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, 1996 - ------ 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 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, 36,491,296 shares as of June 30, 1996.
2 2 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT June 30, 1996 <TABLE> <CAPTION> Page ---- <S> <C> Part I. Financial Information Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - 3 June 30, 1996 and December 31, 1995 Consolidated Statements of Operations - 4 Three months ended June 30, 1996 and 1995 Consolidated Statements of Operations - 5 Six months ended June 30, 1996 and 1995 Consolidated Statements of Cash Flows - 6 Six months ended June 30, 1996 and 1995 Notes to Interim Condensed Consolidated Financial 7 Statements Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations Part II. Other Information Item 4. Submission Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 15 (a) Exhibits (b) Reports on Form 8-K Signature 15 </TABLE>
3 3 Harte-Hanks Communications, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except per share and share amounts) (Unaudited) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1996 1995 ---- ---- <S> <C> <C> Assets Current assets Cash............................................... $ 17,727 $ 18,102 Accounts receivable, net........................... 82,012 80,056 Inventory.......................................... 21,594 24,307 Prepaid expenses................................... 7,379 5,330 Current deferred income tax benefit................ 6,679 7,181 Other current assets............................... 3,739 3,477 --------- --------- Total current assets............................. 139,130 138,453 Property, plant and equipment, net................... 106,019 102,164 Goodwill, net........................................ 293,905 283,149 Other assets......................................... 7,569 5,513 --------- --------- Total assets..................................... $ 546,623 $ 529,279 ========= ========= Liabilities and Stockholders' Equity Current liabilities Accounts payable.................................. $ 38,589 $ 35,768 Accrued payroll and related expenses.............. 14,401 20,677 Customer deposits and unearned revenue............ 16,832 16,174 Income taxes payable.............................. 659 1,593 Other current liabilities......................... 8,336 9,015 --------- --------- Total current liabilities....................... 78,817 83,227 Long term debt...................................... 225,340 220,468 Other long term liabilities......................... 22,628 23,728 --------- --------- Total liabilities............................... 326,785 327,423 --------- --------- Stockholders' equity Common stock, $1 par value, authorized 125,000,000 shares. Issued and outstanding 1996: 36,491,296 shares; 1995: 36,044,228 shares................. 36,491 36,044 Additional paid-in capital........................ 181,202 174,870 Retained earnings (accumulated deficit)........... 2,145 ( 9,058) --------- --------- Total stockholders' equity...................... 219,838 201,856 --------- --------- Total liabilities and stockholders' equity...... $ 546,623 $ 529,279 ========= ========= </TABLE> See Notes to Interim Condensed Consolidated Financial Statements.
4 4 Harte-Hanks Communications, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, ----------------------------- 1996 1995 ---- ---- <S> <C> <C> Operating revenues.................................... $159,916 $149,686 -------- -------- Operating expenses Payroll............................................. 55,546 52,091 Production and distribution......................... 57,032 54,134 Advertising, selling, general and administrative.... 14,461 14,797 Depreciation........................................ 4,569 3,957 Goodwill amortization............................... 2,436 2,397 Merger costs........................................ 12,136 -- -------- -------- 146,180 127,376 -------- -------- Operating income...................................... 13,736 22,310 -------- -------- Other expenses (income) Interest expense.................................... 3,436 4,196 Interest income..................................... (96) (142) Other, net.......................................... (48) 298 -------- -------- 3,292 4,352 -------- -------- Income before income tax expense...................... 10,444 17,958 Income tax expense.................................... 6,538 8,257 -------- -------- Net income............................................ $ 3,906 $ 9,701 ======== ======== Primary: Earnings per share.................................. $ 0.10 $ 0.27 ======== ======== Weighted average common and common equivalent shares outstanding................................ 38,551 36,279 ======== ======== Fully diluted: Earnings per share.................................. $ 0.10 $ 0.26 ======== ======== Weighted average common and common equivalent shares outstanding................................ 38,702 37,677 ======== ======== </TABLE> See Notes to Interim Condensed Consolidated Financial Statements.
