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, 1994 _____ 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, 18,306,100 shares as of September 30, 1994 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT September 30, 1994 Page Part I. Financial Information Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - 3 September 30, 1994 and December 31, 1993 Consolidated Statements of Operations - 4 Three months ended September 30, 1994 and 1993 Consolidated Statements of Operations - 5 Nine months ended September 30, 1994 and 1993 Consolidated Statements of Cash Flows - 6 Nine months ended September 30, 1994 and 1993 Notes to Interim Condensed Consolidated Financial 7 Statements Item 2. Management's Discussion and Analysis of Financial 8 Condition and Results of Operations Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 13 (a) Exhibits (b) Reports on Form 8-K Signature 13 Harte-Hanks Communications, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except per share and share amounts) (Unaudited) September 30, December 31, 1994 1993 Assets Current assets Cash.............................................. $ 6,026 $ 4,392 Accounts receivable, net.......................... 63,881 61,130 Inventory......................................... 12,029 8,032 Prepaid expenses.................................. 6,030 5,385 Current deferred income tax....................... 5,696 4,549 Other current assets.............................. 4,563 3,765 Total current assets............................ 98,225 87,253 Property, plant and equipment, net.................. 91,776 90,809 Goodwill, net....................................... 285,645 292,944 Other assets........................................ 8,726 7,932 Total assets.................................... $ 484,372 $ 478,938 Liabilities and Stockholders' Equity Current liabilities Accounts payable.................................. $ 28,217 $ 24,422 Accrued payroll and related expenses.............. 15,464 12,607 Accrued interest.................................. 464 950 Prepaid subscriptions............................. 3,742 3,753 Current portion of film contracts................. 2,194 1,233 Income taxes payable.............................. 230 235 Other current liabilities......................... 13,679 10,765 Current portion of long term debt................. 337 977 Total current liabilities....................... 64,327 54,942 Long term debt...................................... 298,405 320,087 Other long term liabilities......................... 21,155 20,045 Total liabilities............................... 383,887 395,074 Stockholders' equity Common stock, $1 par value, authorized 50,000,000 shares. Issued and outstanding 1994: 18,306,100 shares; 1993: 18,129,400 shares................. 18,306 18,129 Additional paid-in capital........................ 143,653 142,664 Accumulated deficit............................... (61,474) (76,929) Total stockholders' equity...................... 100,485 83,864 Total liabilities and stockholders' equity...... $ 484,372 $ 478,938 <FN> See Notes to Interim Condensed Consolidated Financial Statements. Harte-Hanks Communications, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts) (Unaudited) Three Months Ended September 30, 1994 1993 Operating revenues.................................... $128,433 $117,512 Operating expenses Payroll............................................. 48,072 44,430 Production and distribution......................... 45,155 41,684 Advertising, selling, general and administrative.... 12,981 12,795 Depreciation........................................ 3,030 2,775 Goodwill amortization............................... 2,352 2,350 111,590 104,034 Operating income...................................... 16,843 13,478 Other expenses (income) Interest expense.................................... 4,404 7,770 Interest income..................................... (49) (46) Other, net.......................................... 410 24 4,765 7,748 Income before income tax expense...................... 12,078 5,730 Income tax expense.................................... 5,829 3,563 Income before extraordinary item...................... 6,249 2,167 Extraordinary item: Loss due to early extinguishment of debt, net of income tax benefit of $2,062............... -- (3,850) Net income (loss)..................................... $ 6,249 $ (1,683) Primary: Income (loss) per common share: Income before extraordinary item.................. $ 0.33 $ 0.17 Extraordinary item................................ -- (0.31) Net income (loss)................................. $ 0.33 $ (0.14) Weighted average common and common equivalent shares outstanding................................ 19,046 12,312 Fully diluted: Income (loss) per common share: Income before extraordinary item.................. $ 0.31 $ 0.17 Extraordinary item................................ -- (0.31) Net income (loss)................................. $ 0.31 $ (0.14) Weighed average common and common equivalent share outstanding................................... 20,482 12,312 <FN> See Notes to Interim Condensed Consolidated Financial Statements. Harte-Hanks Communications, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts) (Unaudited) Nine Months Ended September 30, 1994 1993 Operating revenues.................................... $370,414 $334,141 Operating expenses Payroll............................................. 142,703 128,538 Production and distribution......................... 129,335 118,765 Advertising, selling, general and administrative.... 38,914 36,327 Depreciation........................................ 9,366 8,607 Goodwill amortization............................... 7,054 7,817 Goodwill write-down................................. -- 55,463 327,372 355,517 Operating income (loss)............................... 