UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2004
For the transition period from to
Commission File Number 1-7120
HARTE-HANKS, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification Number)
Registrant’s telephone number including area code — 210/829-9000
Indicate by checkmark 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 by checkmark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock: $1 par value per share, 85,320,612 shares as of October 31, 2004.
HARTE-HANKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
September 30, 2004
Part I. Financial Information
Item 4
Part II.Other Information
Item 2.
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Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (in thousands, except share amounts)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventory
Prepaid expenses
Current deferred income tax asset
Other current assets
Total current assets
Property, plant and equipment, (less accumulated depreciation of $206,678 in 2004 and $194,987 in 2003)
Goodwill, (less accumulated amortization of $81,973 in 2004 and 2003)
Other intangible assets, (less accumulated amortization of $2,783 in 2004 and $2,333 in 2003)
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
Accrued payroll and related expenses
Customer deposits and unearned revenue
Income taxes payable
Other current liabilities
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Stockholders’ equity
Common stock, $1 par value per share, 250,000,000 shares authorized. 114,176,842 and 113,280,794 shares issued at September 30, 2004 and December 31, 2003, respectively
Additional paid-in capital
Retained earnings
Less treasury stock: 28,935,200 and 25,788,502 shares at cost at September 30, 2004 and December 31, 2003, respectively
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
Consolidated Statements of Operations (in thousands, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
Operating revenues
Operating expenses
Labor
Production and distribution
Advertising, selling, general and administrative
Depreciation and amortization
Intangible amortization
Total operating expenses
Operating income
Other expenses (income)
Interest expense
Interest income
Other, net
Income before income taxes
Income tax expense
Net income
Basic earnings per common share
Weighted-average common shares outstanding
Diluted earnings per common share
Weighted-average common and common equivalent shares outstanding
4
Nine Months Ended
5
Consolidated Statements of Cash Flows (in thousands)
Cash Flows from Operating Activities
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of option-related compensation
Deferred income taxes
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable, net
(Increase) decrease in inventory
(Increase) decrease in prepaid expenses and other current assets
Increase in accounts payable
Increase (decrease) in other accrued expenses and other current liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Acquisitions, net of cash acquired
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Net cash used in investing activities
Cash Flows from Financing Activities
Long-term borrowings
Repayment of long-term borrowings
Issuance of common stock
Purchase of treasury stock
Issuance of treasury stock
Dividends paid
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of period
6
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (in thousands)
(2004 Unaudited)
Balance at January 1, 2003
Common stock issued- employee benefit plans
Exercise of stock options for cash and by surrender of shares
Tax benefit of options exercised
Dividends paid ($0.12 per share)
Treasury stock repurchased
Treasury stock issued
Comprehensive income, net of tax:
Adjustment for minimum pension liability (net of tax of $2,652)
Foreign currency translation adjustment
Total comprehensive income
Balance at December 31, 2003
Balance at September 30, 2004
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Notes to Unaudited Condensed Consolidated Financial Statements
Note A - Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Harte-Hanks, Inc. and subsidiaries (the “Company”).
The statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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, 2003.
Certain prior period amounts have been reclassified for comparative purposes.
Note B - Income Taxes
The Company’s quarterly income tax provision of $17.4 million was calculated using an effective income tax rate of approximately 40.4%. The Company’s nine month income tax provision of $46.7 million, was calculated using an effective income tax rate of approximately 40.0%. The Company’s effective income tax rate is derived by estimating pretax income and income tax expense for the year ending December 31, 2004. 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 that are not deductible for federal income tax purposes.
Note C - Earnings Per Share
A reconciliation of basic and diluted earnings per share (EPS) is as follows:
In thousands, except per share amounts
BASIC EPS
Net Income
Weighted-average common shares outstanding used in earnings per share computations
Earnings per common share
DILUTED EPS
Shares used in diluted earnings per share computations
Computation of shares used in earnings per share computations:
Weighted-average outstanding common shares
Weighted average common equivalent shares - dilutive effect of option shares
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For the purpose of calculating the shares used in the diluted EPS calculation for the three months ended September 30, 2004 there were no anti-dilutive options outstanding. For the purpose of calculating the shares used in the diluted EPS calculation for the three months ending September 30, 2003, 753,000 anti-dilutive market price options have been excluded from the EPS calculations.