5 5 Harte-Hanks Communications, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, --------------------------- 1996 1995 ---- ---- <S> <C> <C> Operating revenues.................................... $310,527 $298,708 -------- -------- Operating expenses Payroll............................................. 111,234 105,328 Production and distribution......................... 113,059 110,654 Advertising, selling, general and administrative.... 28,646 31,003 Depreciation........................................ 8,941 7,971 Goodwill amortization............................... 4,937 4,919 Merger costs........................................ 12,136 -- -------- -------- 278,953 259,875 -------- -------- Operating income...................................... 31,574 38,833 -------- -------- Other expenses (income) Interest expense.................................... 6,884 9,217 Interest income..................................... (1,107) (352) Other, net.......................................... 504 739 Gain on divestitures................................ -- (12,293) -------- -------- 6,281 (2,689) -------- -------- Income before income tax expense...................... 25,293 41,522 Income tax expense.................................... 13,070 23,398 -------- -------- Net income............................................ $ 12,223 $ 18,124 ======== ======== Primary: Earnings per share.................................. $ .32 $ .51 ======== ======== Weighted average common and common equivalent shares outstanding................................ 38,420 35,673 ======== ======== Fully diluted: Earnings per share.................................. $ .32 $ 0.49 ======== ======== Weighted average common and common equivalent shares outstanding................................ 38,495 37,511 ======== ======== </TABLE> See Notes to Interim Condensed Consolidated Financial Statements.
6 6 Harte-Hanks Communications, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, -------------------------- 1996 1995 ---- ---- <S> <C> <C> Cash Flows From Operating Activities Net income.......................................... $ 12,223 $ 18,124 Adjustments to reconcile net income to net cash provided by operating activities Depreciation .................................... 8,941 7,971 Goodwill amortization............................ 4,937 4,919 Amortization of option related compensation...... 599 967 Film amortization................................ 694 1,284 Deferred income taxes............................ (383) (1,430) Other, net....................................... 778 242 Gain on divestiture.............................. -- (12,293) Changes in operating assets and liabilities, net of effects from acquisitions and divestitures: Decrease (increase) in accounts receivable, net.. 1,263 1,227 Decrease (increase) in inventory................. 2,713 (5,975) Increase in prepaid expenses and other current assets................................ (2,325) (861) Increase (decrease)in accounts payable........... 2,003 ( 76) Decrease in other accrued expenses and other liabilities......................... (8,036) (1,806) Other, net....................................... (866) (859) -------- -------- Net cash provided by operating activities.................................... 22,541 11,434 -------- -------- Cash Flows From Investing Activities Purchases of property, plant and equipment.......... (12,305) (11,994) Proceeds from the sale of property, plant and equipment and divested assets................. 346 40,194 Acquisitions........................................ (17,139) (5,760) Payments on film contracts.......................... (654) (1,065) -------- -------- Net cash provided by (used in) investing activities.......................... (29,752) 21,375 -------- -------- Cash Flows From Financing Activities Long term debt borrowings........................... 142,000 739,964 Payments on long term debt, including current maturities ...................................... (137,755) (772,187) Issuance of common stock............................ 3,611 2,292 Dividends paid...................................... (1,020) (960) -------- -------- Net cash provided by (used in) financing activities ...................................... 6,836 (30,891) -------- -------- Net increase (decrease) in cash..................... (375) 1,918 Cash at beginning of year........................... 18,102 11,533 Pooling adjustment to beginning of year balance to conform fiscal years.............. -- ( 1,504) -------- -------- Cash at end of period............................... $ 17,727 $ 11,947 ======== ======== </TABLE> See Notes to Interim Condensed Consolidated Financial Statements.
