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 September 30, 1997 ------------------ Transition report pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934 For the transition period from to -------------- -------------- Commission File Number 1-7120 ------ 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, 36,505,140 shares as of October 31, 1997.
2 2 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT September 30, 1997 <TABLE> <CAPTION> Page ---- <S> <C> <C> Part I. Financial Information Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 3 Consolidated Statements of Operations - Three months ended September 30, 1997 and 1996 4 Consolidated Statements of Operations - Nine months ended September 30, 1997 and 1996 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 1997 and 1996 6 Consolidated Statement of Stockholders' Equity 7 Notes to Interim Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 16 (a) Exhibits (b) Reports on Form 8-K Signature 16 </TABLE>
3 3 Harte-Hanks Communications, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except per share and share amounts) - -------------------------------------------------------------------------------- (Unaudited) <TABLE> <CAPTION> September 30, December 31, 1997 1996 ------------- ------------ <S> <C> <C> Assets Current assets Cash................................................ $ 14,074 $ 12,017 Accounts receivable, net............................ 112,725 107,559 Inventory........................................... 12,710 13,720 Prepaid expenses.................................... 11,560 9,445 Current deferred income tax benefit................. 6,649 6,204 Other current assets................................ 9,313 4,202 --------- --------- Total current assets.............................. 167,031 153,147 Net assets of discontinued operations................. 206,463 210,769 Property, plant and equipment, net.................... 84,308 72,195 Goodwill, net......................................... 243,966 142,053 Other assets.......................................... 3,899 4,442 --------- --------- Total assets...................................... $ 705,667 $ 582,606 ========= ========= Liabilities and Stockholders' Equity Current liabilities Accounts payable.................................... $ 49,267 $ 40,573 Accrued payroll and related expenses................ 20,798 23,116 Customer deposits and unearned revenue.............. 22,130 19,809 Income taxes payable................................ 3,027 2,748 Other current liabilities........................... 14,695 11,481 --------- --------- Total current liabilities......................... 109,917 97,727 Long term debt........................................ 311,400 218,005 Other long term liabilities........................... 16,157 14,182 --------- --------- Total liabilities................................. 437,474 329,914 --------- --------- Stockholders' equity Common stock, $1 par value, 125,000,000 shares authorized. 37,946,890 and 36,801,701 shares issued at September 30, 1997 and December 31, 1996, respectively................................ 37,947 36,802 Additional paid-in capital.......................... 203,815 186,677 Retained earnings................................... 68,898 29,213 --------- --------- 310,660 252,692 Less treasury stock, 1,509,408 shares at cost....... (42,467) -- --------- --------- Total stockholders' equity........................ 268,193 252,692 --------- --------- Total liabilities and stockholders' equity........ $ 705,667 $ 582,606 ========= ========= </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 September 30, -------------------------------- 1997 1996 --------- --------- <S> <C> <C> Operating revenues .................................... $ 155,061 $ 129,210 --------- --------- Operating expenses Payroll ............................................. 56,648 47,004 Production and distribution ......................... 58,447 50,642 Advertising, selling, general and administrative .... 14,268 11,286 Depreciation ........................................ 4,374 3,527 Goodwill amortization ............................... 1,100 888 Merger costs ........................................ -- -- --------- --------- 134,837 113,347 --------- --------- Operating income ...................................... 20,224 15,863 --------- --------- Other expenses (income) Interest expense .................................... 1,854 1,790 Interest income ..................................... (12) (103) Other, net .......................................... 239 (12) --------- --------- 2,081 1,675 --------- --------- Income from continuing operations before income tax expense ......................................... 18,143 14,188 Income tax expense .................................... 7,673 6,157 --------- --------- Net income from continuing operations ................. $ 10,470 $ 8,031 Net income from discontinued operations, net of income taxes ................................. $ 5,079 $ 4,261 --------- --------- Net income ............................................ $ 15,549 $ 12,292 ========= ========= Primary: Earnings per common share Continuing Operations ............................. $ 0.27 $ 0.21 Discontinued Operations ........................... $ 0.13 $ 0.11 --------- --------- Total ........................................... $ 0.40 $ 0.32 ========= ========= Weighted average common and common equivalent shares outstanding ................................ 38,592 38,734 ========= ========= Fully diluted: Earnings per common share Continuing Operations ............................. $ 0.27 $ 0.21 Discontinued Operations ........................... $ 0.13 $ 0.11 --------- --------- Total ........................................... $ 0.40 $ 0.32 ========= ========= Weighted average common and common equivalent share outstanding ................................. 