Weighted-average common equivalent shares - dilutive effect of option shares
Shares used diluted in earnings per share computations
For the purpose of calculating the shares used in the diluted EPS calculation for the nine months ended September 30, 2004 and 2003, 93,000 and 762,000 anti-dilutive market price options have been excluded from the EPS calculations, respectively.
Note D – Business Segments
Harte-Hanks is a highly focused targeted media company with operations in two segments – Direct Marketing and Shoppers.
Information about the Company’s operations in its two different business segments follows:
In thousands
Direct Marketing
Shoppers
Total operating revenues
Operating Income
Corporate Activities
Total operating income
Total income before income taxes
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Note E – Stock-Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation expense has been recognized for options granted where the exercise price is equal to the market price of the underlying stock at the date of grant. For options issued with an exercise price below the market price of the underlying stock on the date of grant, the Company recognizes compensation expense under the provisions of APB No. 25, as permitted under SFAS No. 123.
Had compensation expense for the Company’s options been determined based on the fair value at the grant date for awards since January 1, 1995, consistent with the provisions of SFAS No. 123, the Company’s net income and diluted earnings per share would have been reduced to the pro forma amounts indicated below:
Net income – as reported
Stock-based employee compensation expense, included in reported net income, net of related tax effects
Stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects
Net income – pro forma
Basic earnings per share – as reported
Basic earnings per share – pro forma
Diluted earnings per share – as reported
Diluted earnings per share – pro forma
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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants during the nine months ended September 30, 2004 and 2003:
Expected dividend yield.
Expected stock price volatility
Risk free interest rate
Expected Life of options
Note F – Components of Net Periodic Pension Benefit Cost
Prior to January 1, 1999, the Company maintained a defined benefit pension plan for which most of its employees were eligible. In conjunction with significant enhancements to the Company’s 401(k) plan, the Company elected to freeze benefits under this defined benefit pension plan as of December 31, 1998.
In 1994, the Company adopted a non-qualified, supplemental pension plan covering certain employees, which provides for incremental pension payments so that total pension payments equal those amounts that would have been payable from the Company’s principal pension plan if it were not for limitations imposed by income tax regulation. The benefits under this supplemental pension plan will continue to accrue as if the principal pension plan had not been frozen.
Net pension cost for both plans included the following components:
Service Cost
Interest Cost
Expected return on plan assets
Amortization of prior service cost
Transition obligation
Recognized actuarial loss
Net periodic benefit cost
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The Company presently does not expect to make a contribution to either of its pension plans in 2004.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Harte-Hanks is a worldwide, direct and targeted marketing company that provides direct marketing services and shopper advertising opportunities to a wide range of local, regional, national and international consumer and business-to-business marketers. Harte-Hanks Direct Marketing improves the return on its clients’ marketing investment with a range of services organized around five solution points: Construct and update the database – Access the data – Analyze the data – Apply the knowledge – Execute the programs. Experts at each element within this process, Harte-Hanks Direct Marketing is highly skilled at tailoring solutions for each of the vertical markets it serves. Harte-Hanks Shoppers is North America’s largest owner, operator and distributor of shopper publications, with shoppers that are zoned into more than 900 separate editions with circulation in excess of 11 million in California and Florida each week.
Harte-Hanks derives its revenues from the sale of direct marketing services and shopper advertising services. As a worldwide business, direct marketing is affected by general national and international economic trends. Shoppers operate in local markets and are largely affected by the strength of the local economies. The Company’s principal expense items are payroll, postage and transportation.
Results of Operations
Operating results were as follows:
Change
Revenues
Diluted earnings per share
Consolidated revenues increased 9.7% to $262.6 million and operating income increased 13.0% to $43.5 million in the third quarter of 2004 when compared to the third quarter of 2003. Overall operating expenses compared to 2003 increased 9.1% to $219.1 million in the third quarter of 2004 when compared to the third quarter of 2003.
