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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, 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, 36,593,336 shares as of September 30, 1996.
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HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
September 30, 1996
Page
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Part I. Financial Information
Item 1. Interim Condensed Consolidated Financial
Statements (Unaudited)
Condensed Consolidated Balance Sheets - 3
September 30, 1996 and December 31, 1995
Consolidated Statements of Operations - 4
Three months ended September 30, 1996 and 1995
Consolidated Statements of Operations - 5
Nine months ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows - 6
Nine months ended September 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
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Harte-Hanks Communications, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (in thousands, except per share and share
- --------------------------------------------------------------------------------
amounts)
- --------
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
Assets
Current assets
Cash . . . . . . . . . . . . . . . . . . . . . . . $ 15,925 $ 18,102
Accounts receivable, net . . . . . . . . . . . . . 87,513 80,056
Inventory . . . . . . . . . . . . . . . . . . . . 15,444 24,307
Prepaid expenses . . . . . . . . . . . . . . . . . 6,751 5,330
Current deferred income tax benefit . . . . . . . 6,530 7,181
Other current assets . . . . . . . . . . . . . . . 4,934 3,477
--------- ---------
Total current assets . . . . . . . . . . . . . 137,097 138,453
Property, plant and equipment, net . . . . . . . . . 109,353 102,164
Goodwill, net . . . . . . . . . . . . . . . . . . . . 293,323 283,149
Other assets . . . . . . . . . . . . . . . . . . . . 6,880 5,513
--------- ---------
Total assets . . . . . . . . . . . . . . . . . $ 546,653 $ 529,279
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . $ 38,801 $ 35,768
Accrued payroll and related expenses . . . . . . . 16,513 20,677
Customer deposits and unearned revenue . . . . . . 18,637 16,174
Income taxes payable . . . . . . . . . . . . . . . -- 1,593
Other current liabilities . . . . . . . . . . . . 10,245 9,015
--------- ---------
Total current liabilities . . . . . . . . . . . 84,196 83,227
Long term debt . . . . . . . . . . . . . . . . . . . 205,040 220,468
Other long term liabilities . . . . . . . . . . . . . 24,077 23,728
--------- ---------
Total liabilities . . . . . . . . . . . . . . . 313,313 327,423
========= =========
Stockholders' equity
Common stock, $1 par value, authorized 125,000,000
shares. Issued and outstanding 1996: 36,593,336
shares; 1995: 36,044,228 shares . . . . . . . . 36,593 36,044
Additional paid-in capital . . . . . . . . . . . . 182,908 174,870
Retained earnings (accumulated deficit) . . . . . 13,839 (9,058)
--------- ---------
Total stockholders' equity . . . . . . . . . . 233,340 201,856
--------- ---------
Total liabilities and stockholders' equity . . $ 546,653 $ 529,279
========= =========
See Notes to Interim Condensed Consolidated Financial Statements.
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Harte-Hanks Communications, Inc. and Subsidiaries
Consolidated Statements of Operations (in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
---------- ----------
Operating revenues. . . . . . . . . . . . . . . . $166,248 $146,459
-------- --------
Operating expenses
Payroll . . . . . . . . . . . . . . . . . . . . 59,068 50,942
Production and distribution . . . . . . . . . . 59,389 54,797
Advertising, selling, general and administrative 15,332 13,759
Depreciation . . . . . . . . . . . . . . . . . 4,771 4,037
Goodwill amortization . . . . . . . . . . . . . 2,484 2,420
-------- --------
141,044 125,955
-------- --------
Operating income . . . . . . . . . . . . . . . . . 25,204 20,504
-------- --------
Other expenses (income)
Interest expense . . . . . . . . . . . . . . . 3,254 3,833
Interest income . . . . . . . . . . . . . . . . (188) (150)
Other, net . . . . . . . . . . . . . . . . . . 134 195
Gain on divestiture . . . . . . . . . . . . -- (1,454)
-------- --------
3,200 2,424
-------- --------
Income before income tax expense . . . . . . . . . 22,004 18,080
Income tax expense . . . . . . . . . . . . . . . . 9,712 8,104
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . $ 12,292 $ 9,976
======== ========
Primary:
Earnings per share . . . . . . . . . . . . . . $ 0.32 $ 0.26
======== ========
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . 38,734 37,815
======== ========
Fully diluted:
Earnings per share . . . . . . . . . . . . . . $ 0.32 $ 0.26
======== ========
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . 38,824 37,895
======== ========
See Notes to Interim Condensed Consolidated Financial Statements.
