<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended March 31, 1999
--------------
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, 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
--------------------------------------------------------------
(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, 71,052,380 shares as of April 30, 1999.
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HARTE-HANKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
March 31, 1999
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1. Interim Condensed Consolidated Financial
Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
Three months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 5
Consolidated Statements of Stockholders' Equity -
Three months ended March 31, 1999 and 1998 6
Notes to Interim Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
(a) Exhibits
(b) Reports on Form 8-K
Signature 15
</TABLE>
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Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (in thousands, except per share and share
amounts)
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents ........................ $ 32,568 $ 30,367
Short-term investments ........................... 150,531 138,874
Accounts receivable, net ......................... 126,744 127,518
Inventory ........................................ 4,420 6,485
Prepaid expenses ................................. 8,814 8,727
Current deferred income tax asset ................ 8,473 8,339
Other current assets ............................. 4,773 5,503
------------ ------------
Total current assets .......................... 336,323 325,813
Property, plant and equipment, net .................. 93,698 92,274
Goodwill, net ....................................... 289,162 290,831
Other assets ........................................ 6,840 6,295
------------ ------------
Total assets .................................. $ 726,023 $ 715,213
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ................................. $ 58,842 $ 56,397
Accrued payroll and related expenses ............. 17,518 23,208
Customer deposits and unearned revenue ........... 23,573 23,139
Income taxes payable ............................. 15,626 8,412
Other current liabilities ........................ 3,393 5,328
------------ ------------
Total current liabilities ..................... 118,952 116,484
Other long term liabilities ......................... 25,370 21,638
------------ ------------
Total liabilities ............................. 144,322 138,122
------------ ------------
Stockholders' equity
Common stock, $1 par value, 250,000,000 shares
authorized. 76,076,421 and 75,789,355 shares
issued at March 31, 1999 and December 31,
1998, respectively ............................... 76,076 75,789
Additional paid-in capital .......................... 192,815 189,698
Retained earnings ................................... 439,913 425,999
------------ ------------
708,804 691,486
Less treasury stock: 5,032,990 and 4,531,303
shares at cost at March 31, 1999 and
December 31, 1998, respectively ................... (127,103) (114,395)
------------ ------------
Total stockholders' equity ........................ 581,701 577,091
------------ ------------
Total liabilities and stockholders' equity ........ $ 726,023 $ 715,213
============ ============
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended March 31,
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1999 1998
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<S> <C> <C>
Operating revenues .................................... $ 188,128 $ 177,673
------------ ------------
Operating expenses
Payroll ............................................ 70,852 66,834
Production and distribution ........................ 69,408 67,181
Advertising, selling, general and administrative ... 16,047 17,241
Depreciation ....................................... 5,358 5,366
Goodwill amortization .............................. 2,362 1,926
------------ ------------
164,027 158,548
------------ ------------
Operating income ...................................... 24,101 19,125
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Other expenses (income)
Interest expense ................................... 41 70
Interest income .................................... (2,098) (5,615)
Other, net ......................................... 100 693
------------ ------------
(1,957) (4,852)
------------ ------------
Income before income taxes ............................ 26,058 23,977
Income tax expense .................................... 10,724 9,872
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Net income ............................................ $ 15,334 $ 14,105
============ ============
Basic:
Earnings per common share .......................... $ 0.22 $ 0.19
============ ============
Weighted-average common shares outstanding ......... 71,193 73,481
============ ============
Diluted:
Earnings per common share .......................... $ 0.21 $ 0.18
============ ============
Weighted-average common and common equivalent
shares outstanding ............................... 73,605 77,128
============ ============
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 5
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Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1999 1998