43,042 (21,376) Other expenses (income) Interest expense.................................... 12,514 24,916 Interest income..................................... (140) (97) Other, net.......................................... 687 551 13,061 25,370 Income (loss) before income tax expense............... 29,981 (46,746) Income tax expense.................................... 14,526 5,376 Income (loss) before extraordinary item............... 15,455 (52,122) Extraordinary item: Loss due to early extinguishment of debt, net of income tax benefit of $2,062............... -- (3,850) Net income (loss)..................................... $ 15,455 $(55,972) Primary: Income (loss) per common share: Income (loss) before extraordinary item........... $ 0.81 $ (4.34) Extraordinary item................................ -- (0.32) Net income (loss)................................. $ 0.81 $ (4.66) Weighted average common and common equivalent shares outstanding................................ 19,043 12,009 Fully diluted: Income (loss) per common share: Income (loss) before extraordinary item........... $ 0.78 $ (4.34) Extraordinary item................................ -- (0.32) Net income (loss)................................. $ 0.78 $ (4.66) Weighed average common and common equivalent share outstanding................................... 20,483 12,009 <FN> See Notes to Interim Condensed Consolidated Financial Statements. Harte-Hanks Communications, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) (Unaudited) Nine Months Ended September 30, 1994 1993 Operating Activities Net income (loss)................................... $ 15,455 $(55,972) Add (deduct) non-cash income and expenses: Depreciation ................................... 9,366 8,607 Goodwill amortization........................... 7,054 7,817 Goodwill write-down............................. -- 55,463 Film amortization............................... 1,881 2,701 Deferred income taxes........................... (1,882) (89) Other, net...................................... 446 171 Changes in operating assets and liabilities Increase in accounts receivable, net.............. (2,566) (1,848) Increase in inventory............................. (4,118) (106) Increase in prepaid expenses and other current assets.................................. (622) (3,710) Increase in accounts payable...................... 1,417 103 Increase (decrease) in other accrued expenses and other liabilities........................... 5,032 (7,673) Other, net........................................ 1,172 (39) Extraordinary loss due to early extinguishment of debt......................................... -- 5,912 Net cash provided by operating activities....... 32,635 11,337 Investing Activities Acquisitions........................................ -- (9,783) Purchases of property, plant and equipment.......... (10,977) (18,621) Proceeds from the sale of property, plant and equipment..................................... 74 1,038 Payments on film contracts.......................... (1,468) (2,664) Net cash used in investing activities............. (12,371) (30,030) Financing Activities Long term debt borrowings........................... 348,302 405,629 Payments on long term debt, including current maturities ....................................... (367,958) (382,234) Payment of premium on early extinguishment of debt........................................... -- (3,446) Stock transactions.................................. 1,026 (15) Net cash provided by (used in) financing activities...................................... (18,630) 19,934 Net increase in cash................................ 1,634 1,241 Cash at beginning of year........................... 4,392 3,279 Cash at end of period............................... $ 6,026 $ 4,520 <FN> See Notes to Interim Condensed Consolidated Financial Statements. 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 nine months ended September 30 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, 1993. Certain prior period amounts have been reclassified for comparative purposes. Note B - 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. Applying the estimated annual effective income tax rate to the pretax income for the nine months ended September 30, 1994 results in an income tax expense of $14.5 million. 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Operating results, excluding the effect of the second quarter 1993 goodwill write-down (discussed under "Goodwill Write-Down," page 12) and third quarter 1993 extraordinary loss (discussed under "Extraordinary Item," page 12), were as follows: Three months ended Nine months ended In thousands September 30, 1994 September 30, 1993 Change September 30, 1994 September 30, 1993 Change Revenues $128,433 $117,512 9.3% $370,414 $334,141 10.9% Operating expenses 111,590 104,034 7.3% 327,372 300,054 9.1% Operating income $ 16,843 $ 13,478 25.0% $ 43,042 $ 34,087 26.3% Net income $ 6,249 $ 2,167 188.4% $ 15,455 $ 3,341 362.6% Each business segment contributed to consolidated revenue growth of 9.3% to $128.4 million and operating income growth of 25.0% to $16.8 million in the third quarter of 1994 as compared to the third quarter of 1993. The most dramatic growth occurred in the direct marketing business where revenues increased 26.5% and operating income increased 67.1%. The Company's overall growth for both the quarter and year-to-date periods resulted from the development of new products and services, new customers, shopper circulation expansion and improving general economic conditions. The same growth factors also caused operating expenses to rise in both time periods. Direct Marketing Direct marketing operating results were as follows: Three months ended Nine months ended In thousands September 30, 1994 September 30, 1993 Change September 30, 1994 September 30, 1993 Change Revenues $41,700 $32,961 26.5% $115,728 $87,655 32.0% Operating expenses 36,716 29,979 22.5% 104,012 79,933 30.1% Operating income $ 4,984 $ 2,982 67.1% $ 11,716 $ 7,722 51.7% Direct marketing revenues increased $8.7 million in the third quarter of 1994 when compared to the third quarter of 1993. The most significant revenue increases occurred in database, response management and integrated direct marketing. These service offerings enable customers to identify and communicate with their marketing targets and to evaluate responses and measure the effectiveness of their marketing communications. Overall, revenue growth resulted from increased business with both new and existing customers, particularly in services provided to the retail, banking, mutual funds and other financial industries and international customers. Payroll costs increased $2.7 million for the third quarter of 1994 as compared to 1993, primarily due to increased hiring to support direct marketing's revenue growth. Production costs also rose due to increased volumes. Direct marketing revenues increased $28.1 million in the first nine months of 1994 as compared to the first nine months of 1993. Increased revenues reflected significant growth in all service categories, particularly in response management, integrated direct marketing and database. The revenue increase in the first nine months of 1994 was also slightly affected by the April 1993 acquisition of Direct Market Concepts, Inc. Year-to-date 1994 operating expenses rose $24.1 million when compared to 1993, reflecting increased activity as well as investments to support future growth. Year-to-date 1994 operating expenses were also affected slightly by the April 1993 acquisition. Shoppers Shopper operating results, excluding the second quarter 1993 goodwill write- down, were as follows: Three months ended Nine months ended In thousands September 30, 1994 September 30, 1993 Change September 30, 1994 September 30, 1993 Change Revenues $45,043 $45,089 -0.1% $132,485 $130,549 1.5% Operating expenses 39,281 39,681 -1.0% 118,746 118,517 0.2% Operating income $ 5,762 $ 5,408 6.5% $ 13,739 $ 12,032 14.2% Excluding revenues from the Company's smallest shopper, sold in February 1994, shopper revenues grew $1.4 million, or 3.2%, in the third quarter of 1994 as compared to the same period in 1993. Revenues grew primarily as a result of circulation expansion. During the 12 months ended September 30, 1994, circulation for the Company's four remaining shoppers grew from 6.7 million to 6.9 million households. Excluding operating expenses from the divested shopper, third quarter operating expenses increased $1.2 million. Postage costs increased $0.5 million primarily due to higher circulation. Newsprint costs were flat, with increased costs resulting from higher volumes due to circulation growth offset by average price declines. Payroll costs rose $0.7 million, and general and administrative expenses decreased $0.2 million. Excluding revenues from the divested shopper, year-to-date revenues increased $5.5 million, or 4.4%, as compared to 1993. Revenue growth for the first nine months of 1994 was primarily attributable to circulation expansion and, to a lesser extent, increased advertising in existing circulation zones. Excluding operating expenses from the divested shopper, year-to-date operating costs increased $4.4 million. Payroll, postage and newsprint costs increased $2.0 million, $1.5 million and $0.3 million, respectively, due to increased circulation. General and administrative expenses remained flat. Newspapers Newspaper operating results, excluding the second quarter 1993 goodwill write-down, were as follows: Three months ended Nine months ended In thousands September 30, 1994 September 30, 1993 Change September 30, 1994 September 30, 1993 Change Revenues $34,682 $32,619 6.3% $101,694 $95,572 6.4% Operating expenses 28,564 27,525 3.8% 83,917 82,126 2.2% Operating income $ 6,118 $ 5,094 20.1% $ 17,777 $13,446 32.2% Newspaper revenues increased $2.1 million in the third quarter of 1994 when compared to the third quarter of 1993. Advertising revenues were up 8.0% overall. Classified advertising revenues grew 11.9% led by strong automotive volumes. Retail advertising revenues increased 3.6%, while insert revenues rose 2.5%. In addition, niche and specialty product revenues were up as a result of investments made to broaden the newspaper revenue base. Circulation revenues increased 4.4%, reflecting home-delivery price increases in the fall of 1993. Payroll costs were $0.5 million higher in the third quarter of 1994 as compared to 1993 due to increased sales commissions on higher advertising volumes and normal payroll increases. In addition, general and administrative costs rose $0.4 million. Newsprint costs decreased $0.2 million as a result of lower average newsprint prices offset slightly by higher volumes. Year-to-date 1994 newspaper revenues grew $6.1 million when compared to 1993. Advertising revenues increased 7.4%, driven largely by volume increases in classified advertising. Circulation revenues increased 5.9%. Payroll costs for the first nine months of 1994 rose $1.9 million due to increased advertising volumes in the Company's primary products and normal payroll increases. In addition, general and administrative costs increased $0.9 million. Newsprint costs declined $0.6 million due to lower average newsprint prices offset by higher volumes. Goodwill amortization decreased $0.8 million due to the second quarter 1993 goodwill write-down that related to the Company's suburban newspapers in Boston and Dallas. Television Television operating results were as follows: Three months ended Nine months ended In thousands September 30, 1994 September 30, 1993 Change September 30, 1994 September 30, 1993 Change Revenues $7,008 $6,843 2.4% $20,507 $20,365 0.7% Operating expenses 4,959 5,004 -0.9% 14,445 14,781 -2.3% Operating income $2,049 $1,839 11.4% $ 6,062 $ 5,584 8.6% Revenues for the television segment increased $0.2 million in the third quarter of 1994 when compared to the same period in 1993. Revenues from the television station operation increased $0.3 million due to higher advertising revenues, including early political advertising for the November elections. The revenue increase from the television station operation was partially offset by decreased revenue from the segment's print graphics services. For the first nine months of 1994, television segment revenues increased $0.1 million as compared to the same period in 1993. The nine months of 1993 was affected by a number of favorable events: the favorable impact from the closure of one of San Antonio's daily newspapers, a special senatorial election runoff and the San Antonio Olympic Festival. Year-to-date revenues from the television station operation increased $0.4 million. A direct mail product and radio station introduced in 1993 also resulted in additional revenues for 1994. These revenue increases were offset by a $0.5 million decline in revenues from the segment's print graphics services. Expenses for the television segment remained relatively flat during the third quarter. Year-to-date expenses decreased $0.3 million when compared to the same period in 1993 primarily because of film programming cost declines due to the expiration of certain film contracts. These decreases were slightly offset by increases in payroll costs and other production costs. Other Items Affecting Operating Results Postage expense represents approximately 11% of the Company's total operating expenses. Shoppers, which accounts for approximately 95% of the Company's total postage expense, and newspapers both have experienced stable postal rates in recent years. While postal rates generally increase every three years, the 10.3% increase proposed for 1995 would be the first postal rate increase in four years. In addition, the 10.3% proposed increase will impact direct marketing customers' costs. Newsprint expense represents approximately 7% of the Company's total operating expenses. Newspapers and shoppers both have benefited from favorable newsprint prices in the past several years. Newsprint prices increased about 11% in June 1994 and about 8% in August 1994, and an additional price increase of approximately 8% has been announced for December 1, 1994. These price increases will impact results for the fourth quarter of 1994 as well as fiscal 1995. Interest Expense Interest expense decreased $3.4 million in the third quarter of 1994 and $12.4 million in the first nine months of 1994 when compared to the same periods in 1993 as a result of reduced debt levels and the use of less expensive debt. The Company redeemed $100 million of its 11 7/8% Subordinated Debentures in August 1993 with borrowings under its credit facility. The remaining $100 million of Debentures was redeemed in December 1993, funded primarily with proceeds from the Company's initial public offering. Although short term interest rates have risen throughout the year, the impact on the Company has been mitigated somewhat by more favorable pricing under terms of the Company's credit facility. The more favorable pricing is a result of increased operating cash flow, as defined in the Company's credit facility agreement, and reduced debt levels. Income Taxes The Company's income tax expense increased $2.3 million in the third quarter of 1994 and $9.2 million in the first nine months of 1994 when compared to the same periods in 1993. The expense increase was directly related to the increased income levels. Goodwill Write-Down During the second quarter of 1993, the Company incurred a goodwill write- down charge of $55.5 million. This write-down was related to the Company's daily, semi-weekly and weekly newspapers in suburban Boston and Dallas and, to a lesser extent, its shopper publication in Tucson. The Company sold the Tucson shopper in February 1994. Extraordinary Item As a result of the third quarter 1993 debt redemption discussed under "Interest Expense," the Company incurred an extraordinary loss of $3.9 million, net of income tax benefits of $2.1 million, from the payment of redemption premiums and the write-off of related unamortized financing costs and issuance costs. Liquidity and Capital Resources Cash provided from operating activities for the nine months ended September 30, 1994 was $32.6 million, as compared to $11.3 million for the nine months ended September 30, 1993. Net cash outflows for investing activities were $12.4 million, as compared to $30.0 million in 1993. Year-to-date investing activities for 1994 included $11.0 million in capital expenditures for equipment purchases. In 1993, the net cash outflows for investing activities of $30.0 million consisted primarily of $18.6 million in capital expenditures and $9.8 million in cash expenditures on acquisitions. Capital resources are also 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, 1999. 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 September 30, 1994, the Company had $103.3 million of unused borrowing capacity under its credit facility, of which $60.0 million was reserved to serve as backup for the Company's outstanding commercial paper and other short-term borrowing facilities. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See index to Exhibits on Page 14. (b) No reports on Form 8-K were filed for the three months ended September 30, 1994. 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 11, 1994 /s/ Richard L. Ritchie Date Richard L. Ritchie Senior Vice President, Finance and Chief Financial and Accounting Officer Exhibit No. Description of Exhibit Page No. *11 Statement Regarding Computation of Net Income (Loss) 15 Common Share *27 Financial Data Schedules * Filed herewith.