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Harte-Hanks Communications, Inc. and Subsidiaries
Consolidated Statements of Operations (in thousands, except per share amounts)
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(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1996 1995
----------- -----------
Operating revenues . . . . . . . . . . . . . . . . . . . $476,775 $445,167
-------- --------
Operating expenses
Payroll . . . . . . . . . . . . . . . . . . . . . . . 170,302 156,270
Production and distribution . . . . . . . . . . . . . 172,448 165,451
Advertising, selling, general and administrative . . 43,978 44,762
Depreciation . . . . . . . . . . . . . . . . . . . . 13,712 12,008
Goodwill amortization . . . . . . . . . . . . . . . . 7,421 7,339
Merger costs . . . . . . . . . . . . . . . . . . . . . 12,136 --
-------- --------
419,997 385,830
-------- --------
Operating income... . . . . . . . . . . . . . . . . . . . 56,778 59,337
-------- --------
Other expenses (income)
Interest expense . . . . . . . . . . . . . . . . . . 10,138 13,050
Interest income . . . . . . . . . . . . . . . . . . . (1,295) (502)
Other, net . . . . . . . . . . . . . . . . . . . . . 638 934
Gain on divestitures. . . . . . . . . . . . . . . . . -- (13,747)
-------- --------
9,481 (265)
-------- --------
Income before income tax expense . . . . . . . . . . . 47,297 59,602
Income tax expense . . . . . . . . . . . . . . . . . . . 22,782 31,502
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 24,515 $ 28,100
======== ========
Primary:
Earnings per share . . . . . . . . . . . . . . . . . $ .64 $ .77
======== ========
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . 38,524 36,387
======== ========
Fully diluted:
Earnings per share . . . . . . . . . . . . . . . . . $ .63 $ 0.75
======== ========
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . 38,613 37,639
======== ========
See Notes to Interim Condensed Consolidated Financial Statements.
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Harte-Hanks Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
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(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1996 1995
------------ ----------
Cash Flows From Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . $ 24,515 $ 28,100
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation . . . . . . . . . . . . . . . . . . . 13,712 12,008
Goodwill amortization . . . . . . . . . . . . . . 7,421 7,339
Amortization of option related compensation . . . 772 1,483
Film amortization . . . . . . . . . . . . . . . . 919 1,831
Deferred income taxes . . . . . . . . . . . . . . 1,428 (1,218)
Other, net . . . . . . . . . . . . . . . . . . . . 1,026 708
Gain on divestiture . . . . . . . . . . . . . . . -- (13,747)
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures:
Increase in accounts receivable, net . . . . . . . (4,238) (711)
Decrease (increase) in inventory . . . . . . . . . 8,863 (9,529)
Increase in prepaid expenses and other
current assets . . . . . . . . . . . . . . . . . (1,971) (1,221)
Increase in accounts payable . . . . . . . . . . . 2,215 8,505
Decrease in other accrued expenses
and other liabilities . . . . . . . . . . . . . (3,600) (2,424)
Other, net . . . . . . . . . . . . . . . . . . . . (1,778) 418
---------- ----------
Net cash provided by operating activities . . . 49,284 31,542
---------- ----------
Cash Flows From Investing Activities
Purchases of property, plant and equipment . . . . . (20,653) (17,824)
Proceeds from the sale of property, plant
and equipment and divested assets . . . . . . . . . 661 42,924
Acquisitions . . . . . . . . . . . . . . . . . . . . (18,251) (9,538)
Payments on film contracts. . . . . . . . . . . . . . (1,115) (1,441)
---------- ----------
Net cash provided by (used in)
investing activities . . . . . . . . . . . . . . . (39,358) 14,121
---------- ----------
Cash Flows From Financing Activities
Long term debt borrowings . . . . . . . . . . . . . . 187,000 831,064
Payments on long term debt, including current
maturities . . . . . . . . . . . . . . . . . . . . (203,005) (876,627)
Issuance of common stock . . . . . . . . . . . . . . 5,520 4,743
Dividends paid . . . . . . . . . . . . . . . . . . . (1,618) (1,455)
---------- ----------
Net cash used in financing activities . . . . . . (12,103) (42,275)
---------- ----------
Net increase (decrease) in cash . . . . . . . . . . . (2,177) 3,388
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 . . . . . . . . . . . . . . . . $ 15,925 $ 13,417
========== ==========
See Notes to Interim Condensed Consolidated Financial Statements.
