<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended June 30, 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
------
HARTE-HANKS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 74-1677284
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Concord Plaza Drive, San Antonio, Texas 78216
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code -- 210/829-9000
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: $1 par value, 69,768,535 shares as of July 31, 1999.
<PAGE> 2
HARTE-HANKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
June 30, 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Interim Condensed Consolidated Financial
Statements (Unaudited)
Condensed Consolidated Balance Sheets - 3
June 30, 1999 and December 31, 1998
Consolidated Statements of Operations - 4
Three months ended June 30, 1999 and 1998
Consolidated Statements of Operations - 5
Six months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows - 6
Six months ended June 30, 1999 and 1998
Consolidated Statements of Stockholders' Equity - 7
Six months ended June 30, 1999 and 1998
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 17
Item 6. Exhibits and Reports on Form 8-K 17
(a) Exhibits
(b) Reports on Form 8-K
Signature 18
</TABLE>
2
<PAGE> 3
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (in thousands, except per share and share
amounts)
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents......................... $ 37,517 $ 30,367
Short-term investments ......................... 90,045 138,874
Accounts receivable, net.......................... 129,790 127,518
Inventory......................................... 4,106 6,485
Prepaid expenses.................................. 9,465 8,727
Current deferred income tax asset................. 7,138 8,339
Other current assets.............................. 3,643 5,503
-------- --------
Total current assets............................ 281,704 325,813
Property, plant and equipment, net.................. 101,328 92,274
Goodwill, net....................................... 310,156 290,831
Other assets........................................ 10,142 6,295
-------- --------
Total assets.................................... $703,330 $715,213
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable.................................. $ 52,631 $ 56,397
Accrued payroll and related expenses.............. 20,894 23,208
Customer deposits and unearned revenue............ 22,665 23,139
Income taxes payable.............................. 6,143 8,412
Other current liabilities......................... 6,182 5,328
-------- --------
Total current liabilities....................... 108,515 116,484
Other long term liabilities......................... 27,546 21,638
-------- --------
Total liabilities............................... 136,061 138,122
-------- --------
Stockholders' equity
Common stock, $1 par value, 250,000,000 shares
authorized. 76,255,876 and 75,789,355 shares
issued at June 30, 1999 and December 31,
1998, respectively.............................. 76,256 75,789
Additional paid-in capital........................ 195,374 189,698
Retained earnings................................. 457,274 425,999
-------- --------
728,904 691,486
Less treasury stock: 6,487,341 and 4,531,303
shares at cost at June 30, 1999 and
December 31, 1998, respectively................. (161,635) (114,395)
-------- --------
Total stockholders' equity...................... 567,269 577,091
-------- --------
Total liabilities and stockholders' equity...... $703,330 $715,213
======== ========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
3
<PAGE> 4
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating revenues ................................... $ 197,033 $ 186,806
--------- ---------
Operating expenses
Payroll ............................................ 70,516 65,422
Production and distribution ........................ 72,777 71,896
Advertising, selling, general and administrative ... 14,947 15,671
Depreciation ....................................... 5,907 5,226
Goodwill amortization .............................. 2,445 1,903
--------- ---------
166,592 160,118
--------- ---------
Operating income ..................................... 30,441 26,688
--------- ---------
Other expenses (income)
Interest expense ................................... 49 59
Interest income .................................... (1,751) (2,766)
Other, net ......................................... 257 168
--------- ---------
(1,445) (2,539)
--------- ---------
Income before income taxes ........................... 31,886 29,227
Income tax expense ................................... 13,118 12,217
--------- ---------
Net income ........................................... $ 18,768 $ 17,010
========= =========
Basic:
Earnings per common share .......................... $ 0.27 $ 0.23
========= =========
Weighted-average common shares outstanding ......... 70,519 73,541
========= =========
Diluted:
Earnings per common share .......................... $ 0.26 $ 0.22
========= =========
Weighted-average common and common equivalent
shares outstanding ............................... 72,781 77,212
========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
4
<PAGE> 5
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating revenues ................................... $ 385,161 $ 364,479
--------- ---------
Operating expenses
Payroll ............................................ 141,368 132,256
Production and distribution ........................ 142,185 139,077
Advertising, selling, general and administrative ... 30,994 32,912
Depreciation ....................................... 11,265 10,592
Goodwill amortization .............................. 4,807 3,829