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<S> <C> <C>
Operating Activities
Net income .............................................. $ 15,334 $ 14,105
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Depreciation ......................................... 5,358 5,366
Goodwill amortization ................................ 2,362 1,926
Amortization of option-related compensation .......... 191 216
Deferred income taxes ................................ 2,584 104
Other, net ........................................... 444 (236)
Changes in operating assets and liabilities, net of
acquisitions:
Decrease (increase) in accounts receivable, net ....... 774 (34)
Decrease in inventory ................................ 2,065 604
Decrease (increase) in prepaid expenses and other
current assets .................................... 643 (1,200)
Increase in accounts payable ......................... 2,445 3,710
Increase in other accrued expenses
and other liabilities ............................. 23 3,303
Other, net ........................................... 293 1,012
------------ ------------
Net cash provided by continuing operations ........ 32,516 28,876
------------ ------------
Net cash used in discontinued operating activities ...... -- (265,650)
------------ ------------
Net cash (used in) provided by operating
activities ...................................... 32,516 (236,774)
------------ ------------
Investing Activities
Acquisitions ............................................ (414) (2,275)
Purchases of property, plant and equipment .............. (6,907) (4,078)
Proceeds from sale of property, plant and equipment ..... 26 183
Net (purchases) sales and maturities of
available-for-sale short-term investments ............ (11,657) 220,564
------------ ------------
Net cash provided by (used in) investing
activities ...................................... (18,952) 214,394
------------ ------------
Financing Activities
Issuance of common stock ................................ 2,757 2,486
Purchase of treasury stock .............................. (12,724) --
Issuance of treasury stock .............................. 24 --
Dividends paid .......................................... (1,420) (1,104)
------------ ------------
Net cash (used in) provided by financing
activities ...................................... (11,363) 1,382
------------ ------------
Net increase (decrease) in cash ......................... 2,201 (20,998)
Cash and cash equivalents at beginning of year .......... 30,367 83,675
------------ ------------
Cash and cash equivalents at end of period .............. $ 32,568 $ 62,677
============ ============
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
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Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
In thousands Stock Capital Earnings Stock Income Equity
------------- --------------- ------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 ......... $ 74,843 $ 177,238 $ 362,000 $ (47,267) $ (577) $ 566,237
Common stock issued - employee
benefit plans .................. 54 878 -- -- -- 932
Exercise of stock options .......... 359 1,217 -- -- -- 1,576
Tax benefit of options
exercised ...................... -- 867 -- -- -- 867
Dividends paid ($0.015 per
share) ......................... -- -- (1,105) -- (1,105)
Net income ......................... -- -- 14,105 -- -- 14,105
Treasury stock repurchase .......... -- -- -- -- -- --
Change in unrealized loss on
short-term investments (net of
tax) ........................... -- -- -- -- 444 444
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1998 .......... $ 75,256 $ 180,200 $ 375,000 $ (42,267) $ (133) $ 583,056
========== ========== ========== ========== ========== ==========
Balance at January 1, 1999 ......... $ 75,789 $ 189,698 $ 425,999 $ (114,395) $ -- $ 577,091
Common stock issued - employee
benefit plans .................. 49 1,026 -- -- -- 1,075
Exercise of stock options .......... 238 1,444 -- -- -- 1,682
Tax benefit of options
exercised ...................... -- 639 -- -- -- 639
Dividends paid ($0.02 per
share) ......................... -- -- (1,420) -- -- (1,420)
Net income ......................... -- -- 15,334 -- -- 15,334
Treasury stock repurchase .......... -- -- -- (12,724) -- (12,724)
Treasury stock issued .............. -- 8 -- 16 -- 24
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1999 .......... $ 76,076 $ 192,815 $ 439,913 $ (127,103) $ -- $ 581,701
========== ========== ========== ========== ========== ==========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 7
7
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 ended March 31, 1999 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, 1998.
Certain prior period amounts have been reclassified for comparative purposes.
NOTE B - INCOME TAXES
The Company's quarterly income tax provision of $10.7 million was calculated
using an effective income tax rate of approximately 41.2%. The Company's
effective income tax rate is derived by estimating pretax income and income tax
expense for the year ending December 31, 1999. The effective income tax rate
calculated is higher than the federal statutory rate of 35% due to the addition
of state taxes and to certain expenses recorded for financial reporting purposes
(primarily goodwill amortization) which are not deductible for federal income
tax purposes.