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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, 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 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 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):
THREE MONTHS ENDED
MARCH 31, 1996 HARTE-HANKS DIMARK ADJUSTMENTS COMBINED
------------------ --------------- ----------- ----------- --------
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
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Adjustments 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 $22.8 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 nine months ended September
30, 1996 resulted in $26.2 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.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Operating results were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 1996 SEPT. 30, 1995 CHANGE SEPT. 30, 1996 SEPT. 30, 1995 CHANGE
- ------------ -------------- -------------- ------ -------------- -------------- ------
Revenues $166,248 $146,459 13.5% $476,775 $445,167 7.1%
Operating expenses 141,044 125,955 12.0% 407,861 385,830 5.7%
-------- -------- -------- --------
Operating income $ 25,204 $ 20,504 22.9% $ 68,914 $ 59,337 16.1%
======== ======== ======== ========
Net income $ 12,292 $ 9,108 35.0% $ 33,251 $ 24,391 36.3%
======== ======== ======== ========
Fully diluted earnings
per share $ 0.32 $ 0.24 33.3% $ 0.86 $ 0.66 30.3%
======== ======== ======== ========
(The above results exclude the 1996 one-time merger costs (discussed under
"Acquisition") and the 1995 gains on divestitures (discussed under "Gain on
Divestiture"). Including these items for the third quarter of 1996, net income
was $12.3 million, or 32 cents per share, compared to net income of $10.0
million, or 26 cents per share, in 1995, and for the first nine months of 1996,
net income was $24.5 million, or 63 cents per share, compared to $28.1 million,
or 75 cents per share, in 1995.)
Consolidated revenues grew 13.5% to $166.2 million, and operating income grew
22.9% to $25.2 million, in the third quarter of 1996 when compared to the same
period in 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 12.0% over 1995. Excluding the sale of the Boston
newspapers, year-to-date revenues increased $38.9 million, or 8.9%, when
compared to the same period in 1995.
DIRECT MARKETING
Direct marketing operating results were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 1996 SEPT. 30, 1995 CHANGE SEPT. 30, 1996 SEPT. 30, 1995 CHANGE
- ------------ -------------- -------------- ------ -------------- -------------- ------
Revenues $81,758 $64,190 27.4% $227,619 $194,212 17.2%
Operating expenses 71,077 55,478 28.1% 197,483 167,609 17.8%
------- ------- -------- --------
Operating income $10,681 $ 8,712 22.6% $ 30,136 $ 26,603 13.3%
======= ======= ======== ========
Direct marketing revenues increased $17.6 million, or 27.4%, in the third
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 due to increased business with existing customers, new customer
gains, particularly in the high technology industry, and to two acquisitions in
May and August 1996. The company acquired Inquiry Handling Service, a Los
Angeles based response management company that serves the high technology and
electronics industries, in May and Lead Management Group, a Boston based
response management, telemarketing and fulfillment company that serves the high
tech industry. Sales lead management, which includes lead generation and
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qualification through inbound inquiries, experienced significant growth both
from new customers and increased 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. These revenue increases were
slightly offset by the absence of an outsourced mailing program which the
customer now performs in-house. Overall, revenue growth resulted from
acquisitions and increased business with both new and existing customers,
particularly in services provided to the high tech, retail, financial services,
insurance and pharmaceutical industries.