--------- ---------
330,619 318,666
--------- ---------
Operating income ..................................... 54,542 45,813
--------- ---------
Other expenses (income)
Interest expense ................................... 90 129
Interest income .................................... (3,849) (8,381)
Other, net ......................................... 357 861
--------- ---------
(3,402) (7,391)
--------- ---------
Income before income taxes ........................... 57,944 53,204
Income tax expense ................................... 23,842 22,089
--------- ---------
Net income ........................................... $ 34,102 $ 31,115
========= =========
Basic:
Earnings per common share .......................... $ 0.48 $ 0.42
========= =========
Weighted-average common shares outstanding ......... 70,856 73,511
========= =========
Diluted:
Earnings per common share .......................... $ 0.47 $ 0.40
========= =========
Weighted-average common and common equivalent
shares outstanding ............................... 73,193 77,170
========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
5
<PAGE> 6
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating Activities
Net income ...................................................... $ 34,102 $ 31,115
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Depreciation ................................................. 11,265 10,592
Goodwill amortization ........................................ 4,807 3,829
Amortization of option-related compensation .................. 329 290
Deferred income taxes ........................................ 4,725 (601)
Other, net ................................................... 141 906
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable, net .............. 2,388 (6,341)
Decrease in inventory ........................................ 2,395 1,596
Decrease (increase) in prepaid expenses and other
current assets ............................................ 1,502 (1,135)
(Decrease) increase in accounts payable ...................... (2,379) 2,903
Decrease in other accrued expenses
and other liabilities ..................................... (6,523) (5,019)
Other, net ................................................... (1,496) 4,411
--------- ---------
Net cash provided by continuing operations ................ 51,256 42,546
--------- ---------
Net cash used in discontinued operating activities .............. -- (265,650)
--------- ---------
Net cash provided by (used in) operating
activities .............................................. 51,256 (223,104)
--------- ---------
Investing Activities
Acquisitions .................................................... (33,228) (2,275)
Purchases of property, plant and equipment ...................... (13,537) (10,419)
Proceeds from sale of property, plant and equipment ............. 124 117
Net sales and maturities of
available-for-sale short-term investments .................... 48,829 217,293
Other ........................................................... (1,000) --
--------- ---------
Net cash provided by investing
activities .............................................. 1,188 204,716
--------- ---------
Financing Activities
Issuance of common stock ........................................ 4,758 4,344
Purchase of treasury stock ...................................... (47,271) (9,850)
Issuance of treasury stock ...................................... 46 --
Dividends paid .................................................. (2,827) (2,209)
--------- ---------
Net cash used in financing
activities .............................................. (45,294) (7,715)
--------- ---------
Net increase (decrease) in cash ................................. 7,150 (26,103)
Cash and cash equivalents at beginning of year .................. 30,367 83,675
--------- ---------
Cash and cash equivalents at end of period ...................... $ 37,517 $ 57,572
========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
6
<PAGE> 7
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Treasury Comprehensive Stockholders'
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 ..... 111 1,982 -- -- -- 2,093
Exercise of stock options .... 476 1,766 -- -- -- 2,242
Tax benefit of options
exercised .................. -- 1,377 -- -- -- 1,377
Dividends paid ($0.03 per
share) ..................... -- -- (2,209) -- -- (2,209)
Net income ................... -- -- 31,115 -- -- 31,115
Treasury stock repurchase .... -- -- -- (9,850) -- (9,850)
Change in unrealized loss on
short-term investments
(net of tax) ............... -- -- -- -- 577 577
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1998 ..... $ 75,430 $ 182,363 $ 390,906 $ (57,117) $ -- $ 591,582
========= ========= ========= ========= ========= =========
Balance at January 1, 1999 ... $ 75,789 $ 189,698 $ 425,999 $(114,395) $ -- $ 577,091
Common stock issued -
employee benefit plans ..... 103 2,128 -- -- -- 2,231
Exercise of stock options .... 364 2,163 -- -- -- 2,527
Tax benefit of options
exercised .................. -- 1,370 -- -- -- 1,370
Dividends paid ($0.04 per
share) ..................... -- -- (2,827) -- -- (2,827)
Net income ................... -- -- 34,102 -- -- 34,102
Treasury stock repurchase .... -- -- -- (47,271) -- (47,271)
Treasury stock issued ........ -- 15 -- 31 -- 46
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1999 ..... $ 76,256 $ 195,374 $ 457,274 $(161,635) $ -- $ 567,269
========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
7
<PAGE> 8
Harte-Hanks, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited Interim Condensed Consolidated Financial Statements
include the accounts of Harte-Hanks, Inc. and subsidiaries (the "Company").
The statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three months and six months ended June 30, 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 and six month income tax provision of $13.1 million and
$23.8 million, respectively, 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 June 30,
In thousands, except per share amount 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EPS
Net Income ................................................... $18,768 $17,010
======= =======
Weighted-average common shares outstanding
used in earnings per share computations .................... 70,519 73,541
======= =======
Earnings per common share .................................... $ 0.27 $ 0.23
======= =======
DILUTED EPS
Net Income ................................................... $18,768 $17,010
======= =======
Shares used in earnings per share computations ............... 72,781 77,212
======= =======
Earnings per common share .................................... $ 0.26 $ 0.22
======= =======
Computation of shares used in earnings per share computations:
Average outstanding common shares ............................ 70,519 73,541
Average common equivalent shares -
dilutive effect of option shares ........................... 2,262 3,671
------- -------
Shares used in earnings per share computations ............... 72,781 77,212
======= =======
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Six Months Ended June 30,
In thousands, except per share amount 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EPS
Net Income ................................................... $34,102 $31,115
======= =======
Weighted-average common shares outstanding
used in earnings per share computations .................... 70,856 73,511
======= =======
Earnings per common share .................................... $ 0.48 $ 0.42
======= =======
DILUTED EPS
Net Income ................................................... $34,102 $31,115
======= =======
Shares used in earnings per share computations ............... 73,193 77,170
======= =======
Earnings per common share .................................... $ 0.47 $ 0.40
======= =======
Computation of shares used in earnings per share computations:
Average outstanding common shares ............................ 70,856 73,511
Average common equivalent shares -
dilutive effect of option shares ........................... 2,337 3,659
------- -------
Shares used in earnings per share computations ............... 73,193 77,170
======= =======
</TABLE>
NOTE D - COMPREHENSIVE INCOME
The Company's total comprehensive income for the second quarter 1999 was equal
to net income, whereas comprehensive income for the second quarter 1998 was $0.6
million greater 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 June 30,
In thousands 1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
Operating revenues
Direct Marketing ................... $ 128,985 $ 121,565
Shoppers ........................... 68,048 65,241
--------- ---------
Total operating revenues ....... $ 197,033 $ 186,806
========= =========
Operating income
Direct Marketing ................... $ 18,524 $ 16,564
Shoppers ........................... 13,758 12,456
Corporate Activities ............... (1,841) (2,332)
--------- ---------
Total operating income ......... $ 30,441 $ 26,688
========= =========
Income before income taxes
Operating income ................... $ 30,441 $ 26,688
Interest expense ................... (49) (59)
Interest income .................... 1,751 2,766
Other, net ......................... (257) (168)
--------- ---------
Total income before income taxes $ 31,886 $ 29,227
========= =========
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Six Months Ended June 30,
In thousands 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Operating revenues
Direct Marketing ................... $ 253,919 $ 235,992