38,642 38,824 --------- --------- </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> Nine Months Ended September 30, ------------------------------- 1997 1996 --------- --------- <S> <C> <C> Operating revenues .................................... $ 444,449 $ 367,001 --------- --------- Operating expenses Payroll ............................................. 166,469 133,661 Production and distribution ......................... 167,857 146,125 Advertising, selling, general and administrative .... 41,921 31,961 Depreciation ........................................ 12,415 9,992 Goodwill amortization ............................... 3,305 2,633 Merger costs ........................................ -- 12,136 --------- --------- 391,967 336,508 --------- --------- Operating income ...................................... 52,482 30,493 --------- --------- Other expenses (income) Interest expense .................................... 5,619 5,438 Interest income ..................................... (62) (681) Other, net .......................................... (82) 537 --------- --------- 5,475 5,294 --------- --------- Income from continuing operations before income tax expense ......................................... 47,007 25,199 Income tax expense .................................... 19,929 12,769 --------- --------- Net income from continuing operations ................. $ 27,078 $ 12,430 Net income from discontinued operations, net of income taxes ................................. $ 14,833 $ 12,085 --------- --------- Net income ............................................ $ 41,911 $ 24,515 ========= ========= Primary: Earnings per common share Continuing Operations ............................. $ 0.70 $ 0.32 Discontinued Operations ........................... $ 0.38 $ 0.32 --------- --------- Total ........................................... $ 1.08 $ 0.64 ========= ========= Weighted average common and common equivalent shares outstanding ................................ 38,719 38,524 ========= ========= Fully diluted: Earnings per common share Continuing Operations ............................. $ 0.70 $ 0.32 Discontinued Operations ........................... $ 0.38 $ 0.31 --------- --------- Total ........................................... $ 1.08 $ 0.63 ========= ========= Weighted average common and common equivalent share outstanding ................................. 38,765 38,613 --------- --------- </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> Nine Months Ended September 30, ------------------------------- 1997 1996 --------- --------- <S> <C> <C> Operating Activities Net income from continuing operations ............................... $ 27,078 $ 12,430 Add (deduct) non-cash income and expenses: Depreciation ..................................................... 12,415 9,992 Goodwill amortization ............................................ 3,305 2,633 Amortization of option related compensation ...................... 551 525 Deferred income taxes ............................................ 634 1,305 Other, net ....................................................... 593 1,026 Changes in operating assets and liabilities, net of acquisitions: Increase (decrease) in accounts receivable, net .................. 28 (4,238) Decrease in inventory ............................................ 1,914 8,863 Increase in prepaid expenses and other current assets ................................................ (5,253) (1,971) Increase in accounts payable ..................................... 6,347 2,215 Decrease in other accrued expenses and other liabilities ......................................... (3,695) (3,600) Other, net ....................................................... 6,247 (1,779) --------- --------- Net cash provided by continuing operating activities .......... 50,164 27,401 --------- --------- Discontinued operations: Net income ....................................................... 14,833 12,085 Adjustment to derive cash flows from operating activities ........ 10,849 9,798 --------- --------- Net cash provided by discontinued operating activities ........ 25,682 21,883 --------- --------- Net operating activities ......................................... 75,846 49,284 --------- --------- Investing Activities Purchases of property, plant and equipment .......................... (21,721) (18,107) Proceeds from the sale of property, plant and equipment ............. 1,926 661 Acquisitions ........................................................ (110,351) (18,251) --------- --------- Net cash used in investing activities of continuing operations .................................................... (130,146) (35,697) --------- --------- Net cash used in investing activities of discontinued operations .................................................... (5,833) (3,661) --------- --------- Net investing activities ......................................... (135,979) (39,358) --------- --------- Financing Activities Long term debt borrowings ........................................... 488,000 187,000 Payments on long term debt, including current maturities ....................................................... (393,365) (203,005) Purchase of treasury stock .......................................... (42,467) -- Issuance of common stock ............................................ 12,248 5,520 Dividends paid ...................................................... (2,226) (1,618) --------- --------- Net cash provided by (used in) financing activities .............. 62,190 (12,103) --------- --------- Net increase(decrease)in cash ....................................... 2,057 (2,177) Cash at beginning of year ........................................... 12,017 18,102 --------- --------- Cash at end of period .................................................. $ 14,074 $ 15,925 ========= ========= </TABLE> See Notes to Interim Condensed Consolidated Financial Statements.
