1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange - ---- Act of 1934. For the quarterly period ended June 30, 1998 ------------- - ---- 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. (formerly HARTE-HANKS COMMUNICATIONS, INC.) ------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 74-1677284 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 200 Concord Plaza Drive, San Antonio, Texas 78216 ------------------------------------------------- (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, 73,299,355 shares as of July 31, 1998.
2 2 HARTE-HANKS, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT June 30, 1998 <TABLE> <CAPTION> Page <S> <C> <C> Part I. Financial Information Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - 3 June 30, 1998 and December 31, 1997 Consolidated Statements of Operations - 4 Three months ended June 30, 1998 and 1997 Consolidated Statements of Operations - 5 Six months ended June 30, 1998 and 1997 Consolidated Statements of Cash Flows - 6 Six months ended June 30, 1998 and 1997 Consolidated Statements of Stockholders' Equity - 7 Six months ended June 30, 1998 and 1997 Notes to Interim Condensed Consolidated Financial 8 Statements Item 2. Management's Discussion and Analysis of Financial 11 Condition and Results of Operations Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 (a) Exhibits (b) Reports on Form 8-K Signature 17 </TABLE>
3 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, 1998 1997 ------------ ------------ <S> <C> <C> Assets Current assets Cash and cash equivalents ........................ $ 57,572 $ 83,675 Short-term investments ........................... 170,408 388,145 Accounts receivable, net ......................... 115,681 109,340 Inventory ........................................ 6,107 7,703 Prepaid expenses ................................. 10,246 8,473 Current deferred income tax benefit .............. 11,738 12,518 Other current assets ............................. 2,647 3,285 --------- --------- Total current assets ........................... 374,399 613,139 Property, plant and equipment, net ................. 88,332 89,351 Goodwill, net ...................................... 244,645 250,363 Other assets ....................................... 7,165 2,070 --------- --------- Total assets ................................... $ 714,541 $ 954,923 ========= ========= Liabilities and Stockholders' Equity Current liabilities Accounts payable ................................. $ 52,821 $ 49,918 Accrued payroll and related expenses ............. 19,348 23,097 Customer deposits and unearned revenue ........... 20,122 17,944 Income taxes payable ............................. 4,370 270,440 Other current liabilities ........................ 6,922 9,950 --------- --------- Total current liabilities ...................... 103,583 371,349 Other long term liabilities ........................ 19,376 17,337 --------- --------- Total liabilities .............................. 122,959 388,686 --------- --------- Stockholders' equity Common stock, $1 par value, 250,000,000 shares authorized. 75,429,883 and 74,842,982 shares issued at June 30, 1998 and December 31, 1997, respectively ................................... 75,430 74,843 Additional paid-in capital ....................... 182,363 177,238 Accumulated other comprehensive income ........... -- (577) Retained earnings ................................ 390,906 362,000 --------- --------- 648,699 613,504 Less treasury stock: 2,092,708 and 1,648,608 shares at cost at June 30, 1998 and December 31, 1997, respectively ............................. (57,117) (47,267) --------- --------- Total stockholders' equity ..................... 591,582 566,237 --------- --------- Total liabilities and stockholders' equity ..... $ 714,541 $ 954,923 ========= ========= </TABLE> See Notes to Interim Condensed Consolidated Financial Statements.
4 4 Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts) - ------------------------------------------------------------------------------- (Unaudited) <TABLE> <CAPTION> Three Months Ended June 30, --------------------------- 1998 1997 ---- ---- <S> <C> <C> Operating revenues ............................... $ 186,806 $ 150,964 --------- --------- Operating expenses Payroll ........................................ 65,422 56,143 Production and distribution .................... 71,896 56,316 Advertising, selling, general and administrative................................ 15,671 13,543 Depreciation ................................... 5,226 4,072 Goodwill amortization .......................... 1,903 1,125 --------- --------- 160,118 131,199 --------- --------- Operating income ................................. 26,688 19,765 --------- --------- Other expenses (income) Interest expense ............................... 59 1,854 Interest income ................................ (2,766) (7) Other, net ..................................... 168 (566) --------- --------- (2,539) 1,281 --------- --------- Income from continuing operations before income taxes .......................................... 29,227 18,484 Income tax expense ............................... 12,217 7,844 --------- --------- Income from continuing operations ................ 17,010 10,640 Income from discontinued operations, net of income taxes ............................ -- 5,705 --------- --------- Net income ....................................... $ 17,010 $ 16,345 ========= ========= Basic earnings per common share: Continuing operations .......................... $ 0.23 $ 0.14 Discontinued operations ........................ -- 0.08 --------- --------- Basic earnings per common share .............. $ 0.23 $ 0.22 ========= ========= Weighted-average common shares outstanding ....... 73,541 74,558 ========= ========= Diluted earnings per common share: Continuing operations .......................... $ 0.22 $ 0.14 Discontinued operations ........................ -- 0.07 --------- --------- Diluted earnings per common share ............ $ 0.22 $ 0.21 ========= ========= Weighted-average common and common equivalent shares outstanding ........................... 77,212 77,664 ========= ========= </TABLE> See Notes to Interim Condensed Consolidated Financial Statements.