7 7 Harte-Hanks Communications, Inc. and Subsidiaries Notes to Interim Condensed Consolidated Financial Statements (Unaudited) NOTE A - FINANCIAL STATEMENTS The accompanying unaudited Interim Condensed Consolidated Financial Statements include the accounts of Harte-Hanks Communications, Inc. and subsidiaries (the "Company"). The statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1996 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, 1995. NOTE B - ACQUISITION Effective April 30, 1996, DiMark, Inc. ("DiMark") was merged with a wholly-owned subsidiary of the Company, and each outstanding share of DiMark common stock was converted into the right to acquire .656 of a share of common stock of Harte-Hanks. As a result, Harte-Hanks issued approximately 6.1 million shares of Harte-Hanks common stock to the shareholders of DiMark, and DiMark's outstanding stock options were converted into options to acquire 1,509,213 shares of Harte-Hanks common stock. The merger was accounted for on a pooling-of-interests basis. Accordingly, the Company's financial statements have been restated to include the results of DiMark for all periods presented. The combined financial results include reclassifications to conform financial statement preparation. Merger expenses related to the transaction were $12.1 million ($8.7 million, net of income taxes). Combined and separate results of the Company and DiMark during the reporting periods preceding the merger were as follows (in thousands): <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 1996 HARTE-HANKS DIMARK ADJUSTMENTS COMBINED ----------- --------- ----------- ---------- <S> <C> <C> <C> <C> Revenue $124,899 $27,377 $ (1,664) $150,612 Net income 6,385 1,923 -- 8,308 FISCAL YEAR ENDED DEC. 31, 1995 Revenue $532,852 $77,583 $ (6,924) $603,511 Net income 33,985 6,001 $ -- $ 39,986 </TABLE>
8 8 Adjustments to revenue consist of elimination of DiMark's postage costs from revenues and cost of sales to conform to Harte-Hanks' accounting classification. NOTE C - INCOME TAXES The Company's quarterly income tax calculation is based on an effective income tax rate that is derived by estimating pretax income and income tax expense for the entire year ended December 31, 1996. Included in the year-to- date income tax provision of $13.1 million is $3.4 million in income tax benefits related to the merger costs. Excluding the taxes related to the merger costs, the estimated annual effective income tax rate of 44.1% for the six months ended June 30, 1996 resulted in $16.5 million in tax expense on income from operations. 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.
9 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Operating results (excluding the 1996 merger costs and 1995 gain on divestiture) were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 1996 JUNE 30, 1995 CHANGE JUNE 30, 1996 JUNE 30, 1995 CHANGE - ------------ ------------- ------------- ------ ------------- ------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $159,916 $149,686 6.8% $310,527 $298,708 4.0% Operating expenses 134,044 127,376 5.2% 266,817 259,875 2.7% -------- -------- -------- -------- Operating income $ 25,872 $ 22,310 16.0% $ 43,710 $ 38,833 12.6% ======== ======== ======== ======== Net income $ 12,628 $ 9,701 30.2% $ 20,945 $ 13,200 58.7% ======== ======== ======== ======== Fully diluted earnings per share $ 0.33 $ 0.26 26.9% $ 0.54 $ 0.35 54.3% ======== ======== ======== ======== </TABLE> (The above results exclude the 1996 one-time merger costs (discussed under "Acquisition") and the 1995 gain on divestiture (discussed under "Gain on Divestiture"). Including these items, net income was $3.9 million, or 10 cents per share, in the second quarter of 1996 compared to net income of $9.7 million, or 26 cents per share, in 1995. For the first six months of 1996, net income was $12.2 million, or 32 cents per share, compared to $18.1 million, or 49 cents per share, in 1995.) Consolidated revenues grew 6.8% to $159.9 million, and operating income grew 16.0% to $25.9 million in the second quarter of 1996 when compared to the second quarter of 1995. The Company's overall growth resulted from acquisitions, increased business with both new and existing customers, new products and services as well as advertising and circulation rate increases. Overall operating expenses increased 5.2% over 1995. Excluding the sale of the Boston newspapers, year-to-date revenues increased $19.2 million, or 6.5%, when compared to the same period in 1995. DIRECT MARKETING Direct marketing operating results were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 1996 JUNE 30, 1995 CHANGE JUNE 30, 1996 JUNE 30, 1995 CHANGE - ------------ ------------- ------------- ------ ------------- ------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $73,349 $65,406 12.1% $145,861 $130,022 12.2% Operating expenses 62,893 56,114 12.1% 126,406 112,126 12.7% ------- ------- -------- -------- Operating income $10,456 $ 9,292 12.5% $ 19,455 $ 17,896 8.7% ======= ======= ======== ======== </TABLE> Direct marketing revenues increased $7.9 million, or 12.1%, in the second quarter of 1996 when compared to 1995. Database, response management and outbound telemarketing services experienced significant revenue growth. Database revenues increased due to higher product sales as well as increased database construction, updates and creations. Response management revenues increased primarily due to new customer gains, particularly in the high technology industry, and to a lesser extent due to the May 31, 1996 acquisition of Inquiry Handling Service, a Los Angeles based response management company that serves the high tech and electronics industries. Sales lead management, which includes lead generation and lead qualification through inbound inquiries, experienced significant growth both from new customers and increased
10 10 call volumes from existing customers. Outbound telemarketing revenues increased primarily due to the January 1996 acquisition of PRO Direct Response Corp., a telemarketing company with a strong customer base in the financial services industry. Second quarter revenue growth was also impacted by the September 1995 acquisition of H&R Communications, Inc. These revenue increases were slightly offset by the absence of an outsourced mailing program which the customer now performs in-house and by the sale of a local hand distribution advertising business in July 1995. Overall, revenue growth resulted from acquisitions and increased business with both new and existing customers, particularly in services provided to the high technology, retail, financial services, health care and pharmaceutical industries. Second quarter operating expenses increased $6.8 million, or 12.1%, when compared to 1995. Payroll costs increased $3.6 million due to expanded hiring to support revenue growth. Also contributing to the increased operating expenses were additional production costs of $2.4 million due to increased volumes. Depreciation expense increased $0.6 million due to higher levels of capital investment to support growth. Operating expenses were also impacted by the acquisitions noted above and the sale of the local hand distribution advertising business in July 1995. Direct marketing revenues increased $15.8 million, or 12.2%, in the first six months of 1996 as compared to the comparable 1995 period. Database, response management and outbound telemarketing experienced significant revenue growth. Overall, revenue growth resulted from acquisitions and increased business, particularly in the high technology, banking, financial services, health care and pharmaceutical industries. Year-to-date 1996 operating expenses rose $14.3 million, or 12.7%, when compared to 1995. Payroll costs increased $10.2 million due to expanded hiring to support revenue growth and to the 1995 reversal of executive compensation, which was waived by the executives. In addition, production costs increased $2.6 million due to increased volumes. Depreciation expense increased $1.2 million due to higher levels of capital investment to support growth. The acquisitions also impacted operating expense growth. SHOPPERS Shopper operating results were as follows: <TABLE> <CAPTION> THREEE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 1996 JUNE 30, 1995 CHANGE JUNE 30, 1996 JUNE 30, 1995 CHANGE - ------------ -------------- ------------- ------ ------------- ------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $48,936 $48,285 1.3% $ 91,930 $ 91,931 0.0% Operating expenses 41,550 41,838 -0.7% 81,213 82,542 -1.6% ------- ------- -------- -------- Operating income $ 7,386 $ 6,447 14.6% $ 10,717 $ 9,389 14.1% ======= ======= ======== ======== </TABLE> Shopper revenues increased $0.7 million, or 1.3%, in the second quarter of 1996 when compared to the same period in 1995. The increase was primarily due to increased in-book advertising revenues resulting from higher display advertising volumes as well as increased usage of the Company's print and deliver products. Display advertising volumes increased due to growth in the Company's core business accounts as well as increased in-column display advertisements made possible with pagination technology implemented in 1995. These increases were offset by lower insert revenues as a result of reduced volumes as well as revenue declines related to intentional reductions of marginal circulation in Dallas.