7 7 Harte-Hanks Communications, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity - -------------------------------------------------------------------------------- (Unaudited) <TABLE> <CAPTION> Retained Additional Earnings Total Common Paid-In (Accumulated Treasury Stockholders' In thousands Stock Capital Deficit) Stock Equity - ------------------------------------ ------ ---------- ------------ --------- ------------- <S> <C> <C> <C> <C> <C> Balance at January 1, 1996 .................. $ 36,044 $ 174,870 $ (9,058) $ -- $ 201,856 Common stock issued-employee benefit plans .................................. 87 1,656 -- -- 1,743 Exercise of stock options ................... 404 4,101 -- -- 4,505 Tax benefit of options exercised ............ -- 1,080 -- -- 1,080 Dividends paid ($ 0.05 per share) ........... -- -- (1,618) -- (1,618) Net income .................................. -- -- 24,515 -- 24,515 Stock issued in conjunction with acquisition earnout .................... 58 1,201 -- -- 1,259 --------- --------- --------- --------- --------- Balance at September 30, 1996 ............... $ 36,593 $ 182,908 $ 13,839 $ -- $ 233,340 ========= ========= ========= ========= ========= Balance at January 1, 1997 .................. $ 36,802 $ 186,677 $ 29,213 $ -- $ 252,692 Common stock issued-employee benefit plans........................... 73 2,625 -- -- 2,698 Exercise of stock options ................... 1,072 8,625 -- -- 9,697 Tax benefit of options exercised ............ -- 5,888 -- -- 5,888 Dividends paid ($ 0.06 per share) ........... -- -- (2,226) -- (2,226) Net income .................................. -- -- 41,911 -- 41,911 Treasury stock purchase ..................... -- -- -- (42,697) (42,467) --------- --------- --------- --------- --------- Balance at September 30, 1997 ............... $ 37,947 $ 203,815 $ 68,898 $ (42,467) $ 268,193 ========= ========= ========= ========= ========= </TABLE> See Notes to Interim Condensed Consolidated Financial Statements.
8 8 Harte-Hanks Communications, Inc. and Subsidiaries Notes to Interim Condensed Consolidated Financial Statements (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited Interim Condensed Consolidated Financial Statements include the accounts of Harte-Hanks Communications, Inc. and subsidiaries (the "Company"). The statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1996. Certain prior period amounts have been reclassified for comparative purposes. NOTE B - DISCONTINUED NEWSPAPER AND TELEVISION OPERATIONS On May 16, 1997, the Company entered into a definitive agreement to sell to the E.W. Scripps Company (NYSE: SSP) its newspaper operations, KENS-TV, the CBS affiliate in San Antonio and KENS-AM for a cash price of $775 million plus approximately $15 million for estimated working capital. The closing occurred on October 15, 1997. Because the newspaper and television operations represent entire business segments that were divested on October 15, 1997, their results are reported as "discontinued operations" for all periods presented. Summarized operating results for the combined newspaper and television discontinued operations are as follows: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED In thousands SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1997 SEPT. 30, 1996 - ------------ -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Revenues $ 38,776 $ 37,038 $114,806 $109,774 Income before income tax expense 9,154 7,885 26,879 22,167 Income tax expense 4,075 3,624 12,046 10,082 ------- -------- -------- -------- Income from discontinued operations $ 5,079 $ 4,261 $ 14,833 $ 12,085 ======== ======== ======== ======== </TABLE> Summarized balance sheet data for the combined newspaper and television discontinued operations are as follows: <TABLE> <CAPTION> In thousands SEPT. 30, 1997 DECEMBER 31, 1996 - ------------ -------------- ----------------- <S> <C> <C> Property, plant and equipment $ 41,188 $ 40,713 Goodwill and other intangibles 172,446 177,236 Other assets 2,727 2,497 Deferred income tax liabilities 8,208 8,154 Other liabilities 1,690 1,523 -------- -------- Net assets of discontinued operations $206,463 $210,769 ======== ======== </TABLE>