Net income increased 11.9% to $25.7 million and diluted earnings per share grew
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11.5% to 29 cents per share in the third quarter of 2004 when compared to the third quarter of 2003. The increase in net income was a result of increased operating income in the third quarter of 2004 when compared to the third quarter of 2003.
Direct Marketing operating results were as follows:
Direct Marketing revenues increased $14.4 million, or 9.8%, in the third quarter of 2004 compared to 2003. These results reflect year-over-year revenue growth in all of Direct Marketing’s vertical markets. Revenues from the high-tech/telecom, pharmaceutical/healthcare and select vertical market groups all had double-digit growth compared to the prior year quarter. Revenues from the financial services vertical market and retail vertical market had mid to high single-digit growth compared to the third quarter of 2003. This was the second consecutive quarter that all of Direct Marketing’s vertical markets increased on a year-over-year comparison. Revenues from the Company’s vertical markets are impacted by the economic fundamentals of each industry as well as the financial condition of specific customers.
From a service offering perspective, Direct Marketing experienced increased revenues from customer care, fulfillment, software, logistics, analytics, database processing and telesales. Partially offsetting these increases were declines in revenues from data processing.
Operating expenses increased $10.7 million, or 8.3%, in the third quarter of 2004 compared to 2003. Labor costs increased $7.9 million, or 12.7%, in the third quarter of 2004 compared to 2003 as a result of increased incentive compensation due to Direct Marketing’s financial performance, higher payroll costs due to higher volumes and increased headcount, and higher unemployment taxes. Labor costs were partially offset by lower healthcare costs and pension expense. Production and distribution costs increased $2.6 million, or 5.4%, due primarily to higher logistics-related transportation costs, outsourcing costs, and production services expense, which were partially offset by decreased lease expense. General and administrative expense increased $0.4 million, or 3.3%, due to increased bad debt expense and employee expenses, partially offset by decreased professional services. Depreciation and amortization expense decreased $0.3 million, or 4.5%, due to lower capital expenditures starting in 2001 and continuing into 2002 and assets becoming fully depreciated.
Direct Marketing revenues increased $37.3 million, or 8.8%, in the first nine months of 2004 compared to the first nine months of 2003. These results reflect double-digit year-over-year revenue growth from the high-tech/telecom, financial services, and pharmaceutical/healthcare vertical markets. Direct Marketing also had low to mid single digit revenue growth from its select vertical market group and retail vertical market in the first nine months of 2004.
From a service offering perspective, Direct Marketing experienced increased revenues from customer care, analytics, software, fulfillment, targeted mail, and agency-related business. Partially offsetting these increases were declines in revenues from data sales and data processing.
Operating expenses increased $29.4 million, or 7.9%, in the first nine months of 2004 compared to the first nine months of 2003. Labor costs increased $20.4 million, or 11.1%, in the first nine months of 2004 compared to 2003 as a result of increased incentive compensation due to Direct Marketing’s financial
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performance, higher payroll costs due to higher volumes and increased headcount, and higher unemployment taxes. Labor costs were partially offset by lower healthcare costs and pension expense. Production and distribution costs increased $8.5 million, or 6.2% primarily due to higher outsourcing costs and production services, which were partially offset by decreased lease expense and logistics-related transportation costs. General and administrative expense increased $2.0 million, or 6.4%, due to increased insurance costs and bad debt expense, partially offset by decreased professional services. Depreciation and amortization expense decreased $1.5 million, or 8.0%, due to lower capital expenditures starting in 2001 and continuing into 2002 and assets becoming fully depreciated.
Direct Marketing’s largest cost components are labor, outsourced costs, and transportation. Each of these costs are variable and tend to fluctuate with revenues and the demand for the Company’s direct marketing services.