11 11 Shopper operating expenses decreased $0.3 million, or 0.7%, in the second quarter of 1996 when compared to 1995. Postage expense decreased $1.3 million due to less overweight postage associated with the lower insert volumes. In addition, the reduced circulation in the Dallas market contributed to the decreased expense. These decreases were offset by paper cost increases of $0.8 million. These increases were primarily attributable to higher rates. Payroll costs also increased $0.4 million as a result of higher commissions on greater sales volumes. Year-to-date shopper revenues remained constant at $91.9 million when compared to the same period in 1995. Revenue growth was experienced in both the display advertising and print and deliver product categories. These increases were offset by lower insert volumes as well as reduced revenues related to circulation reduction in Dallas. Year-to-date shopper operating expenses decreased $1.3 million, or 1.6%, in 1996 when compared to the same period in 1995. This decline was due to lower postage costs of $2.5 million and to lower operating expenses related to the reduction in marginal circulation in Dallas. These decreases were offset by increased paper costs of $1.8 million, or 21.2%. NEWSPAPERS Newspaper operating results were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 1996 JUNE 30, 1995 CHANGE JUNE 30, 1996 JUNE 30, 1995 CHANGE - ------------ ------------- ------------- ------ ------------- ------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $30,803 $29,282 5.2% $60,139 $64,160 -6.3% Operating expenses 23,529 22,338 5.3% 47,004 51,680 -9.0% ------- ------- ------- ------- Operating income $ 7,274 $ 6,944 4.8% $13,135 $12,480 5.2% ======= ======= ======= ======= </TABLE> Newspaper revenues increased $1.5 million, or 5.2%, in the second quarter of 1996 when compared to the same period in 1995. Overall advertising revenues were up $0.6 million, or 2.7%. In particular, classified advertising revenues increased $0.4 million, or 6.3%, as a result of rate increases. Retail advertising revenues were up $0.2 million, or 1.8%, due to increased rates slightly offset by lower volumes. Circulation revenues increased $0.3 million, or 4.9%, due to home delivery rate increases in all markets and a Sunday single-copy rate increase at the Corpus Christi paper. Niche product revenue increased $0.6 million primarily due to the continued growth of existing direct mail programs as well as the launch of new programs in 1996. In addition, new revenue initiatives in community publications, total market coverage products, Internet and audiotext added to second quarter revenue growth. Newspaper operating expenses increased $1.2 million, or 5.3% in the second quarter of 1996 when compared to 1995. Newsprint expense increased $0.9 million, or 21.4%, as a result of higher average newsprint prices offset slightly by reduced volumes. Postage costs also increased slightly due to growth in direct mail volumes. Excluding the sale of the Boston newspapers (discussed under "Gain on Divestiture"), year-to-date newspaper revenues increased $3.3 million, or 5.8%, when compared to the same period in 1995. Overall advertising revenues were up $1.2 million, or 3.2%. In particular, classified advertising revenues increased $1.0 million, or 6.7%, as a result of rate increases. Retail
12 12 advertising revenues were up $0.3 million, or 1.8%, due to increased rates slightly offset by lower volumes. Circulation revenues increased $0.9 million, or 6.5%, due to rate increases. Niche product revenue also increased $1.1 million, primarily due to the continued growth of existing revenue streams as well as the launch of revenue initiatives. Excluding the sale of the Boston newspapers, year-to-date newspaper operating expenses increased $2.8 million, or 6.4%, when compared to 1995. Newsprint expense increased $2.1 million, or 28.2%, as a result of higher average newsprint prices offset slightly by reduced volumes. Postage costs also increased slightly due to growth in direct mail volumes. TELEVISION Television operating results were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED In thousands JUNE 30, 1996 JUNE 30, 1995 CHANGE JUNE 30, 1996 JUNE 30, 1995 CHANGE - ------------ ------------- ------------- ------ ------------- ------------- ------ <S> <C> <C> <C> <C> <C> Revenues $6,828 $ 6,713 1.7% $12,597 $12,595 0.0% Operating expenses 4,267 4,667 -8.6% 8,564 9,124 -6.1% ------ ------- ------- ------- Operating income $2,561 $ 2,046 25.2% $ 4,033 $ 3,471 16.2% ====== ======= ======= ======= </TABLE> Revenues for the television segment increased $0.1 