company's Form 10-Q for the six months ended June 30, 1996 and
incorporated by reference herein).
10(m) 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).
*11 Statement Regarding Computation of Net Income (Loss) Per Common
Share.
*27 Financial Data Schedule.
</TABLE>
<PAGE> 1
20
Exhibit 11
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(in thousands, except per share data)
PRIMARY
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------
1997 1996
-------- --------
<S> <C> <C>
Net income from continuing operations ...................... $ 10,640 $ (589)
======== ========
Shares used in net earnings per
share computations ........................................ 38,832 38,551
======== ========
Earnings per share - continuing operations ................. $ 0.27 $ (0.02)
======== ========
Net income from discontinued operations .................... $ 5,705 $ 4,495
======== ========
Shares used in net earnings per
share computations ........................................ 38,832 38,551
======== ========
Earnings per share - discontinued operations ............... $ 0.15 $ 0.12
======== ========
COMPUTATION OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
<CAPTION>
Three Months Ended June 30,
------------------------------
1997 1996
-------- -------
<S> <C> <C>
Average outstanding common shares............................ 37,279 36,333
Average common equivalent shares --
dilutive effect of option shares............................. 1,553 2,218
-------- -------
Shares used in net earnings
per share computations....................................... 38,832 38,551
======== =======
FULLY DILUTED
-------------
<CAPTION>
Three Months Ended June 30,
------------------------------
1997 1996
-------- -------
<S> <C> <C>
Net income from continuing operations ...................... $10,640 $ (589)
======= ========
Shares used in net earnings per
share computations ........................................ 38,841 38,702
======= ========
Earnings per share - continuing operations ................. $ 0.27 $ (0.02)
======= ========
Net income from discontinued operations .................... $ 5,705 $ 4,495
======= ========
Shares used in net earnings per
share computations ........................................ 38,841 38,702
======= ========
Earnings per share - discontinued operations ............... $ 0.15 $ 0.12
======= ========
</TABLE>
COMPUTATION OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
<TABLE>
Three Months Ended June 30,
------------------------------
1997 1996
-------- -------
<S> <C> <C>
Average outstanding common shares .......................... 37,279 36,333
Average common equivalent shares --
dilutive effect of option shares .......................... 1,562 2,369
------ ------
Shares used in net earnings
per share computations .................................... 38,841 38,702
====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,156
<SECURITIES> 0
<RECEIVABLES> 101,731
<ALLOWANCES> 2,337
<INVENTORY> 12,175
<CURRENT-ASSETS> 148,273
<PP&E> 153,786
<DEPRECIATION> 76,328
<TOTAL-ASSETS> 581,220
<CURRENT-LIABILITIES> 92,066
<BONDS> 192,400
0
0
<COMMON> 37,830
<OTHER-SE> 242,516
<TOTAL-LIABILITY-AND-EQUITY> 581,220
<SALES> 150,964
<TOTAL-REVENUES> 150,964
<CGS> 112,459
<TOTAL-COSTS> 131,199
<OTHER-EXPENSES> (566)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1854
<INCOME-PRETAX> 18,484
<INCOME-TAX> 7,844
<INCOME-CONTINUING> 10,640
<DISCONTINUED> 5,705
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,345
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