5 5 Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts) - ------------------------------------------------------------------------------- (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, ------------------------- 1998 1997 ---- ---- <S> <C> <C> Operating revenues ............................... $ 364,479 $ 289,388 --------- --------- Operating expenses Payroll ........................................ 132,256 109,821 Production and distribution .................... 139,077 109,410 Advertising, selling, general and administrative ............................... 32,912 27,653 Depreciation ................................... 10,592 8,041 Goodwill amortization .......................... 3,829 2,205 --------- --------- 318,666 257,130 --------- --------- Operating income ................................. 45,813 32,258 --------- --------- Other expenses (income) Interest expense ............................... 129 3,765 Interest income ................................ (8,381) (50) Other, net ..................................... 861 (321) --------- --------- (7,391) 3,394 --------- --------- Income from continuing operations before income taxes .......................................... 53,204 28,864 Income tax expense ............................... 22,089 12,256 --------- --------- Income from continuing operations ................ 31,115 16,608 Income from discontinued operations, net of income taxes ............................ -- 9,754 --------- --------- Net income ....................................... $ 31,115 $ 26,362 ========= ========= Basic earnings per common share: Continuing operations .......................... $ 0.42 $ 0.22 Discontinued operations ........................ -- 0.13 --------- --------- Basic earnings per common share .............. $ 0.42 $ 0.35 ========= ========= Weighted-average common shares outstanding ....... 73,511 74,410 ========= ========= Diluted earnings per common share: Continuing operations .......................... $ 0.40 $ 0.21 Discontinued operations ........................ -- 0.13 --------- --------- Diluted earnings per common share ............ $ 0.40 $ 0.34 ========= ========= Weighted-average common and common equivalent shares outstanding ............................. 77,170 77,566 ========= ========= </TABLE> See Notes to Interim Condensed Consolidated Financial Statements.
6 6 Harte-Hanks, Inc. and Subsidiaries <TABLE> Consolidated Statements of Cash Flows (in thousands) - ---------------------------------------------------------------------------------------- (Unaudited) <CAPTION> Six Months Ended June 30, ------------------------- 1998 1997 ---- ---- <S> <C> <C> Operating Activities Net income .......................................... $ 31,115 $ 26,362 Adjustments to reconcile net income to cash (used in) provided by operating activities: Income from discontinued operations ............... -- (9,754) Depreciation ...................................... 10,592 8,041 Goodwill amortization ............................. 3,829 2,205 Amortization of option related compensation ....... 290 406 Deferred income taxes ............................. (601) 1,101 Other, net ........................................ 906 528 Changes in operating assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable, net ..... (6,341) 9,386 Decrease in inventory ............................... 1,596 1,545 Increase in prepaid expenses and other current assets .................................. (1,135) (1,777) Increase (decrease) in accounts payable ........... 2,903 (1,384) Decrease in other accrued expenses and other liabilities ........................... (5,019) (6,121) Other, net ........................................ 4,411 6,717 --------- --------- Net cash provided by continuing operations ..... 42,546 37,255 --------- --------- Net cash (used in) provided by discontinued operating activities ............................ (265,650) 16,375 --------- --------- Net cash (used in) provided by operating activities .................................... (223,104) 53,630 --------- --------- Investing Activities Acquisitions ........................................ (2,275) (5,949) Purchases of property, plant and equipment .......... (10,419) (15,138) Proceeds from sale of property, plant and equipment . 117 1,760 Net proceeds from sale of and maturities of available-for-sale short-term investments ....... 217,293 -- Discontinued operations: Purchases of property, plant and equipment ........ -- (2,288) Proceeds from sale of property, plant and equipment ....................................... -- 16 Payments on film contracts ........................ -- (919) --------- --------- Net cash provided by (used in) investing activities .................................... 204,716 (22,518) --------- --------- Financing Activities Long-term borrowings ................................ -- 193,300 Payments on debt, including current maturities ..... -- (217,665) Issuance of common stock ............................ 4,344 10,372 Purchase of treasury stock .......................... (9,850) (13,494) Dividends paid ...................................... (2,209) (1,486) --------- --------- Net cash used in financing activities ........... (7,715) (28,973) --------- --------- Net (decrease) increase in cash ..................... (26,103) 2,139 Cash and cash equivalents at beginning of year ...... 83,675 12,017 --------- --------- Cash and cash equivalents at end of period .......... $ 57,572 $ 14,156 ========= ========= </TABLE> See Notes to Interim Condensed Consolidated Financial Statements.