Shoppers ........................... 131,242 128,487
--------- ---------
Total operating revenues ....... $ 385,161 $ 364,479
========= =========
Operating income
Direct Marketing ................... $ 35,808 $ 30,640
Shoppers ........................... 22,543 19,763
Corporate Activities ............... (3,809) (4,590)
--------- ---------
Total operating income ......... $ 54,542 $ 45,813
========= =========
Income before income taxes
Operating income ................... $ 54,542 $ 45,813
Interest expense ................... (90) (129)
Interest income .................... 3,849 8,381
Other, net ......................... (357) (861)
--------- ---------
Total income before income taxes $ 57,944 $ 53,204
========= =========
</TABLE>
10
<PAGE> 11
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 1999 JUNE 30, 1998 CHANGE JUNE 30, 1999 JUNE 30, 1998 CHANGE
- ------------ ------------- ------------- ------ ------------- ------------- ------
<S> <C> <C> <C> <C> <C>
Revenues $ 197,033 $ 186,806 5.5% $ 385,161 $ 364,479 5.7%
Operating expenses 166,592 160,118 4.0% 330,619 318,666 3.8%
----------- ---------- ----------- ----------
Operating income $ 30,441 $ 26,688 14.1% $ 54,542 $ 45,813 19.1%
=========== ========== =========== ==========
Net income $ 18,768 $ 17,010 10.3% $ 34,102 $ 31,115 9.6%
=========== ========== =========== ==========
Diluted earnings
per share $ 0.26 $ 0.22 18.2% $ 0.47 $ 0.40 17.5%
=========== ========== =========== ==========
</TABLE>
Consolidated revenues grew 5.5% to $197.0 million and operating income grew
14.1% to $30.4 million in the second quarter of 1999 when compared to the second
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 4.0% to $166.6
million.
Net income grew 10.3% to $18.8 million, or 26 cents per share, compared to 22
cents per share on a diluted basis. The net income growth resulted from the
growth in operating income offset by a decrease of $1.0 million in interest
income.
DIRECT MARKETING
- ----------------
Direct marketing operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 1999 JUNE 30, 1998 CHANGE JUNE 30, 1999 JUNE 30, 1998 CHANGE
- ------------ ------------- ------------- ------ ------------- ------------- ------
<S> <C> <C> <C> <C> <C>
Revenues $ 128,985 $ 121,565 6.1% $ 253,919 $ 235,992 7.6%
Operating expenses 110,461 105,001 5.2% 218,111 205,352 6.2%
----------- ---------- ----------- ----------
Operating income $ 18,524 $ 16,564 11.8% $ 35,808 $ 30,640 16.9%
=========== ========== =========== ==========
</TABLE>
Direct marketing revenues increased $7.4 million, or 6.1%, in the second quarter
of 1999 compared to 1998. Revenue increases were experienced by response
management which had strong growth and marketing services which experienced
steady growth. Response management revenues increased due to increased inbound
telemarketing and internet business with existing customers and new customer
gains. 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
Printing Management Systems, Inc. (PMSI) and the May 1999 acquisition of Direct
Marketing Associates, Inc. (DMA) also contributed to the marketing services
revenue increase. Database marketing revenues were soft, primarily due to
slowdowns in the healthcare/managed care and insurance industries, partially
offset by increases in the banking and pharmaceutical industries.
11
<PAGE> 12
Operating expenses increased $5.5 million, or 5.2%, in the second quarter of
1999 compared to 1998. Payroll costs increased $5.5 million due to expanded
hiring to support future revenue growth. General and administrative expense
decreased $1.2 million due to decreased bad debt expense and decreased employee
expenses. Depreciation and amortization expense increased $1.1 million due to
goodwill associated with acquisitions and higher levels of capital investment to
support growth. Operating expenses were also impacted by the acquisitions noted
above.