The acquisition of Avellino Technologies Ltd. at the end of February 2004 had a minimal impact on revenues and operating expenses for the first nine months of 2004, and is not expected to materially impact revenues or operating expenses for the full year 2004.
Shopper operating results were as follows:
Shopper revenues increased $8.8 million, or 9.6%, in the third quarter of 2004 compared to 2003. Revenue increases were the result of improved sales in established markets as well as new year-over-year geographic expansions into new neighborhoods and household growth in California and Florida. Shoppers expanded circulation by approximately 148,500 in California and Florida during the third quarter of 2004 and at the end of the quarter Shopper circulation was more than 11.0 million (including circulation of 241,000 in South Orange County, California where Shoppers publish two editions each week). The Company believes that expansions provide increased revenue opportunities and plans to expand in each of the next few years. Newer areas initially contribute less from a revenue-per-thousand perspective than existing areas, and in fact are typically expected to be less profitable or even unprofitable until the publications in those areas mature.
From a product-line perspective, Shoppers had growth in both run-of-press (ROP, or in-book) advertising and its distribution products.
Operating expenses increased $6.5 million, or 9.1%, in the third quarter of 2004 compared to 2003. Labor costs increased $2.7 million, or 10.8%, due to higher payroll costs as a result of higher volumes and circulation expansions, and higher unemployment taxes, partially offset by lower pension and health care expense. Production costs increased $3.8 million, or 10.5%, including increased postage of $1.9 million due to increased volumes, and increased paper costs due to increased volumes and rates. General and administrative costs decreased slightly, down 0.4%, primarily due to decreased promotion costs, insurance expense, and professional services, partially offset by higher bad debt expense and business services. Depreciation and amortization expense increased slightly, up 3.6% in the third quarter of 2004 compared to 2003 due to recent capital investments to support future growth.
Shopper revenues increased $26.8 million, or 10.1%, in the first nine months of 2004 compared to the first nine months of 2003. Revenue increases were the
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result of improved sales in established markets as well as new year-over-year geographic expansions into new neighborhoods and household growth in California and Florida. Shoppers expanded circulation by approximately, 600,000 in the first nine months of 2004.
Operating expenses increased $19.7 million, or 9.5%, in the first nine months of 2004 compared to the first nine months of 2003. Labor costs increased $7.1 million, or 9.6%, due to higher payroll costs as a result of higher volumes and circulation expansions, and higher unemployment taxes, partially offset by lower pension expense. Production costs increased $11.5 million, or 11.0%, including additional postage of $6.2 million due to increased volumes, increased paper costs due to increased volumes and rates and higher outsourcing costs. General and administrative costs increased $1.0 million, or 4.4%, due to increased business services costs, bad debt expense, taxes and employee expense, partially offset by decreased promotion costs. Depreciation and amortization expense increased slightly, up 1.2% during the first nine months of 2004 compared to 2003 due to recent capital investments to support future growth.
Shopper labor costs are variable and tend to fluctuate with volumes and revenues. Standard postage rates increased at the beginning of the third quarter of 2002 and it is unclear at this time when the next increase might occur. Increased postage rates would impact total Shopper production costs. Newsprint prices began to climb in the fourth quarter of 2003 and continued to increase in the first nine months of 2004. This increase impacted Shopper’s production costs in the first nine months of 2004 and is expected to impact Shopper’s production costs for the remainder of the year.
General Corporate Expense
General corporate expense increased $1.1 million, or 57.3%, to $3.0 million during the third quarter of 2004 compared to the third quarter of 2003. General corporate expense increased $1.9 million, or 30.9%, to $8.0 million during the first nine months of 2004 compared to the first nine months of 2003. The increase in general corporate expense in both the third quarter and the first nine months of 2004 was primarily a result of increased incentive compensation due to the Company’s financial performance, and increased professional services.
Other Income and Expense
Other net expense for the third quarter and first nine months of 2004 primarily consists of balance-based bank charges and stockholder expenses, and was partially offset by currency gains.
Interest Expense/Interest Income
Interest expense was up slightly in the third quarter and first nine months of 2004 compared to the same periods in 2003, primarily due to increases in interest rates.