7 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' In thousands Stock Capital Earnings Stock Income Equity ----------- ----------- --------- --------- -------------- ------------ <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 1997 ... $ 73,604 $ 149,875 $ 29,213 $ -- $ -- $ 252,692 Common stock issued - employee benefit plans ............ 154 1,703 -- -- -- 1,857 Exercise of stock options .... 1,902 6,749 -- -- -- 8,651 Tax benefit of options exercised ................ -- 5,764 -- -- -- 5,764 Dividends paid ($0.02 per share) ................... -- -- (1,486) -- -- (1,486) Net income ................... -- -- 26,362 -- -- 26,362 Treasury stock repurchase .... (542) 542 -- (13,494) -- (13,494) --------- --------- --------- --------- --------- --------- Balance at June 30, 1997 ..... $ 75,118 $ 164,633 $ 54,089 $ (13,494) $ -- $ 280,346 ========= ========= ========= ========= ========= ========= Balance at January 1, 1998 ... $ 74,843 $ 177,238 $ 362,000 $ (47,267) $ (577) $ 566,237 Common stock issued - employee benefit plans ............ 111 1,982 -- -- -- 2,093 Exercise of stock options .... 476 1,766 -- -- -- 2,242 Tax benefit of options exercised ................ -- 1,377 -- -- -- 1,377 Dividends paid ($0.03 per share) ................... -- -- (2,209) -- -- (2,209) Net income ................... -- -- 31,115 -- -- 31,115 Treasury stock repurchase .... -- -- -- (9,850) -- (9,850) Change in unrealized loss on short-term investments (net of tax) ................. -- -- -- -- 577 577 --------- --------- --------- --------- --------- --------- Balance at June 30, 1998 ..... $ 75,430 $ 182,363 $ 390,906 $ (57,117) $ -- $ 591,582 ========= ========= ========= ========= ========= ========= </TABLE> See Notes to Interim Condensed Consolidated Financial Statements.
8 8 Harte-Hanks, Inc. and Subsidiaries Notes to Interim Condensed Consolidated Financial Statements (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited Interim Condensed Consolidated Financial Statements include the accounts of Harte-Hanks, Inc. and subsidiaries (the "Company"). The statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1997. Certain prior period amounts have been reclassified for comparative purposes. NOTE B - DISCONTINUED NEWSPAPER AND TELEVISION OPERATIONS On October 15, 1997, the Company sold its newspaper operations, KENS-TV, the CBS affiliate in San Antonio, and KENS-AM radio to the E.W. Scripps Company (NYSE: SSP) for a cash price of $775 million plus approximately $15 million for working capital. Because the newspaper and television operations represent entire business segments that were divested, their results are reported as "discontinued operations" for January 1, 1997 through October 15, 1997. NOTE C - INCOME TAXES The Company's quarterly and six month income tax provision of $12.2 million and $22.1 million, respectively, was calculated using an effective income tax rate of approximately 42%. The Company's effective income tax rate is derived by estimating pretax income and income tax expense for the year ended December 31, 1998. The effective income tax rate calculated is higher than the federal statutory rate of 35% due to the addition of state taxes and to certain expenses recorded for financial reporting purposes (primarily goodwill amortization) which are not deductible for federal income tax purposes. NOTE D - EARNINGS PER SHARE The Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This statement requires the presentation of basic earnings per share (EPS) and diluted EPS for reporting periods of all public companies ending after December 15, 1997, instead of the primary and fully diluted EPS previously reported. The new standard requires the restatement of EPS for all periods presented. EPS is calculated as follows:
9 9 <TABLE> <CAPTION> Three Months Ended June 30, In thousands, except per share amount 1998 1997 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> BASIC EPS Income from continuing operations .................................... $ 17,010 $ 10,640 Income from discontinued operations .................................. -- 5,705 -------- -------- Net Income ........................................................... $ 17,010 $ 16,345 ======== ======== Weighted-average common shares outstanding used in net earnings per share computations ..................... 73,541 74,558 ======== ======== Basic earnings per common share: Continuing operations ........................................... $ 0.23 $ 0.14 Discontinued operations ......................................... -- 0.08 -------- -------- Net income ...................................................... $ 0.23 $ 0.22 ======== ======== DILUTED EPS Income from continuing operations .................................... $ 17,010 $ 10,640 Income from discontinued operations .................................. -- 5,705 -------- -------- Net Income ........................................................... $ 17,010 $ 16,345 ======== ======== Shares used in net earnings per share computations ................... 