NOTE C - EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
In thousands, except per share amount 1999 1998
----------- -----------
<S> <C> <C>
BASIC EPS
Net Income ...................................................... $ 15,334 $ 14,105
========== ==========
Weighted-average common shares outstanding
used in earnings per share computations ....................... 71,193 73,481
========== ==========
Earnings per common share ....................................... $ 0.22 $ 0.19
========== ==========
DILUTED EPS
Net Income ...................................................... $ 15,334 $ 14,105
========== ==========
Shares used in earnings per share computations .................. 73,605 77,128
========== ==========
Earnings per common share ....................................... $ 0.21 $ 0.18
========== ==========
Computation of shares used in earnings per share computations:
Average outstanding common shares ............................... 71,193 73,481
Average common equivalent shares -
dilutive effect of option shares .............................. 2,412 3,647
---------- ----------
Shares used in earnings per share computations .................. 73,605 77,128
========== ==========
</TABLE>
<PAGE> 8
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NOTE D - COMPREHENSIVE INCOME
The Company's total comprehensive income for the first quarter 1999 was equal to
net income, whereas comprehensive income for the first quarter 1998 was $0.4
million more than net income.
NOTE E - BUSINESS SEGMENTS
Harte-Hanks is a highly focused targeted media company with continuing
operations in two segments - direct marketing and shoppers.
Information about the Company's operations in different industry segments:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Three Months Ended March 31
In thousands 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues
Direct Marketing .......................... $ 124,934 $ 114,427
Shoppers .................................. 63,194 63,246
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Total operating revenues .............. $ 188,128 $ 177,673
============ ============
Operating income
Direct Marketing .......................... $ 17,284 $ 14,076
Shoppers .................................. 8,785 7,307
Corporate Activities ...................... (1,968) (2,258)
------------ ------------
Total operating income ................ $ 24,101 $ 19,125
============ ============
Income before income taxes
Operating income .......................... $ 24,101 $ 19,125
Interest expense .......................... (41) (70)
Interest income ........................... 2,098 5,615
Other, net ................................ (100) (693)
------------ ------------
Total income before income taxes ...... $ 26,058 $ 23,977
============ ============
</TABLE>
<PAGE> 9
9
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
In thousands MARCH 31, 1999 MARCH 31, 1998 CHANGE
- ------------ -------------- -------------- ------
<S> <C> <C> <C>
Revenues $ 188,128 $ 177,673 5.9%
Operating expenses 164,027 158,548 3.5%
------------ ------------
Operating income $ 24,101 $ 19,125 26.0%
============ ============
Net income $ 15,334 $ 14,105 8.7%
============ ============
Diluted earnings
per share $ 0.21 $ 0.18 16.7%
============ ============
</TABLE>
Consolidated revenues grew 5.9% to $188.1 million and operating income grew
26.0% to $24.1 million in the first quarter of 1999 when compared to the first
quarter of 1998. 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 1998 increased 3.5% to $164.0
million.
Net income grew 8.7% to $15.3 million, or 21 cents per share, compared to 18
cents per share on a diluted basis. The net income growth resulted from the
growth in operating income offset by a decrease of $3.5 million in interest
income due to larger cash and investment balances in the first quarter of 1998
since divestiture related tax payments were not made until the end of the first
quarter in 1998.
DIRECT MARKETING
Direct marketing operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
In thousands MARCH 31, 1999 MARCH 31, 1998 CHANGE
- ------------ -------------- -------------- ------
<S> <C> <C> <C>
Revenues $ 124,934 $ 114,427 9.2%
Operating expenses 107,650 100,351 7.3%
----------- -----------
Operating income $ 17,284 $ 14,076 22.8%
=========== ===========
</TABLE>
Direct marketing revenues increased $10.5 million, or 9.2%, in the first quarter
of 1999 compared to 1998. Revenue increases were lead by response management
which had strong growth, followed by marketing services and database marketing,
both of which experienced steady internal revenue growth for the quarter.
Response management revenues increased due to increased inbound telemarketing
and internet business with existing customers, new customer gains, and the
August 1998 acquisition of Cornerstone Integrated Services. The traditional
growth oriented business-to-business activities of response management had
significant growth; however, total response management results were influenced
by revenue declines in the outbound credit card business which began in the
third quarter of 1998. The high technology industry sector contributed
significantly to overall response management revenue growth. 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. The November 1998 acquisition of PMSI also contributed to
the marketing services revenue increase. Database marketing revenues increased
primarily due to the growth in database processing and software sales. The
retail, insurance and pharmaceutical industries provided the largest revenue
increase for database marketing.
<PAGE> 10
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Operating expenses increased $7.3 million, or 7.3%, in the first quarter of 1999
compared to 1998. Payroll costs increased $5.7 million due to expanded hiring to
support revenue growth. Also contributing to the increased operating expenses
were additional production costs of $2.1 million due to increased volumes.