million, or 1.7%, in the second quarter of 1996 when compared to 1995. This increase was primarily attributable to local advertising and an increase in network compensation revenue due to a renegotiated network affiliation agreement. These increases in revenue were partially offset by decreased national advertising demands. Second quarter operating expenses decreased $0.4 million, or 8.6%, when compared to the same period in 1995. The decrease was due primarily to film cost savings, as well as effective management of other production and general and administrative costs. Partially offsetting these cost reductions was an increase in payroll costs due to additional investment in sales and news. Revenues for the television segment remained relatively constant for the first half of 1996 when compared to the same period in 1995. Increased local advertising and network compensation revenues were offset by lower national advertising revenues, reflecting continued weak CBS network performance. First half operating expenses for the television segment decreased $0.6 million, or 6.1%, when compared to the same period in 1995. The decrease was due primarily to lower film costs, which were slightly offset by higher payroll costs. Acquisition As described in Note 2 to the Notes to Interim Condensed Consolidated Financial Statements included herein, on April 30, 1996, DiMark was merged with a wholly-owned subsidiary of the Company, and each outstanding share of DiMark common stock was converted into the right to acquire .656 of a share of common stock of Harte-Hanks. As a result, Harte-Hanks issued approximately 6.1 million shares of Harte-Hanks Common Stock to the shareholders of DiMark, and DiMark's outstanding stock options were converted into options to acquire 1.5 million shares of Harte-Hanks common stock. The merger was accounted for on a pooling-of-interests basis, and all historical information has been restated as if the pooling occurred at the beginning of the periods presented. One-time merger
13 13 expenses of $12.1 million ($8.7 million after-tax) were recognized in the second quarter of 1996. DiMark provides a full range of outsource marketing, database services and telemarketing to clients in the insurance, healthcare, pharmaceutical, financial services and telecommunications industries, as well as direct response printing services. Interest Expense/Interest Income Interest expense decreased $0.8 million in the second quarter of 1996 when compared to the same period in 1995 due to lower effective interest rates and lower debt levels. Year-to-date interest expense declined $2.3 million in the first half of 1996 when compared to 1995, primarily due to lower debt levels and rates. Debt levels decreased due to proceeds from the divestiture described below in "Gain on Divestiture", the 1995 conversion of the Company's 6-1/4% notes to common stock and increased cash flow from operations. Interest income increased $0.8 million in the first half of 1996 when compared to 1995 due to interest income related to an income tax refund that resulted from a favorable tax settlement. Gain on Divestiture In March 1995, the Company sold its suburban Boston community newspapers. As a result of this transaction, the Company recognized a gain on divestiture of $2.3 million, or 7 cents per share, net of $10.0 million of income taxes. Income Taxes Excluding the income taxes related to the 1996 merger costs and the 1995 gain on divestiture, income tax expense in the second quarter and the first six months of 1996 increased due to higher income levels. Liquidity and Capital Resources Cash provided from operating activities for the six months ended June 30, 1996 was $22.5 million as compared to $11.4 million for the same period in 1995. Net cash outflows for investing activities were $29.8 million as compared to inflows of $21.4 million in 1995. Investing activities for the first six months of 1996 included acquisitions of $17.1 million and for the first six months of 1995 included $40.2 million in proceeds from the sale of property, plant and equipment and divested assets. Capital resources are available from and provided through the Company's unsecured credit facility. All borrowings under the revolving credit facility are to be repaid by December 31, 2001. Management believes that its credit facility, together with cash provided from operating activities, will be sufficient to fund operations, anticipated capital and film expenditures, and debt service requirements for the foreseeable future. As of June 30, 1996, the Company had $96 million of unused borrowing capacity under its credit facility.