77,212 77,664 ======== ======== Diluted earnings per common share: Continuing operations ........................................... $ 0.22 $ 0.14 Discontinued operations ......................................... -- 0.07 -------- -------- Net income ...................................................... $ 0.22 $ 0.21 ======== ======== Computation of shares used in net earnings per share computations: Average outstanding common shares .................................... 73,541 74,558 Average common equivalent shares - dilutive effect of option shares ................................ 3,671 3,106 -------- -------- Shares used in net earnings per share computations ................... 77,212 77,664 ======== ======== </TABLE> <TABLE> <CAPTION> Six Months Ended June 30, In thousands, except per share amount 1998 1997 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> BASIC EPS Income from continuing operations .................................... $ 31,115 $ 16,608 Income from discontinued operations .................................. -- 9,754 -------- -------- Net Income ........................................................... $ 31,115 $ 26,362 ======== ======== Weighted-average common shares outstanding used in net earnings per share computations ..................... 73,511 74,410 ======== ======== Basic earnings per common share: Continuing operations ........................................... $ 0.42 $ 0.22 Discontinued operations ......................................... -- 0.13 -------- -------- Net income ...................................................... $ 0.42 $ 0.35 ======== ======== DILUTED EPS Income from continuing operations .................................... $ 31,115 $ 16,608 Income from discontinued operations .................................. -- 9,754 -------- -------- Net Income ........................................................... $ 31,115 $ 26,362 ======== ======== Shares used in net earnings per share computations ................... 77,170 77,566 ======== ======== Diluted earnings per common share: Continuing operations ........................................... $ 0.40 $ 0.21 Discontinued operations ......................................... -- 0.13 -------- -------- Net income ...................................................... $ 0.40 $ 0.34 ======== ======== Computation of shares used in net earnings per share computations: Average outstanding common shares .................................... 73,511 74,410 Average common equivalent shares - dilutive effect of option shares ................................ 3,659 3,156 -------- -------- Shares used in net earnings per share computations ................... 77,170 77,566 ======== ======== </TABLE>
10 10 NOTE E - COMPREHENSIVE INCOME The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." This statement requires the reporting of comprehensive income and its components in the financial statements, or in the notes to interim financial statements, for reporting periods ending after December 15, 1997. Comprehensive income is defined as the total non-owner changes in equity, which includes net income and all revenues, expenses, gains and losses that are excluded from net income under generally accepted accounting principles, but do not result from investments by owners or distributions to owners. The Company's total comprehensive income for the second quarter 1998 was $0.6 million greater than net income, whereas comprehensive income for the second quarter 1997 was equal to net income. Total comprehensive income for the six months ending June 30 of 1998 was also $0.6 million greater than net income, whereas comprehensive income was equal to net income for the same period of 1997. NOTE F - STOCKHOLDERS' EQUITY On March 16, 1998, the Company effected a two-for-one split of its common stock in the form of a 100% stock dividend paid to holders of record on March 2, 1998. All share, per share and common stock amounts have been restated to retroactively reflect the stock split. In May 1998, the Company amended its Certificate of Incorporation to increase its total authorized common stock to 250,000,000 shares. The financial statements reflect this increase in authorized shares of common stock. NOTE G - RECENTLY ISSUED ACCOUNTING STANDARDS In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on the timing and amount of revenue recognition when licensing, selling, leasing or otherwise marketing computer software and is effective for transactions entered into during fiscal years beginning after December 15, 1997. The adoption of the provisions of SOP 97-2, which were effective as of January 1, 1998, have not materially affected the Company's financial condition or results of operations.