Depreciation and amortization expense increased $0.6 million due to goodwill
associated with acquisitions and higher levels of capital investment to support
growth. Operating expenses were also impacted by the acquisitions noted above.
SHOPPERS
Shopper operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
In thousands MARCH 31, 1999 MARCH 31, 1998 CHANGE
- ------------ -------------- -------------- ------
<S> <C> <C> <C>
Revenues $ 63,194 $ 63,246 -0.1%
Operating expenses 54,409 55,939 -2.7%
----------- -----------
Operating income $ 8,785 $ 7,307 20.2%
=========== ===========
</TABLE>
Shopper revenues decreased $.1 million, or -0.1%, in the first quarter of 1999
compared to 1998. Although revenues remained flat, after eliminating the
revenues from the three small shopper publications in Dallas, TX, Wichita, KS
and Springfield, MO, which were sold in April 1998, revenues increased $3.4
million, or 5.7%, in the first quarter of 1999 compared to 1998. Excluding the
effects of the divestiture discussed above, revenue increases were the result of
improved sales in established markets as well as new year-over-year geographic
expansions into new neighborhoods, primarily in Southern California. From a
product-line perspective, Shoppers had growth in both its in-book products,
primarily employment and core sales, and its distribution products, primarily
4-color glossy heatset flyers and pre-printed inserts. In the quarter, Shoppers
experienced slowdown in its real-estate, automotive and personals advertising
segments.
Operating expenses decreased $1.5 million, or -2.7%, in the first quarter of
1999 compared to 1998. The sale of the three small shopper publications
mentioned above resulted in a $3.7 million reduction in operating expenses.
Excluding the divestiture mentioned above, operating expenses increased $2.1
million, or 4.0%, in the first quarter of 1999 compared to 1998. The increase in
operating expenses was primarily due to increases in postage of $1.0 million due
to increased volumes, and additional production costs of $0.9 million.
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
Interest income decreased $3.5 million in the first quarter of 1999 over the
same period in 1998 due to larger cash and investment balances in the first
quarter of 1998 since divestiture related tax payments were not made until the
end of the first quarter in 1998.
Income Taxes
The Company's income tax expense increased $0.9 million in the first quarter
compared to the first quarter of 1998. This increase was due primarily to the
higher pre-tax income levels. The effective tax rate was 41.2% for the first
quarter of 1999 and 1998.
<PAGE> 11
11
Liquidity and Capital Resources
Cash provided by operating activities of continued operations for the three
months ended March 31, 1999 was $32.5 million. Net cash used by discontinued
operations in 1998 of $265.7 million relates to the payment of income taxes on
the 1997 sale of discontinued operations. Net cash outflows from investing
activities were $19.0 million for the first three months of 1999 compared to net
cash inflows of $214.4 million for the first three months of 1998. The cash
inflows from investing activities in 1998 was primarily attributable to sales
and maturities of marketable securities totaling $220.6 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 $11.4 million
compared to net cash inflows of $1.4 million in 1998. The cash outflow from
financing activities in 1999 is attributable primarily to the repurchase of
treasury stock of $12.7 million in the first quarter of 1999.
Management believes that the net proceeds from the Company's 1997 sale of
newspaper and television operations, together with cash provided from operating
activities, will be sufficient to fund operations and anticipated capital
service needs for the foreseeable future.
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, 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 January 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.
<PAGE> 12
12
Economic Conditions -- Changes in national economic conditions can affect levels
of advertising expenditures generally, and such changes can affect each of the
Company's businesses. In addition, revenues from the Company's shopper business
are dependent to a large extent on local advertising expenditures in the markets
in which they operate. Such expenditures are substantially affected by the
strength of the local economies in those markets. Direct 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.
Accordingly, computer systems that rely on two digits to define an applicable
year may recognize a date using "00" as the year 1900, rather than the Year 2000
(the "Year 2000 Issue"). This could result in a system failure or
miscalculations causing disruptions of operations, including, but not limited
to, a temporary inability to process or transmit data or engage in normal
business activities.