9 9 The major components of cash flows for the combined newspaper and television discontinued operations are as follows: <TABLE> <CAPTION> NINE MONTHS ENDED In thousands SEPT. 30, 1997 SEPT. 30, 1996 - ------------ -------------- -------------- <S> <C> <C> Net income from discontinued operations $ 14,833 $ 12,085 Depreciation and goodwill amortization 8,589 8,509 Film amortization 1,306 919 Other, net 954 370 -------- -------- Net cash provided by discontinued operations 25,682 21,883 ======== ======== Purchases of property, plant and equipment (4,371) (2,546) Payments on film contracts (1,481) (1,115) Other, net 19 -- -------- -------- Net cash used in investing activities of discontinued operations $ (5,833) $ (3,661) ======== ======== </TABLE> NOTE C - ACQUISITIONS Effective September 24, 1997, the Company completed the previously announced acquisition of the ABC Shoppers Group from ABC, Inc., an indirect subsidiary of The Walt Disney Company for approximately $104 million. Tentative allocation of the purchase price has been made to the assets and liabilities acquired using both the determined values and preliminary estimates, for those values that have not been determined, as of September 30, 1997. Effective April 30, 1996, DiMark, Inc. ("DiMark") was merged with a wholly-owned subsidiary of the Company, and each outstanding share of DiMark common stock was converted into the right to acquire .656 of a share of common stock of Harte-Hanks. As a result, Harte-Hanks issued approximately 6.1 million shares of Harte-Hanks common stock to the shareholders of DiMark and DiMark's outstanding stock options were converted into options to acquire approximately 1.5 million shares of Harte-Hanks common stock. The merger was accounted for on a pooling-of-interests basis. Accordingly, the Company's financial statements have been restated to include the results of DiMark for all periods presented. The combined financial results include reclassifications to conform with financial statement preparation. Merger expenses related to the transaction were $12.1 million ($8.7 million, net of income taxes). Combined and separate results of the Company and DiMark during the reporting period preceding the merger were as follows: THREE MONTHS ENDED MARCH 31, 1996 <TABLE> <CAPTION> In thousands HARTE-HANKS DIMARK ADJUSTMENTS COMBINED - ------------ ----------- ------ ----------- -------- <S> <C> <C> <C> <C> Revenues from continuing operations $ 89,794 $ 27,377 $ (1,665) $115,506 Net Income from continuing operations 3,066 1,932 -- 4,998 </TABLE> Adjustments consist of elimination of DiMark's postage costs from revenues and cost of sales to conform to Harte-Hanks' accounting classification.
10 10 NOTE D - INCOME TAXES The Company's quarterly income tax provision of $7.7 million for continuing operations was calculated using an effective income tax rate of 42.3%. The Company's effective income tax rate is derived by estimating pretax income and income tax expense for the year ended December 31, 1997. The effective income tax rate calculated is higher than the federal statutory rate of 35% due to the addition of state taxes and to certain expenses recorded for financial reporting purposes (primarily goodwill amortization) which are not deductible for federal income tax purposes. NOTE E - NEW ACCOUNTING PRONOUNCEMENT In March 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which specifies the computing, presentation and disclosure requirements for earnings per share. SFAS 128 is effective for all periods ending after December 15, 1997 and requires retroactive restatement of prior periods EPS. The statement replaces the "primary EPS" calculation with a "basic EPS" and redefines the "dilutive EPS" computation. The Company will implement the statement in the required period.