11 11 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS As described in Note B of the Notes to Interim Condensed Consolidated Financial Statements included herein, on October 15, 1997, the Company sold its newspaper and television operations. Therefore, the newspaper and television operations results are excluded from management's discussion and analysis of financial condition and results of operations below. Operating results from continuing operations -- direct marketing and shoppers -- were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 1998 JUNE 30, 1997 CHANGE JUNE 30, 1998 JUNE 30, 1997 CHANGE - ------------ ------------- ------------- ------ ------------- ------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $186,806 $150,964 23.7% $364,479 $289,388 25.9% Operating expenses 160,118 131,199 22.0% 318,666 257,130 23.9% -------- -------- -------- -------- Operating income $ 26,688 $ 19,765 35.0% $ 45,813 $ 32,258 42.0% ======== ======== ======== ======== Net income $ 17,010 $ 10,200 66.8% $ 31,115 $ 16,168 92.4% ======== ======== ======== ======== Diluted earnings per share $ 0.22 $ 0.13 69.2% $ 0.40 $ 0.21 90.5% ======== ======== ======== ======== </TABLE> (The results above exclude second quarter 1997 and six months ended June 30, 1997 non-recurring income of $0.8 million, or $0.4 million net of income taxes. This represents a gain on the sale of stock in another company partially offset by other non-recurring items. Including this gain, net income was $10.6 million or 14 cents per share.) Consolidated revenues grew 23.7% to $186.8 million and operating income grew 35.0% to $26.7 million in the second quarter of 1998 when compared to the second quarter of 1997. The Company's overall growth resulted from increased business with both new and existing customers and from the sale of new products and services. Overall operating expenses compared to 1997 increased 22.0% to $160.1 million. Net income grew 66.8% to $17.0 million, or 22 cents per share, compared to 13 cents per share on a diluted basis. The net income growth resulted from the growth in operating income as well as from $2.8 million interest income in the second quarter of 1998 compared to $1.9 million interest expense (allocated based upon percentage of net assets) for the same period in 1997. DIRECT MARKETING Direct marketing operating results were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 1998 JUNE 30, 1997 CHANGE JUNE 30, 1998 JUNE 30, 1997 CHANGE - ------------ ------------- ------------- ------ ------------- ------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $121,565 $100,413 21.1% $235,992 $194,203 21.5% Operating expenses 105,001 87,685 19.7% 205,352 170,985 20.1% -------- -------- -------- -------- Operating income $ 16,564 $ 12,728 30.1% $ 30,640 $ 23,218 32.0% ======== ======== ======== ======== </TABLE> Direct marketing revenues increased $21.2 million, or 21.1%, in the second quarter of 1998 when compared to 1997. Revenues were lead by database marketing, which had significant revenue growth for the quarter, followed by response management and marketing services, both of which experienced good internal revenue growth. Database marketing revenues increased primarily due to the growth in database processing and in hardware sales. Database marketing revenues were also impacted by the November 1997 acquisition of Mercantile Software Systems, which contributed significantly to the increased hardware sales. Response management revenues increased due to increased telemarketing and
12 12 internet business with existing customers, new customer gains, the November 1997 acquisition of Tele Support Services and to a lesser extent the May 1997 opening of the Langhorne, PA call center. Marketing services' revenues, led by its logistics operations, increased due to increased product sales as well as new product sales to new and existing customers, primarily in the retail industry. Operating expenses increased $17.3 million, or 19.7%, in the second quarter of 1998 when compared to 1997. Payroll costs increased $5.3 million due to expanded hiring to support revenue growth. Also contributing to the increased operating expenses were additional production costs of $8.5 million due to increased volumes. General and administrative expense increased $2.3 million due to increased professional and outside services fees and increased employee expenses related to growth. Depreciation expense increased $1.0 million due to higher levels of capital investment to support growth. Operating expenses were also impacted by the acquisitions noted above. Direct marketing revenues increased $41.8 million, or 21.5%, in the first six months of 1998 compared to the first six months of 1997. Database marketing, response management and marketing services all experienced significant revenue growth. Overall, revenue growth resulted from increased business with both new and existing customers, particularly in services provided to the retail, financial services, high technology and insurance industries. Operating expenses rose $34.4 million, or 20.1%, in the first half of 1998 when compared to the first half of 1997. Payroll costs increased $12.3 million due to expanded hiring to support revenue growth. In addition, production costs increased $14.5 million due to increased volumes. General and administrative expense increased $5.0 million due