Interest income was flat in the third quarter of 2004 compared to the third quarter of 2003. Interest income was up $0.2 million in the first nine months of 2004 compared to the first nine months of 2003 due to interest related to a tax refund the Company received in the first quarter of 2004.
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Income Taxes
The Company’s income tax expense increased $2.5 million in the third quarter of 2004 and $6.3 million in the first nine months of 2004 compared to the same periods in 2003. These changes were primarily due to the changes in pre-tax income levels. The effective tax rate was 40.4% for the third quarter of 2004 and 39.4% for the third quarter of 2003. The effective tax rate was 40.0% for the first nine months of 2004 and 39.3% for the first nine months of 2003.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended September 30, 2004 was $84.4 million, compared to $87.9 million for the first nine months of 2003. Net cash outflows from investing activities were $39.1 million for the first nine months of 2004, compared to $25.6 million for the first nine months of 2003. The difference between net cash outflows from investing activities in 2004 and 2003 is primarily the result of the acquisition of Avellino Technologies Ltd. in February 2004. The remaining net cash outflows in both years primarily relate to purchases of fixed assets. Net cash outflows from financing activities were $58.3 million in 2004 compared to $57.6 million in 2003. The difference between net cash outflows from financing activities in 2004 and 2003 is attributable primarily to net borrowings on the Company’s credit facility of $15.0 million in the first nine months of 2004 compared to net borrowings of $8.7 million in the first nine months of 2003. Partially offsetting the difference in outflows from financing activities in 2004 compared to 2003 were a higher amount spent for the repurchase of treasury stock and higher dividend payments in 2004.
Capital resources are also available from and provided through the Company’s unsecured credit facility. This credit facility, a three-year $125 million variable-rate, revolving loan commitment, was put in place on October 18, 2002. All borrowings under this credit agreement are to be repaid by October 17, 2005. As of September 30, 2004, the Company had $105 million of unused borrowing capacity under this credit facility. Management believes that its credit facility, together with cash provided from operating activities, will be sufficient to fund operations and anticipated acquisitions, capital expenditures, stock repurchases and dividend payments for the foreseeable future. Management also believes that the Company has the ability to obtain a larger credit facility if it were to become necessary.
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 that could affect the Company’s future performance, including its revenues, net income and earnings per share; however, the risks described below are not the only ones the Company faces. Additional risks and uncertainties that are not presently known, or that the Company currently considers immaterial, could also impair the Company’s business operations.
Legislation – There could be a material adverse impact on the Company’s Direct Marketing business due to the enactment of additional legislation or industry regulations, including consumer privacy legislation. Restrictions or prohibitions could be placed upon the collection and use of information that is currently legally available.
Data Suppliers – There could be a material adverse impact on the Company’s Direct Marketing business if owners of the data the Company uses were to withdraw the data. Data providers could withdraw their data if there is a competitive reason to do so or if additional legislation is passed restricting the use of the data.
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Acquisitions - The Company continues to pursue acquisition opportunities. Acquisition activities, even if not consummated, require substantial amounts of management time and can distract from normal operations. In addition, there can be no assurance that the synergies and other objectives sought in acquisitions will be achieved.
Competition – Direct marketing is a rapidly evolving business, subject to periodic technological advancements, high turnover of customer personnel who make buying decisions, and changing customer needs and preferences. Consequently, the Company’s Direct Marketing business faces competition in all of its offerings and within each of its vertical markets. The Company’s Shopper business competes for advertising, as well as for readers, with other print and electronic media. Competition comes from local and regional newspapers, magazines, radio, broadcast and cable television, shoppers, other communications media and other advertising printers that operate in the Company’s markets. The extent and nature of such competition are, in large part, determined by the location and demographics of the markets targeted by a particular advertiser, and the number of media alternatives in those markets. Failure to continually improve the Company’s current processes and to develop new products and services could result in the loss of the Company’s customers to current or future competitors. In addition, failure to gain market acceptance of new products and services could adversely affect the Company’s growth.