Direct marketing revenues increased $17.9 million, or 7.6%, in the first six
months of 1999 compared to the first six months of 1998. Response management and
marketing services experienced good revenue growth, while database marketing
experienced softness in the first six months of 1999, partially due to a strong
first half of 1998. Overall, revenue growth resulted from increased business
with both new and existing customers, particularly in services provided to the
retail, high tech, government/not-for-profit and pharmaceutical industries.
Operating expenses rose $12.8 million, or 6.2%, in the first half of 1999
compared to the first half of 1998. Payroll costs increased $11.3 million due to
expanded hiring to support revenue growth. In addition, production costs
increased $2.2 million due to increased volumes. General and administrative
expense decreased $2.5 million primarily due to decreased bad debt expense.
Depreciation and amortization expense increased $1.8 million due to goodwill
associated with acquisitions and higher levels of capital investment to support
growth. The acquisitions mentioned above also contributed to the increased
operating expenses.
SHOPPERS
- --------
Shopper operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
In thousands JUNE 30, 1999 JUNE 30, 1998 CHANGE JUNE 30, 1999 JUNE 30, 1998 CHANGE
- ------------ ------------- ------------- ------ ------------- ------------- ------
<S> <C> <C> <C> <C> <C>
Revenues $ 68,048 $ 65,241 4.3% $ 131,242 $ 128,487 2.1%
Operating expenses 54,290 52,785 2.9% 108,699 108,724 0.0%
----------- ---------- ----------- ----------
Operating income $ 13,758 $ 12,456 10.5% $ 22,543 $ 19,763 14.1%
=========== ========== =========== ==========
</TABLE>
Shopper revenues increased $2.8 million, or 4.3%, in the second quarter of 1999
compared to 1998. Excluding the effects of three small shopper publications
which were sold in April 1998, 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 flyers (both
4-color glossy and non-glossy). In the quarter, Shoppers experienced slowdown in
its real-estate and personals advertising segments. Pre-printed inserts remained
flat during the quarter.
Operating expenses increased $1.5 million, or 2.9%, in the second quarter of
1999 compared to 1998. Excluding the divestiture mentioned above, the increase
in operating expenses was primarily due to increases in payroll costs of $0.7
million, additional production costs of $1.1 million, and increased postage of
$0.6 million due to increased volumes.
Shopper revenues increased $2.8 million, or 2.1%, in the first six months of
1999 compared to the first six months of 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 flyers (both
4-color glossy and non-glossy) and pre-printed inserts. In the first half of
12
<PAGE> 13
1999, Shoppers experienced slowdown in its real-estate and personals advertising
segments.
Operating expenses remained flat in the first half of 1999 compared to the first
half of 1998. Excluding the divestiture mentioned above, the increase in
operating expenses was primarily due to increases in payroll costs of $0.9
million, additional production costs of $2.0 million, and increased postage of
$1.6 million due to increased volumes.
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 investment
portfolio.
Interest Expense/Interest Income
- --------------------------------
Interest income decreased $1.0 million in the second quarter of 1999 and $4.5
million in the first six months of 1999 over the same periods in 1998. The
decrease in the first six months of 1999 over the same period in 1998 was 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 second quarter of
1999 and $1.8 million in the first six months of 1999 compared to the same
periods in 1998. This increase was due primarily to the higher pre-tax income
levels. The effective tax rate was 41.2% for the second quarter of 1999 and the
first six months of 1999 compared to 41.8% and 41.5%, respectively, for the same
periods of 1998.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities of continuing operations for the six
months ended June 30, 1999 was $51.3 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 inflows from investing
activities were $1.2 million for the first six months of 1999 compared to net
cash inflows of $204.7 million for the first six months of 1998. The cash
inflows from investing activities in 1998 were primarily attributable to sales
and maturities of marketable securities totaling $217.3 million, the proceeds of
which were used to help fund the Company's tax payments made in the first
quarter of 1998. Net cash outflows from financing activities were $45.3 million
compared to net cash outflows of $7.7 million in 1998. The cash outflow from
financing activities in 1999 is attributable primarily to the repurchase of
treasury stock of $47.3 million in the first six months 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.