to increased professional and outside services fees as well as an increased provision for bad debt related to the increased revenues. Depreciation expense increased $2.1 million due to the higher levels of capital investment. The acquisitions mentioned above also contributed to the increased operating expenses. SHOPPERS Shopper operating results were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 1998 JUNE 30, 1997 CHANGE JUNE 30, 1998 JUNE 30, 1997 CHANGE - ------------ ------------- ------------- ------ ------------- ------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $ 65,241 $ 50,551 29.1% $128,487 $ 95,185 35.0% Operating expenses 52,785 41,488 27.2% 108,724 81,922 32.7% -------- -------- -------- -------- Operating income $ 12,456 $ 9,063 37.4% $ 19,763 $ 13,263 49.0% ======== ======== ======== ======== </TABLE> Shopper revenues increased $14.7 million, or 29.1%, in the second quarter of 1998 as compared to 1997. The increase was primarily due to the September 1997 acquisition of the ABC Shopper Group, which accounted for $16.0 million of the revenue increase, partially offset by the sale of the Dallas-Fort Worth Shoppers Guide in April 1998 which resulted in a $1.3 million revenue decrease. The increased revenues were influenced by increased employment-related in-book revenues and increased distribution product revenues partially offset by decreased in-book ROP advertising, automotive and real estate in particular, and declines in standard print and delivery products. Distribution product revenues increased due to higher volumes in four color glossy print and deliver products and preprinted inserts. Operating expenses increased $11.3 million, or 27.2%, in the second quarter of 1998 when compared to 1997. The acquisition of the ABC Shopper Group accounted for a $13.9 million increase in operating expenses. The sale of the Dallas-Fort Worth Shoppers Guide resulted in a $1.3 million reduction in operating expenses. Excluding the acquisition and divestiture mentioned above, operating costs declined primarily due to decreased labor costs of $1.2 million which were influenced by improved
13 13 production efficiencies and staff reductions. Shopper revenues increased $33.3 million, or 35.0%, in the first six months of 1998 compared to the first six months of 1997. The ABC Shopper Group acquisition accounted for $32.0 million of this increase while the sale of the Dallas-Fort Worth Shoppers Guide in April 1998 resulted in a $1.2 million revenue decrease. Excluding the effects of the acquisition and the divestiture discussed above, revenues grew 2.3% due to growth in preprinted inserts, four-color glossy print and deliver products, in-book employment related advertising and improved trade sales. Gains in these categories were partially offset by declines in standard print and deliver products and in automotive and real estate related in-book advertising. Operating expenses rose $26.8 million, or 32.7%, in the first half of 1998 when compared to the first half of 1997. The acquisition of the ABC Shopper Group accounted for a $28.5 million increase in operating costs. The sale of the Dallas-Fort Worth Shoppers Guide resulted in a $1.2 million reduction in operating expenses. Excluding the acquisition and divestiture mentioned above, operating costs declined primarily due to decreased labor costs of $1.3 million which were influenced by improved production efficiencies, staff reductions and lower fringe benefit costs. Other Income and Expense The company realized a loss of approximately $0.4 million in the first quarter 1998 on the sale of equity securities that were held in its short-term investment portfolio. Interest Expense/Interest Income Total Company interest income and expense were allocated to continuing and discontinued operations based on percentage of net assets through October 15, 1997. The percentage allocated to continuing operations was approximately 58% for the second quarter and first six months of 1997. Interest expense decreased $1.8 million in the second quarter of 1998 and $3.6 million in the first six months of 1998 over the same periods in 1997 due to the extinguishment of debt with the proceeds from the October 15, 1997 sale of the Company's newspaper and television operations. Interest income increased $2.8 million in the second quarter of 1998 and $8.3 million in the first six months of 1998 over the same periods in 1997 due to the short-term investment of the proceeds from the sale of newspaper and television operations, after debt extinguishment, operational fundings and income tax payments. Income Taxes The Company's income tax expense increased $4.4 million in the second quarter and $9.8 million in first six months of 1998, when compared to the second quarter and first six months of 1997. This increase was due primarily to the higher pre-tax income levels. The effective tax rate was 41.8% for the second quarter and 41.5% for the first six months of 1998 compared to 42.4% and 42.5%, respectively for the same periods of 1997. Liquidity and Capital Resources Cash used in operating activities for the six months ended June 30, 1998 was $223.1 million. The cash outflow from operating activities related primarily to the first quarter 1998 payment of $265.7 million in income taxes, resulting from the gain on the October 15, 1997 sale of newspaper and television operations.