The Company relies on computer hardware, information technology ("IT Systems")
and non-information technology systems ("Non-IT Systems") to operate its
business. IT Systems are used in the creation and delivery of the Company's
products and services, as well as, the Company's internal operations such as
billing and accounting. IT Systems include systems which use information
provided by third-party data suppliers to update the Company's databases. The
Company also relies on Non-IT Systems (primarily consisting of embedded
technology), such as microprocessors in tape drives, printing and inserting
equipment, and elevators, and on utilities, such as telecommunications and
power.
The Company has defined Year 2000 Compliant to mean that a process will continue
to run in the same manner when dealing with dates on or after January 1, 2000,
as it did before January 1, 2000. The Company has conducted a comprehensive
review of its IT Systems and Non-IT Systems to identify those that could be
affected by the Year 2000 Issue, and has developed a remediation plan to resolve
the issue. The most important areas of focus of the Company's Year 2000
remediation plan are the Company's products and services (including its
databases, software that manipulates these databases and software provided to
customers); business operation support systems (billing, ordering, tracking
systems, payroll and technical infrastructure (such as LANs, mail systems and
websites)); and suppliers, facilities and equipment. The Company is utilizing
both internal and external resources to correct or reprogram, and test the
systems for the Year 2000 compliance.
The Company's compliance objectives include products and services the Company
has provided to customers in the past and will provide to customers in the
future; all internal operating software systems and equipment; and the services,
products, equipment and systems the Company has obtained and will obtain in the
future from outside vendors. The Company's first objective was to remediate all
products and services the Company has, or will provide, to customers. This
included informing customers of their need to make their applications Year 2000
compliant to provide or accept associated files for services provided by the
Company. This objective was deemed the top priority and was initiated in late
1997. In early 1998, the Company initiated action to remediate all internal
business operation support systems, and the associated equipment it runs on. As
part of this process, the Company developed a standard Year 2000 compliance
certification memorandum to be sent to all vendors who have or are currently
providing products or services to the Company, revised customer standard
contract language to include a Year 2000 statement, and instituted a review
process for formally responding to customer inquiries on the Company's Year 2000
compliance plans and status. The Company is also in the process of contacting
its critical suppliers and other entities to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 Issues. While the Company has not been informed of
any
<PAGE> 13
13
material risks associated with these entities, there is no guarantee that
the systems of these critical suppliers or other entities on which the Company
relies, will be timely converted and will not have an adverse effect on the
Company's systems or operations. In addition to the above, the Company formed a
Year 2000 Compliance Council in June 1998 to monitor the status of compliance
efforts and to ensure that all compliance issues are consistently addressed.
The Company's Year 2000 remediation plan consists of four key phases:
Inventory/Assessment, Repair/Replacement, Testing and Compliance/Internal
Certification. As related to the Company's products and services, the Company is
100%, 98%, 95% and 95% completed, respectively. With regards to business
operation support systems, the Company is 100%, 98%, 95%, and 95% completed,
respectively. Finally, suppliers, facilities and equipment are 100%, 97%, 97%,
97% completed, respectively. The Company has completed its high priority
reprogramming and testing efforts as of March 31, 1999. Some low priority items,
such as voicemail system updates, will be completed by early third quarter,
however the Company can provide no assurance in this regard.
The Company has spent $3.2 million of cost incurred to date related to the Year
2000 Issue. The total remaining cost of the Year 2000 project is presently
estimated at $.9 million. The costs of the project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this areas and the ability to
locate and correct all relevant computer codes.
The Company presently believes that with modifications to existing software and,
in certain instances, conversions to new software, the Year 2000 Issue can be
mitigated. As noted above, the Company has not yet completed all necessary
phases of the Year 2000 remediation program. In the event that the Company does
not complete any additional phases, it could experience disruptions in its
operations, including among other things, a temporary inability to fulfill
customer direct marketing requests (such as sales leads and personalized
mailings), process financial transactions, or engage in similar normal business
activities. In addition, disruptions in the economy generally resulting from the
Year 2000 Issues could also materially adversely affect the Company. The Company
could be subject to litigation for computer systems failures, equipment
shutdowns or failure to properly date business records. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
Contingency plans are currently being developed and are anticipated to be
completed by September 30, 1999. This includes developing contingency plans for
products and services, as well as business operation support systems.
Contingency plans already in the development process include identifying
alternate providers in case the primary providers cannot meet delivery
requirements, and providing specific 100-year interval windowing techniques to
customers in the event their applications could not be made Year 2000 compliant.