14 14 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting of stockholders on April 30, 1996. At the meeting the stockholders were requested to vote on the following: 1. To approve the issuance of shares of Harte-Hanks Common Stock to DiMark stockholders pursuant to the Agreement and Plan of Merger dated as of February 4, 1996 by and among Harte-Hanks, HHD Acquisition Corp., a New Jersey corporation and wholly-owned subsidiary of Harte-Hanks ("Newco") and DiMark, Inc., a New Jersey corporation ("DiMark"), providing for the merger of Newco with and into DiMark and the conversion of each outstanding share of DiMark common stock, no par value per share, into .656 of a share of Harte-Hanks common stock, par value $1.00 per share. The result of the vote was as follows: <TABLE> <CAPTION> For Against Abstentions Nonvotes ---------- ---------- ------------ ------------ <S> <C> <C> <C> 24,520,634 19,130 10,847 1,765,101 </TABLE> 2. To elect Houston H. Harte, Andrew B. Shelton and Richard M. Hochhauser as Class III directors for a three- year term and David L. Copeland as a Class I director for a one-year term. The result of the vote was as follows: <TABLE> <CAPTION> For Withheld ---------- --------- <S> <C> <C> Houston H. Harte 26,300,727 14,985 Andrew B. Shelton 26,300,733 14,979 Richard M. Hochhauser 26,299,157 16,555 David L. Copeland 26,300,474 15,238 </TABLE> The names of each director whose term of office continued are: Peter T. Flawn, Larry Franklin, Christopher M. Harte, Edward H. Harte and James L. Johnson. 3. To approve an amendment to the Certificate of Incorporation of Harte- Hanks to increase the number of authorized shares of Harte-Hanks Common Stock from 50,000,000 to 125,000,000. The result of the vote was as follows: <TABLE> <CAPTION> For Against Abstentions Nonvotes ---------- ---------- ------------ ----------- <S> <C> <C> <C> 23,058,863 1,485,165 10,847 1,765,101 </TABLE> 4. To approve an amendment to the Harte-Hanks Communications, Inc. 1991 Stock Option Plan to increase the aggregate number of shares of Harte- Hanks Common Stock that may be issued under such Plan from 3,000,000 to 4,000,000. The result of the vote was as follows: <TABLE> <CAPTION> For Against Abstentions ---------- ----------- ------------ <S> <C> <C> 25,723,451 570,511 21,750 </TABLE> 5. To approve the adoption of the Harte-Hanks Communications, Inc. 1996 Incentive Compensation Plan. The result of the vote was as follows: <TABLE> <CAPTION> For Against Abstentions ----------- ---------- ------------ <S> <C> <C> 26,086,356 219,213 10,143 </TABLE>
15 15 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See index to Exhibits on Page 16. (b) The company filed a report on Form 8-K dated April 30, 1996 relating to the agreement to acquire DiMark, Inc. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HARTE-HANKS COMMUNICATIONS, INC. August 7, 1996 /s/ Richard L. Ritchie ----------------------- ----------------------------- Date Richard L. Ritchie Senior Vice President, Finance and Chief Financial and Accounting Officer
16 16 <TABLE> <CAPTION> Exhibit No. Description of Exhibit Page No. - ------- ---------------------------------------------------------------- -------- <S> <C> <C> 2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 2(b) Agreement and Plan of Merger dated as of February 4, 1996 among Harte-Hanks Communications, Inc., HHD Acquisition Corp. and DiMark, Inc. (filed as Appendix A to the Company's Registration Statement No. 333-2047 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 17 Restated Certificate of Incorporation. *3(d) Amended and Restated Certificate of Incorporation 20 as amended through April 30, 1996. 4(a) Long term debt instruments are not being filed pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K. Copies of such instruments will be furnished to the Commission upon request. *10(o) Amendment No. 3 to Harte-Hanks Communications 27 (formerly HHC Holding Inc.) 1991 Stock Option Plan. *10(p) Harte-Hanks Communications, Inc. 1996 Incentive 28 Compensation Plan. *11 Statements Regarding Computation of Per 29 Share Earnings *27 Financial Data Schedules 31 </TABLE> - ------------------------------- * Filed herewith.