Third quarter operating expenses increased $15.6 million, or 28.1%, when
compared to 1995. Payroll costs increased $8.4 million due to expanded hiring
to support revenue growth. Also contributing to the increased operating
expenses were additional production costs of $5.2 million due to increased
volumes. Depreciation expense increased $0.5 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 $33.4 million, or 17.2%, in the first nine
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 tech, retail, financial services, healthcare and
pharmaceutical industries.
Year-to-date 1996 operating expenses rose $29.9 million, or 17.8%, when
compared to 1995. Payroll costs increased $18.5 million due to expanded hiring
to support revenue growth. In addition, production costs increased $7.8 million
due to increased volumes. Depreciation expense increased $1.7 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:
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 1996 SEPT. 30, 1995 CHANGE SEPT. 30, 1996 SEPT. 30, 1995 CHANGE
- ------------ -------------- -------------- ------ -------------- -------------- ------
Revenues $47,452 $47,550 -0.2% $139,382 $139,481 - 0.1%
Operating expenses 40,537 41,365 -2.0% 121,750 123,907 - 1.7%
------- ------- -------- --------
Operating income $ 6,915 $ 6,185 11.8% $ 17,632 $ 15,574 13.2%
======= ======= ======== ========
Shopper revenues decreased $0.1 million, or 0.2%, in the third quarter of 1996
when compared to the same period in 1995. The decrease was due primarily to
lower insert revenues as a result of reduced volumes as well as revenue
declines related to intentional reductions of marginal circulation in Dallas.
The decreases were offset by increased in-book advertising revenues resulting
from higher display advertising volumes. Display advertising volumes increased
due to growth in the Company's core business accounts as well as increased
in-column display advertisements made possible by pagination technology
implemented in 1995.
Shopper operating expenses decreased $0.8 million, or 2.0%, in the third
quarter of 1996 when compared to 1995. Postage expense decreased $1.4 million
due to lower rates as a result of postal reclassification and less overweight
postage associated with the lower insert volumes. In addition, reduced
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circulation in the Dallas market contributed to the decreased expense. These
decreases were offset by paper cost increases of $0.4 million. Paper cost
increases were primarily attributable to higher rates.
Year-to-date shopper revenues remained constant at $139.4 million when compared
to the same period in 1995. Revenue growth occurred 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 the
circulation reduction in Dallas.
Year-to-date shopper operating expenses decreased $2.2 million, or 1.7%, in
1996 when compared to the same period in 1995. This decline was due to lower
postage costs of $3.9 million and to lower operating expenses related to the
reduction in marginal circulation in Dallas. These decreases were partially
offset by increased paper costs of $2.2 million, or 17.2%.
NEWSPAPERS
Newspaper operating results were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 1996 SEPT. 1995 CHANGE SEPT. 30, 1996 SEPT. 30, 1995 CHANGE
- ------------ -------------- ---------- ------ -------------- -------------- ------
Revenues $30,635 $28,803 6.4% $90,774 $92,963 -2.4%
Operating expenses 23,514 22,361 5.1% 70,518 74,041 -4.8%
------- ------- ------- -------
Operating income $ 7,121 $ 6,442 10.5% $20,256 $18,922 7.0%
======= ======= ======= =======
Newspaper revenues increased $1.8 million, or 6.4%, in the third quarter of
1996 when compared to the same period in 1995. Overall advertising revenues
were up $1.0 million, or 5.2%. In particular, retail advertising revenues were
up $0.5 million, or 6.6%, due to increased rates. In addition, classified
advertising revenues increased $0.4 million, or 4.6%, also as a result of rate
increases. Circulation revenues increased $0.4 million, or 5.3%, 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 $0.4 million
primarily due to the continued growth of existing direct mail programs as well
as the launch of new programs in 1996. In addition, initiatives in community
publications, total market coverage products, Internet and audiotext added to
third quarter revenue growth.
Newspaper operating expenses increased $1.2 million, or 5.1%, in the third
quarter of 1996 when compared to 1995. Newsprint expense increased $0.5
million, or 12.3%, as a result of higher average newsprint prices offset
slightly by reduced volumes. General and administrative costs increased $0.4
million, or 11.8%.