<PAGE> 14
14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See index to Exhibits on Page 16.
(b) No Form 8-K has been filed during the three months ended
March 31, 1999.
<PAGE> 15
15
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.
May 13, 1999 /s/ Jacques D. Kerrest
------------ -----------------------------------
Date Jacques D. Kerrest
Senior Vice President, Finance and
Chief Financial Officer
<PAGE> 16
16
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- ---------------------- --------
<S> <C> <C>
2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a) to
the Company's Registration Statement No. 33-69202 and
incorporated by reference herein).
2(b) Agreement and Plan of Merger dated as of February 4, 1996 among
Harte-Hanks Communications, Inc., HHD Acquisition Corp. and
DiMark, Inc. (filed as Appendix A to the Company's Registration
Statement No. 333-02047 and incorporated by reference herein).
2(c) Agreement and Plan of Merger and Reorganization, dated as of May
16, 1997, by and between The E.W. Scripps Company and
Harte-Hanks Communications, Inc. (filed as Exhibit 2.1 to the
Company's Form 8-K dated May 22, 1997 and incorporated by
reference herein).
2(d) Acquisition Agreement, dated as of May 16, 1997, by and between
The E.W. Scripps Company and Harte-Hanks Communications, Inc.
(filed as Exhibit 2.2 to the Company's Form 8-K dated May 22,
1997 and incorporated by reference herein).
2(e) Stock Purchase Agreement dated as of July 26, 1997 between ABC,
Inc. and Harte-Hanks Communications, Inc. (filed as Exhibit 2(e)
to the Company's Form 10-Q for the nine months ended September
30, 1997 and incorporated by reference herein).
3(a) Amended and Restated Certificate of Incorporation (filed as
Exhibit 3(a) to the Company's Form 10-K for the year ended
December 31, 1993 and incorporated by reference herein).
3(b) Amended and Restated Bylaws (filed as Exhibit 3(b) to the
Company's Registration Statement No. 33-69202 and incorporated
by reference herein).
3(c) Amendment dated April 30, 1996 to Amended and Restated
Certificate of Incorporation (filed as Exhibit 3(c) to the
Company's Form 10-Q for the nine months ended September 30, 1996
and incorporated by reference herein).
3(d) Amendment dated May 5, 1998 to Amended and Restated Certificate
of Incorporation (filed as Exhibit 3(d) to the Company's Form
10-Q for the six months ended June 30, 1998 and incorporated by
reference herein).
3(e) Amended and Restated Certificate of Incorporation as amended
through May 5, 1998 (filed as Exhibit 3(e) to the Company's Form
10-Q for the six months ended June 30, 1998 and incorporated by
reference herein).
4(a) 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.
</TABLE>
<PAGE> 17
17
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- ---------------------- --------
<S> <C> <C>
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. Restoration Pension 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
nine months ended September 30, 1996 and incorporated by
reference herein).
10(g) Harte-Hanks, Inc. Amended and Restated 1991 Stock Option Plan
(filed as Exhibit 10(g) to the Company's Form 10-Q for the six
months ended June 30, 1998 and incorporated by reference
herein).
10(h) Harte-Hanks, Inc. 1998 Director Stock Plan (filed as Exhibit
10(h) to the Company's Form 10-Q for the six months ended June
30, 1998 and incorporated by reference herein).
10(i) Harte-Hanks, Inc. Deferred Compensation Plan (filed as Exhibit
10(i) to the Company's Form 10-K for the year ended December 31,
1998 and incorporate by reference herein).
10(j) Amendment to Harte-Hanks, Inc. Restoration Pension Plan (filed
as Exhibit 10(j) to the Company's Form 10-K for the year ended
December 31, 1998 and incorporate by reference herein).