14 14 Net cash inflows from investing activities were $204.7 million for the first half of 1998 compared to net cash outflows of $22.5 million for the first half of 1997. The increase of cash inflows from investing activities was primarily attributable to sales and maturities of marketable securities totaling $217.3 million, the proceeds of which were used to help fund the Company's tax payments made in the first quarter of 1998. Net cash outflows from financing activities were $7.7 million compared to $29.0 million in 1997. The decrease in cash outflows from financing activities from 1997 is attributed primarily to the extinguishment of debt in October 1997. Capital resources were available from and provided through the Company's unsecured credit facility through October 15, 1997. All borrowings under the revolving credit facility were to be repaid by December 31, 2001. However, these outstanding borrowings ($306.3 million) were retired on October 15, 1997, funded primarily through the proceeds received from the sale of the Company's newspaper and television operations as described in Note B of the Notes to Interim Condensed Consolidated Financial Statements included herein. Management believes that the proceeds from the Company's sale of newspaper and television operations remaining after the retirement of debt and the payment of income taxes related to the sale, together with cash provided from operating activities, will be sufficient to fund operations and anticipated capital service needs for the foreseeable future. Divestiture On May 1, 1998, the Company sold three of its smallest shopper publications, located in Dallas, TX, Wichita, KS and Springfield, MO, to Central States Publishing, LLC. Recent Developments On July 30, 1998, the Company signed a definitive agreement to acquire Cornerstone Integrated Services of Austin, Texas, a leading provider of technical and marketing support to the high-tech industry. The transaction closed on August 3, 1998. Factors That May Affect Future Results and Financial Condition From time to time, in both written reports and oral statements by senior management, the Company may express its expectations regarding its future performance. These "forward-looking statements" are inherently uncertain, and investors should realize that events could turn out to be other than what senior management expected. Set forth below are some key factors which could affect the Company's future performance. Acquisitions -- In recent years the Company has made a number of acquisitions in its direct marketing and shopper businesses, and it expects to pursue additional acquisition opportunities. Acquisition activities, even if not consummated, require substantial amounts of management time and can distract from normal operations. In addition, there can be no assurance that the synergies and other objectives sought in acquisitions will be achieved. Competition -- Direct marketing is a rapidly evolving business, subject to periodic technological advancements, high turnover of customer personnel who make buying decisions, and changing customer needs and preferences. Consequently, the Company's direct marketing business faces competition in each of its three sectors -- response management/teleservices, database marketing, and marketing services. The Company's shopper business competes for advertising, as well as for readers, with other print and electronic media. Competition comes from local and regional newspapers, magazines, radio, broadcast and cable television,
15 15 shoppers and other communications media that operate in the Company's markets. The extent and nature of such competition are, in large part, determined by the location and demographics of the markets targeted by a particular advertiser, and the number of media alternatives in those markets. Postal Rates -- The Company's shoppers are delivered by standard mail, and postage is the second largest expense, behind payroll, in the Company's shopper business. The present standard postage rates went into effect in July 1995, and the next increase is expected in 1999. Postal rates also influence the demand for the Company's direct marketing services even though the cost of mailings is borne by the Company's customers and is not directly reflected in the Company's revenues or expenses. Newsprint Prices -- Newsprint represents a substantial expense in the Company's shopper operations. In recent years newsprint prices have fluctuated widely, and such fluctuations can materially affect the results of the Company's operations. Economic Conditions -- Changes in national economic conditions can affect levels of advertising expenditures generally, and such changes can affect each of the Company's businesses. In addition, revenues from the Company's shopper business is dependent to a large extent on local advertising expenditures in the markets in which they operate. Such expenditures are substantially affected by the strength of the local economies in those markets. Direct marketing revenues are dependent on national and international economics. Year 2000 Issue -- The Year 2000 issue is a result of computer programs being written using two digits rather than four to define the applicable year. The Company has conducted a comprehensive review of its computer systems to identify those that could be affected by the Year 2000 issue and has developed an implementation plan to resolve the issue. The Company is utilizing both internal and external resources to correct or reprogram, and test the systems for the year 2000 compliance. It is anticipated that all reprogramming efforts will be complete by December 31, 1998, allowing adequate time for testing. The Company is also in the process of obtaining confirmations, from primary processing vendors and customers, that plans are being developed to address processing of transactions in the year 2000. The Company does not expect the amounts required to be expensed over the next eighteen months to have a material effect on its financial position or results of operations.