Acquisitions
- ------------
In May, 1999, the Company acquired Direct Marketing Associates, Inc. of
Baltimore, Maryland, a leading provider of integrated direct marketing services
to commercial, government and non-profit organizations.
13
<PAGE> 14
In June, 1999, the Company acquired LYNQS Newmedia of Kansas City, Missouri, a
developer of internet and intranet applications for the financial services,
pharmaceutical and other industries.
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 adversely
affect the Company's future performance, including its revenues, net income and
earnings per share; however, the risks described below are not the only ones the
Company faces. Additional risks and uncertainties that are not presently known,
or that the Company currently considers immaterial, could also impair the
Company's business operations.
Legislation -- There could be a material adverse impact on the Company's direct
marketing business due to the enactment of legislation or industry regulations
arising from public concern over consumer privacy issues. Restrictions or
prohibitions could be placed upon the collection and use of information that is
currently legally available.
Data Suppliers -- The Company could suffer a material adverse effect if owners
of the data the Company uses were to withdraw the data. Data providers could
withdraw their data if there is a competitive reason to do so or if legislation
is passed restricting the use of the data.
Acquisitions -- In recent years the Company has made a number of acquisitions in
its direct 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.
Failure to continually improve the Company's current processes and to develop
new products and services could result in loss of the Company's customers to
current or future competitors. In addition, failure to gain market acceptance of
new products and services could adversely affect the Company's growth.
Qualified Personnel -- Competition for qualified technical and other personnel
is intense, and the Company periodically is required to pay premium wages to
attract and retain personnel. There can be no assurance that the Company will be
able to continue to hire and retain sufficient qualified management, technical,
sales and other personnel necessary to conduct operations successfully,
particularly if the planned growth of the Company's business occurs.
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
14
<PAGE> 15
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. Postal
increases could force direct mailers to mail fewer pieces and to target their
prospects more carefully. This sort of response by direct mailers could affect
the Company by decreasing the amount of processing services purchased.
Economic Conditions -- Changes in national economic conditions can affect levels
of advertising expenditures generally, and such changes can affect each of the
Company's businesses. Revenues from the Company's shopper business are dependent
to a large extent on local advertising expenditures in the markets in which they
operate. Such expenditures are substantially affected by the strength of the
local economies in those markets. Direct 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 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 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 developed a remediation plan to resolve the issue. The
most important areas of focus of the Company's Year 2000 remediation plan were
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 utilized both internal and
external resources to correct or reprogram, and test the systems for the Year
2000 compliance.
The Company's compliance objectives included products and services the Company
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 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 these systems
operate on. As part of this process, the Company developed a standard Year 2000
15
<PAGE> 16
compliance certification memorandum which was sent to all vendors who had or
were 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 contacted its critical
suppliers and other entities to determine the extent to which the Company's
interface systems were vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. While the Company has not been informed of any
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 which monitored the status of
compliance efforts to ensure that compliance issues were consistently addressed.
The Company's Year 2000 remediation plan consisted 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%, 100%, 98% and 98% completed, respectively. With regards to business
operation support systems, the Company is 100%, 100%, 99%, and 99% completed,
respectively. Finally, suppliers, facilities and equipment are 100%, 100%, 98%,
98% completed, respectively. The Company completed its high priority
reprogramming efforts as of March 31, 1999, and has performed extensive testing
efforts through June 30, 1999. Some items will be completed in the third
quarter, mostly consisting of low priority items such as phone and voicemail
system updates; however, the Company can provide no assurance in this regard. In
addition, several recent acquisitions are currently being reviewed to insure
that they are also Year 2000 complaint based on the Company's definition.
The Company has spent $3.85 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 $.57 million. The cost of the project and the date on which the
Company believed it would complete the Year 2000 modifications were based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources. At
this time, based on the status of the project, we believe these estimates have
been achieved and actual results should not differ materially from those stated
above.