*11 Statement Regarding Computation of Net Income (Loss) Per Common
Share 18
*21 Subsidiaries of the Company. 19
*27 Financial Data Schedule. 20
</TABLE>
- ---------------------
*Filed herewith
<PAGE> 1
18
Exhibit 11
HARTE-HANKS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March,
In thousands, except per share amount 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EPS
Net Income ................................................... $ 15,334 $ 14,105
========== ==========
Weighted-average common shares outstanding
used in earnings per share computations ................... 71,193 73,481
========== ==========
Earnings per common share .................................... $ 0.22 $ 0.19
========== ==========
DILUTED EPS
Net Income ................................................... $ 15,334 $ 14,105
========== ==========
Shares used in earnings per share computations ............... 73,605 77,128
========== ==========
Earnings per common share .................................... $ 0.21 $ 0.18
========== ==========
Computation of shares used in earnings per share computations:
Average outstanding common shares ............................ 71,193 73,481
Average common equivalent shares -
dilutive effect of option shares .......................... 2,412 3,647
---------- ----------
Shares used in earnings per share computations ............... 73,605 77,128
========== ==========
</TABLE>
<PAGE> 1
Exhibit 21
RESTRICTED SUBSIDIARIES
OF HARTE-HANKS , INC.
As of March 31, 1999
<TABLE>
<CAPTION>
State of
Name of Corporation Organization % Owned
- ------------------- ------------ -------
<S> <C> <C>
DiMark, Inc. New Jersey 100%
DiMark Marketing, Inc. Pennsylvania 100%(1)
Direct Market Concepts, Inc. Florida 100%
DMK, Inc. Delaware 100%(2)
The Flyer Publishing Corporation Florida 100%
Harte-Hanks Data Technologies, Inc. Massachusetts 100%
Harte-Hanks Delaware, Inc. Delaware 100%
Harte-Hanks Direct, Inc. Delaware 100%
Harte-Hanks Direct Marketing/Baltimore, Inc. Maryland 100%
Harte-Hanks Direct Marketing/Cincinnati, Inc. Ohio 100%
Harte-Hanks Direct Marketing/Dallas, Inc. Delaware 100%
Harte-Hanks Direct Marketing/Fullerton, Inc. California 100%
Harte-Hanks do Brazil Consultoria e Servicos Ltda. Brazil 100%(3)
Harte-Hanks Limited England 100%(3)
Harte-Hanks Market Research, Inc. New Jersey 100%
Harte-Hanks Partnership, Ltd. Texas 100%(6)
Harte-Hanks Pty. Limited Australia 100%(3)
Harte-Hanks Response Management/Austin, Inc. Delaware 100%
Harte-Hanks Response Management/Boston, Inc. Massachusetts 100%
Harte-Hanks Response Management Call Centers, Inc. Delaware 100%
Harte-Hanks Response Management Europe Belgium 100%
Harte-Hanks Shoppers, Inc. California 100%
Harte-Hanks Stock Plan, Inc. Delaware 100%
H&R Communications, Inc. New Jersey 100%(2)
HTS, Inc. Connecticut 100%
Information for Marketing Limited (shell corporation) England 100%(5)
Marketing Communications, Inc. Missouri 100%
Mars Graphic Services, Inc. New Jersey 100%(4)
NSO, Inc. Ohio 100%
Printing Management Services, Inc. Delaware 100%
PRO Direct Response Corp. New Jersey 100%(2)
Southern Comprint Co. California 100%
Spectral Resources, Inc. New York 100%
</TABLE>
(1) Owned by Mars Graphic Services, Inc.
(2) Owned by DiMark Marketing, Inc.
(3) Owned by Harte-Hanks Data Technologies, Inc.
(4) Owned by DiMark, Inc.
(5) Owned by Harte-Hanks Limited
(6) 99.5% Owned by Harte-Hanks Delaware, Inc.
.5% Owned by Harte-Hanks, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 32,568
<SECURITIES> 150,531
<RECEIVABLES> 129,361
<ALLOWANCES> 2,617
<INVENTORY> 4,420
<CURRENT-ASSETS> 336,323
<PP&E> 195,957
<DEPRECIATION> 102,259
<TOTAL-ASSETS> 726,023
<CURRENT-LIABILITIES> 118,952
<BONDS> 0
0
0
<COMMON> 76,076
<OTHER-SE> 505,625
<TOTAL-LIABILITY-AND-EQUITY> 726,023
<SALES> 188,128
<TOTAL-REVENUES> 188,128
<CGS> 140,260
<TOTAL-COSTS> 164,027
<OTHER-EXPENSES> (1,998)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 26,058
<INCOME-TAX> 10,724
<INCOME-CONTINUING> 15,334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,334
<EPS-PRIMARY> .22
<EPS-DILUTED> .21
</TABLE>