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 May 16, 1997, the Company entered into a definitive agreement to sell its newspaper and television operations. Therefore, the newspaper and television operations results are excluded from management's discussion and analysis of financial condition and results of operations below. Operating results from continuing operations -- direct marketing and shoppers -- were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED In thousands SEPT. 30, 1997 SEPT. 30, 1996 CHANGE SEPT. 30, 1997 SEPT. 30, 1996 CHANGE - ------------ -------------- -------------- ------ -------------- -------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $155,061 $129,210 20.0% $444,449 $367,001 21.1% Operating expenses 134,837 113,347 19.0% 391,967 324,372 20.8% -------- -------- -------- -------- Operating income $ 20,224 $ 15,863 27.5% $ 52,482 $ 42,629 23.1% ======== ======== ======== ======== Net income $ 10,470 $ 8,031 30.4% $ 26,638 $ 21,137 26.0% ======== ======== ======== ======== Fully diluted earnings per share $ 0.27 $ 0.21 28.6% $ 0.69 $ 0.55 25.5% ======== ======== ======== ======== </TABLE> (The results above exclude the second quarter 1997 one-time investment gain -- discussed under "Other Income and Expense" -- and the second quarter 1996 one-time merger costs -- discussed in Note C of the Notes to Interim Condensed Consolidated Financial Statements included herein. Including these items, net income for first nine months of 1997 was $27.1 million, or 70 cents per share, compared to $12.4 million, or 32 cents per share, for the nine months ended September 30, 1996.) Consolidated revenues from continuing operations grew 20.0% to $155 million and operating income grew 27.5% to $20.2 million in the third quarter of 1997 when compared to the third quarter of 1996. The Company's overall growth resulted from increased business with both new and existing customers and from the sale of new products and services. Overall operating expenses compared to 1996 increased 19.0% to $134.8 million. Net income from continuing operations grew 30.4% to $10.5 million, or 27 cents per share, compared to 21 cents per share on a fully diluted basis. DIRECT MARKETING Direct marketing operating results were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED In thousands SEPT. 30, 1997 SEPT. 30, 1996 CHANGE SEPT. 30, 1997 SEPT. 30, 1996 CHANGE - ------------ -------------- -------------- ------ -------------- -------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $105,114 $ 81,758 28.6% $299,317 $227,619 31.5% Operating expenses 91,446 71,077 28.7% 262,431 197,483 32.9% -------- -------- -------- -------- Operating income $ 13,668 $ 10,681 28.0% $ 36,886 $ 30,136 22.4% ======== ======== ======== ======== </TABLE> Direct marketing revenues increased $23.4 million, or 28.6%, in the third quarter of 1997 when compared to 1996. Response management/teleservices, database marketing, and marketing services all experienced significant revenue growth. Response management/teleservices revenues increased due to new customer gains, particularly in the high technology industry and increased business with existing
12 12 customers particularly in the high technology and non-banking finance industries. Database marketing revenues increased primarily due to higher data processing volumes, higher sales of data append services, increased database construction and, to a lesser extent, the acquisition of Information for Marketing, a London based database marketing service provider. Marketing services revenues, including logistics operations, increased due to higher product sales as well as new product sales to new and existing retail industry customers. Lastly, revenues increased due to the November 1996 acquisition of Marketing Communications Inc., a Kansas City based integrated database marketing company that serves the pharmaceutical industry and others. Operating expenses increased $20.4 million, or 28.7%, in the third quarter of 1997 when compared to 1996. Payroll costs increased $9.6 million due to expanded hiring to support revenue growth. Also contributing to increased operating expenses were additional production costs of $7.5 million due to increased volumes. General and administrative expense increased $2.0 million due primarily to the increased provision for bad debt related to the increased revenues. Depreciation expense increased $1.1 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 $71.7 million, or 31.5%, in the first nine months of 1997 as compared to the comparable 1996 period. Database marketing, response management/teleservices, and logistics operations experienced significant revenue growth. Overall, revenue growth resulted from increased business with both new and existing customers, particularly in services provided to the retail, financial services, high technology, insurance, and health care industries, and from acquisitions. Operating expenses rose $65.0 million, or 32.9%, in the first nine months of 1997 when compared to the same period in 1996. Payroll costs increased $31.0 million due to expanded hiring to support revenue growth. In addition, production costs increased $23.7 million due to increased volumes. General and administrative costs increased $6.9 million primarily due to increased employee expense, the increased provision for bad debt related to the increased revenues and to increased business services expense. Depreciation expense increased $2.7 million due to higher levels of capital investment to support growth. The acquisitions noted above also impacted operating expense growth. SHOPPERS Shopper operating results were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED In thousands SEPT. 30, 1997 SEPT. 30, 1996 CHANGE SEPT. 30, 1997 SEPT. 30, 1996 CHANGE - ------------ -------------- -------------- ------ -------------- -------------- ------ <S> <C> <C> <C> <C> <C> <C> Revenues $ 49,947 $ 47,452 5.3% $145,132 $139,382 4.1% Operating expenses 41,568 40,537 2.5% 123,490 121,750 1.4% -------- -------- -------- -------- Operating income $ 8,379 $ 6,915 21.2% $ 21,642 $ 17,632 22.7% ======== ======== ======== ======== </TABLE> Shopper revenues increased $2.5 million, or 5.3%, in the third quarter of 1997 as compared to 1996. The increase was attributable to increased distribution product revenues and higher in-book advertising revenue. Distribution product revenues increased due to higher volumes in four color glossy print and deliver products and preprinted inserts. In-book advertising revenues increased primarily due to growth in employment advertisements. Operating expenses increased $1.0 million, or 2.5% in the third quarter of 1997 when compared to 1996. Payroll costs were flat for the period as compared to 1996. General and administrative expense increased $1.0 million due to higher promotion and bad debt expense. Production and distribution costs were flat, due