Through the Company's Year 2000 review efforts, we believe that all critical
areas are ready to operate in the Year 2000 and beyond. It has been our goal to
manage this date change successfully without adverse affect on our employees and
our customers. There can be no guarantee that the Company will not 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.
16
<PAGE> 17
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 4, 1999. At the
meeting the stockholders were requested to vote on the following:
To elect Houston H. Harte and Richard M. Hochhauser as Class III
directors for a three-year term. The result of the vote was as follows:
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
Houston H. Harte 62,314,000 349,026
Richard M. Hochhauser 62,332,724 330,302
</TABLE>
The names of each director whose term of office continued are: David
L. Copeland, Dr. Peter T. Flawn, Larry Franklin, Christopher M. Harte
and James L. Johnson.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See index to Exhibits on Page 19.
(b) No Form 8-K has been filed during the three months ended
June 30, 1999.
17
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
HARTE-HANKS, INC.
August 13, 1999 /s/ Jacques D. Kerrest
--------------- ----------------------------------
Date Jacques D. Kerrest
Senior Vice President, Finance and
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
<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>
19
<PAGE> 20
<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. 21
*21 Subsidiaries of the Company. 22
*27 Financial Data Schedule. 23
</TABLE>
- ---------------------
*Filed herewith
20
<PAGE> 1
Exhibit 11
HARTE-HANKS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30,
In thousands, except per share amount 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EPS
Net Income ................................................... $18,768 $17,010
======= =======
Weighted-average common shares outstanding
used in earnings per share computations .................... 70,519 73,541
======= =======
Earnings per common share .................................... $ 0.27 $ 0.23
======= =======
DILUTED EPS
Net Income ................................................... $18,768 $17,010
======= =======
Shares used in earnings per share computations ............... 72,781 77,212
======= =======
Earnings per common share .................................... $ 0.26 $ 0.22
======= =======
Computation of shares used in earnings per share computations:
Average outstanding common shares ............................ 70,519 73,541
Average common equivalent shares -
dilutive effect of option shares ........................... 2,262 3,671
------- -------
Shares used in earnings per share computations ............... 72,781 77,212
======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
In thousands, except per share amount 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EPS
Net Income ................................................... $34,102 $31,115
======= =======
Weighted-average common shares outstanding
used in earnings per share computations .................... 70,856 73,511
======= =======
Earnings per common share .................................... $ 0.48 $ 0.42
======= =======
DILUTED EPS
Net Income ................................................... $34,102 $31,115
======= =======
Shares used in earnings per share computations ............... 73,193 77,170
======= =======
Earnings per common share .................................... $ 0.47 $ 0.40
======= =======
Computation of shares used in earnings per share computations:
Average outstanding common shares ............................ 70,856 73,511
Average common equivalent shares -
dilutive effect of option shares ........................... 2,337 3,659
------- -------
Shares used in earnings per share computations ............... 73,193 77,170
======= =======
</TABLE>
21
<PAGE> 1
Exhibit 21
RESTRICTED SUBSIDIARIES
OF HARTE-HANKS, INC.
As of June 30, 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%
Direct Marketing Associates, Inc. Maryland 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.
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 37,517
<SECURITIES> 90,045
<RECEIVABLES> 131,777
<ALLOWANCES> 1,987
<INVENTORY> 4,106
<CURRENT-ASSETS> 281,704
<PP&E> 213,346
<DEPRECIATION> 112,018
<TOTAL-ASSETS> 703,330
<CURRENT-LIABILITIES> 108,515
<BONDS> 0
0
0
<COMMON> 76,256
<OTHER-SE> 491,013
<TOTAL-LIABILITY-AND-EQUITY> 703,330
<SALES> 385,161
<TOTAL-REVENUES> 385,161
<CGS> 283,553
<TOTAL-COSTS> 330,619
<OTHER-EXPENSES> (3,492)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90
<INCOME-PRETAX> 57,944
<INCOME-TAX> 23,842
<INCOME-CONTINUING> 34,102
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,102
<EPS-BASIC> .48
<EPS-DILUTED> .47
</TABLE>