Excluding the sale of the Boston newspapers (discussed under "Gain on
Divestiture"), year-to-date newspaper revenues increased $5.1 million, or 6.0%,
when compared to the same period in 1995. Overall advertising revenues were up
$2.2 million, or 3.8%. In particular, classified advertising revenues
increased $1.3 million, or 6.0%, as a result of rate increases. Retail
advertising revenues were up $0.9 million, or 3.4%, due to increased rates
slightly offset by lower volumes. Circulation revenues increased $1.3 million,
or 6.1%, due to rate increases. Niche product revenue increased $1.5 million,
primarily due to the continued growth of existing revenue streams as well as
the launch of revenue initiatives.
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Excluding the sale of the Boston newspapers, year-to-date newspaper operating
expenses increased $4.0 million, or 6.0%, when compared to 1995. Newsprint
expense increased $2.6 million, or 22.4%, 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. In addition, general
and administrative costs rose $0.6 million, or 6.1%.
TELEVISION
Television operating results were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 1996 SEPT. 30, 1995 CHANGE SEPT. 30, 1996 SEPT. 30, 1995 CHANGE
- ------------ -------------- -------------- ------ -------------- -------------- ------
Revenues $6,403 $ 5,916 8.2% $19,000 $18,511 2.6%
Operating expenses 4,090 4,407 -7.2% 12,654 13,531 -6.5%
------ ------- ------- -------
Operating income $2,313 $ 1,509 53.3% $ 6,346 $ 4,980 27.4%
====== ======= ======= =======
Revenues for the television segment increased $0.5 million, or 8.2%, in the
third quarter of 1996 when compared to 1995. This increase was primarily
attributable to increases in local and national advertising and an increase in
network compensation revenue due to a renegotiated network affiliation
agreement. These increases were partially offset by decreased graphics
revenues.
Third quarter operating expenses decreased $0.3 million, or 7.2%, 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.
Revenues for the television segment increased $0.5 million, or 2.6%, for the
first nine months 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 weak CBS network performance.
Operating expenses for the first nine months of 1996 for the television segment
decreased $0.9 million, or 6.5%, 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
approximately 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 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,
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financial services and telecommunications industries, as well as direct
response printing services.
Interest Expense/Interest Income
Interest expense decreased $0.6 million in the third 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 $2.9 million in 1996
when compared to 1995, primarily due to lower debt levels and rates. Debt
levels decreased due to proceeds from the divestitures 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 nine months of 1996 when
compared to 1995 due to interest income related to an income tax refund that
resulted from a favorable tax settlement.
Gains on Divestitures
In March 1995 and July 1995, the Company sold its suburban Boston community
newspapers and a small local hand distribution advertising business. As a
result of these transactions, the Company recognized gains on divestitures of
$3.1 million, or 9 cents per share, net of $10.6 million of income taxes.
Income Taxes
Excluding the income taxes related to the 1996 merger costs and the 1995 gains
on divestitures, income tax expense in the third quarter and the first nine
months of 1996 increased due to higher income levels.
Liquidity and Capital Resources
Cash provided from operating activities for the nine months ended September 30,
1996 was $49.3 million as compared to $31.5 million for the same period in
1995. Net cash outflows for investing activities were $39.4 million as
compared to inflows of $14.1 million in 1995. Investing activities for the
first nine months of 1996 included acquisitions of $20.7 million. For the
first nine months of 1995, investing activities included $42.9 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 September 30,
1996, the Company had $124 million of unused borrowing capacity under its
credit facility, of which $7.8 million was reserved to support short-term
borrowings.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See index to Exhibits on Page 16.
(b) No reports on Form 8-K were filed for the nine months ended
September 30, 1996.
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, 1996 /s/ Larry Franklin
--------------------- ----------------------------
Date Larry Franklin
President
and Chief Executive Officer
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Exhibit
No. Description of Exhibit Page No.
- -------- ------------------------------------------------------------------- -----------
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
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(o) 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(p) 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 Statements Regarding Computation of Per 16
Share Earnings
*27 Financial Data Schedules 18
* Filed herewith.