13 13 primarily to increased postage and printing expenses offset by decreased paper costs. Postage expense increased $0.6 million while printing expense increased $0.4 million, due both primarily to increased volumes. Paper costs decreased $0.8 million due to lower paper prices, slightly offset by higher distribution volumes. Shopper revenues increased $5.8 million, or 4.1%, in the first nine months of 1997 as compared to the first nine months of 1996. The increase was attributable to higher in-book advertising revenue, primarily from display advertising, as well as increased revenue from distribution products, including four color glossy print and deliver products and preprinted inserts. Year-to-date operating expenses increased $1.7 million, or 1.4%, in 1997 when compared to the same period in 1996. Payroll costs increased $1.2 million primarily due to increased revenue volumes. Additionally, general and administrative expense increased $2.7 million due to higher promotion costs of $1.4 million, higher provision for bad debt of $0.6 million, as well as higher business services costs of $0.4 million. These expense increases were partially offset by a $2.1 million decrease in production and distribution expense. This decrease in production and distribution expense was due primarily to paper rate savings of $3.4 million and a one-time sales tax refund that were partially offset by increased temporary labor of $0.8 million and increased postage costs of $0.3 million caused by higher revenue volumes. Other Income and Expense On May 16, 1997, the Company sold its 40 percent interest in SiteSpecific, an Internet-related company that was acquired by CKS Group, Inc. This transaction resulted in a gain of approximately $1.8 million in the second quarter of 1997. This investment gain was partially offset by reserves of $1.0 million for possible costs associated with a previous newspaper sale and the abandonment of minor equipment. Interest Expense/Interest Income Total interest income and expense was allocated to continuing and discontinued operations based on percentage of assets. The percentage allocated to continuing operations was approximately 58% for the first nine months of 1997 and 54% for the first nine months of 1996. Interest income and expense for continuing operations in the third quarter of 1997 was comparable to that of the third quarter of 1996. Income Taxes The Company's income tax expense for continuing operations increased $1.5 million in the third quarter of 1997 when compared to the third quarter of 1996. This increase was due primarily to the higher income levels. The effective tax rate for continuing operations was 42.3% for the third quarter of 1997 and 43.4% for the third quarter of 1996. The Company's income tax expense for the first nine months of 1997 increased $7.2 million when compared to 1996. This increase is attributable to the higher income levels as well as the absence of the 1996 merger related costs.
14 14 Liquidity and Capital Resources Cash provided from operating activities by continuing operations for the nine months ended September 30, 1997 was $50.2 million, as compared to $27.4 million for the nine months ended September 30, 1996. Net cash outflows for investing activities of continuing operations were $130.1 million as compared to outflows of $35.7 million in 1996. This increase in cash outflows for investing activities is attributable to the Company's purchase of the ABC Shoppers Group discussed below under "Acquisition" and in Note C of the Notes to Interim Condensed Consolidated Financial Statements included herein. 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, $311.4 million at September 30, 1997, were retired on October 15, 1997. This retirement was 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. Acquisition On September 24, 1997, the Company completed the previously announced acquisition of the ABC Shoppers Group from ABC, Inc., an indirect subsidiary of The Walt Disney Company for approximately $104 million. Factors That May Affect Future Results and Financial Condition From time to time, in both written reports and oral statements by senior management, the Company may express its expectations regarding its future performance. These "forward-looking statements" are inherently uncertain, and investors should realize that events could turn out to be other than what senior management expected. Set forth below are some key factors which could affect the Company's future performance. Acquisitions -- In recent years the Company has made a number of acquisitions in its direct marketing business, and it expects to pursue additional acquisition opportunities in its direct marketing and shopper businesses. Acquisition activities, even if not consummated, require substantial amounts of management time and can distract from normal operations. In addition, there can be no assurance that the synergies and other objectives sought in acquisitions will be achieved. Competition -- Direct marketing is a rapidly evolving business, subject to periodic technological advancements, high turnover of personnel who make buying decisions, and changing customer needs and preferences. Consequently, the Company's direct marketing business faces competition in each of its three sectors -- response management/teleservices, database marketing and marketing services. The Company shopper 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 to the number of media alternatives in those markets.