Qualified Personnel – The Company believes that its future prospects will depend in large part upon its ability to attract, train and retain highly skilled technical, client services and administrative personnel. While dependent on employment levels and general economic conditions, qualified personnel historically have been in great demand and from time to time and in the foreseeable future will likely remain a limited resource.
Postal Rates – The Company’s Shoppers and Direct Marketing services depend on the United States Postal Service to deliver products. The Company’s Shoppers are delivered by standard mail, and postage is the second largest expense, behind payroll, in the Company’s Shopper business. Standard postage rates increased at the beginning of the third quarter of 2002. Overall Shopper postage costs are expected to grow as a result of anticipated increases in circulation and insert volumes. 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.
Paper Prices – Paper represents a substantial expense in the Company’s Shopper operations. In recent years newsprint prices have fluctuated widely, and such fluctuations can materially affect the results of the Company’s operations.
Economic Conditions – Changes in national economic conditions can affect levels of advertising expenditures generally, and such changes can affect each of the Company’s businesses. In addition, revenues from the Company’s Shopper business are 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 economies.
Interest Rates – Interest rate movements in Europe and the United States can affect the amount of interest the Company pays related to its debt and the amount it earns on cash equivalents. The Company’s primary interest rate exposure is to interest rate fluctuations in Europe, specifically EUROLIBOR rates due to their impact on interest related to the Company’s $125 million credit facility. The Company also has exposure to interest rate fluctuations in the United States, specifically money market, commercial paper and overnight time deposit rates as these affect the Company’s earnings on its excess cash.
War – War and/or terrorism or the threat of war and/or terrorism involving the
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United States could have a significant impact on the Company’s operations. War or the threat of war could substantially affect the levels of advertising expenditures by clients in each of the Company’s businesses. In addition each of the Company’s businesses could be affected by operation disruptions and a shortage of supplies and labor related to such a war or threat of war.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s earnings are affected by changes in short-term interest rates as a result of its revolving credit agreement, which bears interest at variable rates based on EUROLIBOR (effective rate of 2.28% at September 30, 2004) and has a maturity date of October 17, 2005. At September 30, 2004, the Company had $20 million of debt outstanding under its revolving line of credit. The Company’s earnings are also affected by changes in short-term interest rates as a result of its deferred compensation agreement, which bears interest at variable rates based on Prime (effective rate of 4.75% at September 30, 2004) and has a balance of $6.4 million at September 30, 2004. Assuming the current level of borrowing and deferred compensation balance and assuming a one percentage point change in the quarter’s and first nine months’ annual interest rates, it is estimated that the Company’s net income for the third quarter and first nine months of 2004 would have been approximately $35,000 and $69,000 lower, respectively. Due to the Company’s debt level and deferred compensation balance at September 30, 2004, anticipated cash flows from operations, and the various financial alternatives available to management, should there be an adverse change in interest rates, the Company does not believe that it has significant exposure to market risks associated with changing interest rates as of September 30, 2004. The Company does not use derivative financial instruments in its operations.
The Company’s earnings are also affected by fluctuations in foreign exchange rates as a result of its operations in foreign countries. Due to the level of operations in foreign countries, the impact of fluctuations in foreign exchange rates is not significant to the Company’s overall earnings.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that the design and operation of these disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. No significant changes were made in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains information about the Company’s purchases of its equity securities during the third quarter of 2004:
Period
AveragePrice
Paid perShare
Total Numberof SharesPurchased
as Part of
a PubliclyAnnounced Plan
July 1 – 31, 2004
August 1 – 31, 2004(2)
September 1 – 30, 2004
Total
Item 6. Exhibits
See index to Exhibits on Page 23.
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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.
November 9, 2004
/s/ Richard M. Hochhauser
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/s/ Dean H. Blythe
21
/s/ Jessica M. Huff
22
Description of Exhibit
23
The agreements set forth above describe the contents of certain exhibits thereunto which are not included. However, such exhibits will be furnished to the Commission upon request.
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