16 16 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting of stockholders on May 5, 1998. At the meeting the stockholders were requested to vote on the following: 1. To elect Larry Franklin and James L. Johnson as Class II directors for a three-year term. The result of the vote was as follows: <TABLE> <CAPTION> For Withheld ---------- -------- <S> <C> <C> Larry Franklin 55,222,507 177,048 James L. Johnson 55,222,507 177,048 </TABLE> The names of each director whose term of office continued are: David L. Copeland, Dr. Peter T. Flawn, Christopher M. Harte, Houston H. Harte and Richard M. Hochhauser. 2. To approve an amendment to the Company's Certificate of Incorporation to change the name of the Company to "Harte-Hanks, Inc." The result of the vote was as follows: <TABLE> <CAPTION> For Against Abstentions ---------- ------- ----------- <S> <C> <C> 55,355,837 17,271 26,447 </TABLE> 3. To approve an amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of common stock from 125,000,000 to 250,000,000. The result of the vote was as follows: <TABLE> <CAPTION> For Against Abstentions ---------- ------- ----------- <S> <C> <C> 54,799,965 568,516 31,074 </TABLE> 4. To approve the adoption of the Company's 1998 Director Stock Plan. The result of the vote was as follows: <TABLE> <CAPTION> For Against Abstentions ---------- ------- ----------- <S> <C> <C> 54,904,051 388,399 107,105 </TABLE> 5. To approve amendments to the Company's 1991 Stock Option Plan. The result of the vote was as follows: <TABLE> <CAPTION> For Against Abstentions ---------- ------- ----------- <S> <C> <C> 54,071,120 1,215,050 113,385 </TABLE> Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See index to Exhibits on Page 14. (b) No Form 8-K has been filed during the three months ended June 30, 1998.
17 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HARTE-HANKS, INC. August 13, 1998 /s/ Jacques D. Kerrest --------------- ------------------------------------- Date Jacques D. Kerrest Senior Vice President, Finance and Chief Financial and Accounting Officer
18 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Description of Exhibit - ------- ---------------------- <S> <C> 2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 2(b) Agreement and Plan of Merger dated as of February 4, 1996 among Harte-Hanks Communications, Inc., HHD Acquisition Corp. and DiMark, Inc. (filed as Appendix A to the Company's Registration Statement No. 333-02047 and incorporated by reference herein). 2(c) Agreement and Plan of Merger and Reorganization, dated as of May 16, 1997, by and between The E.W. Scripps Company and Harte-Hanks Communications, Inc. (filed as Exhibit 2.1 to the Company's Form 8-K dated May 22, 1997 and incorporated by reference herein). 2(d) Acquisition Agreement, dated as of May 16, 1997, by and between The E.W. Scripps Company and Harte-Hanks Communications, Inc. (filed as Exhibit 2.2 to the Company's Form 8-K dated May 22, 1997 and incorporated by reference herein). 2(e) Stock Purchase Agreement dated as of July 26, 1997 between ABC, Inc. and Harte-Hanks Communications, Inc. (filed as Exhibit 2(e) to the Company's Form 10-Q for the nine months ended September 30, 1997 and incorporated by reference herein). 3(a) Amended and Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 3(b) Amended and Restated Bylaws (filed as Exhibit 3(b) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 3(c) Amendment dated April 30, 1996 to Amended and Restated Certificate of Incorporation (filed as Exhibit 3(c) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). *3(d) Amendment dated May 5, 1998 to Amended and Restated Certificate of Incorporation. *3(e) Amended and Restated Certificate of Incorporation as amended through May 5, 1998. 4(a) Long term debt instruments are not being filed pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K. Copies of such instruments will be furnished to the Commission upon request. </TABLE>
19 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Description of Exhibit - ------- ---------------------- <S> <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. Pension Restoration Plan (filed as Exhibit 10(j) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(f) Harte-Hanks Communications, Inc. 1996 Incentive Compensation Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). *10(g) Harte-Hanks, Inc. Amended and Restated 1991 Stock Option Plan. *10(h) Harte-Hanks, Inc. 1998 Director Stock Plan. *11 Statement Regarding Computation of Net Income (Loss) Per Common Share *21 Subsidiaries of the Company. *27 Financial Data Schedule. </TABLE> - ----------------- *Filed herewith