15 15 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. Postal Rates -- The Company's shoppers are delivered by standard mail, and postage is the second largest expense, behind payroll, in the Company's shopper business. The present standard postage rates went into effect in July 1995, and the next increase is expected in May 1998, although there can be no assurance postal rates will not increase prior to that time. Postal rates also influence the demand for the Company's direct marketing services even though the cost of mailings is borne by the Company's customers and is not directly reflected in the Company's revenues or expenses. Economic Conditions -- Changes in national economic conditions can affect levels of advertising expenditures generally, and such changes can affect each of the Company's businesses. In addition, revenues from the Company's shopper 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.
16 16 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See index to Exhibits on Page 17. (b) No Form 8-K has been filed during the three months ended September 30, 1997. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HARTE-HANKS COMMUNICATIONS, INC. November 13, 1997 /s/ Jacques D. Kerrest - ----------------- -------------------------------------- Date Jacques D. Kerrest Senior Vice President, Finance and Chief Financial and Accounting Officer
17 17 <TABLE> <CAPTION> Exhibit No. Description of Exhibit Page No. - ------- --------------------------------------------------------------- -------- <S> <C> <C> 2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 2(b) Agreement and Plan of Merger dated as of February 4, 1996 among Harte-Hanks Communications, Inc., HHD Acquisition Corp. and DiMark, Inc. (filed as Appendix A to the Company's Registration Statement No. 333-2047 and incorporated by reference herein). 2(c) Agreement and Plan of Merger and Reorganization, dated as of May 16, 1997, by and between The E.W. Scripps Company and Harte-Hanks Communications, Inc. (filed as Exhibit 2.1 to the Company's Form 8-K dated May 22, 1997 and incorporated by reference herein). 2(d) Acquisition Agreement, dated as of May 16, 1997, by and between The E.W. Scripps Company and Harte-Hanks Communications, Inc. (filed as Exhibit 2.2 to the Company's Form 8-K dated May 22, 1997 and incorporated by reference herein). *2(e) Stock Purchase Agreement dated as of July 26, 1997 between ABC, Inc. and Harte-Hanks Communications, Inc. 19 3(a) Amended and Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 3(b) Amended and Restated Bylaws (filed as Exhibit 3(b) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 3(c) Amendment dated April 30, 1996 to Amended and Restated Certificate of Incorporation (filed as Exhibit 3(c) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). 3(d) Amended and Restated Certificate of Incorporation as amended through April 30, 1996 (filed as Exhibit 3(d) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). 4(a) Long term debt instruments are not being filed pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K. Copies of such instruments will be furnished to the Commission upon request. 10(a) 1984 Stock Option Plan (filed as Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1984 and incorporated herein by reference). </TABLE>
18 18 <TABLE> <CAPTION> Exhibit No. Description of Exhibit Page No. - ------- ------------------------------------------------------------- -------- <S> <C> <C> 10(b) Registration Rights Agreement dated as of September 11, 1984 among HHC Holding Inc. and its stockholders (filed as Exhibit 10(b) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 10(c) HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1991 and incorporated by reference herein). 10(d) Amendment to HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit 10(j) to the Company's Form 10-K for the year ended December 31, 1992 and incorporated by reference herein). 10(e) 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(f) Form of Severance Agreement between Harte-Hanks Communications, Inc. and certain Executive Officers of the Company, dated as of July 23, 1993 (filed as Exhibit 10(h) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(g) Amendment No. 2 to HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit 10(1) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(h) Harte-Hanks Communications, Inc. Pension Restoration Plan (filed as Exhibit 10(j) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(i) Amendment No. 3 to Harte-Hanks Communications (formerly HHC Holding Inc.) 1991 Stock Option Plan (filed as Exhibit 10(o) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). 10(j) Harte-Hanks Communications, Inc. 1996 Incentive Compensation Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). *11 Statement Regarding Computation of Net Income (Loss) Per Common Share. 55 *21 Subsidiaries of the Company. 56 *27 Financial Data Schedule. 57 </TABLE> - ----------- * Filed herewith