HARTE HANKS INC - FORM 8-K - EX-99.2 - EXHIBIT 99.2 - March 6, 2018

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Exhibit 99.2

HARTE HANKS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The accompanying financial information reflects the historical results of Harte Hanks as adjusted on a pro forma basis to give effect to the sale of 3Q Digital, Inc. (the "Transaction"), as described in Item 2.01 of Harte Hanks’ Current Report on Form 8-K to which this Exhibit 99.2 is attached. The accompanying unaudited pro forma condensed consolidated financial information is presented as of September 30, 2017 using Harte Hanks’ unaudited condensed consolidated balance sheet and for the nine months ended September 30, 2017 and the year ended December 31, 2016 using Harte Hanks' unaudited condensed consolidated statement of operations. The unaudited pro forma condensed consolidated balance sheet as of September 30, 2017 is based on Harte Hanks’ balance sheet as of September 30, 2017, after giving effect to the Transaction as of the balance sheet date. The pro forma condensed consolidated statements of operations for the nine months ended September 30, 2017 and for the year ended December 31, 2016 assume that the Transaction was consummated on the first day of the period presented and gives full effect to the Transaction.
 
The unaudited pro forma condensed consolidated financial information (i) has been provided for informational purposes only; (ii) includes adjustments directly attributable to the Transaction; and (iii) is not necessarily indicative of the operating results or financial position that would have occurred if the Transaction had been completed as of the dates set forth above and does not purport to project the future financial position or operating results of Harte Hanks. The pro forma adjustments are described in the accompanying notes and give effect to pro forma events that are (1) directly attributable to the transactions, (2) factually supportable and (3) with respect to the consolidated statements of operations, expected to have a continuing impact on the results.
 
The following unaudited pro forma condensed consolidated financial information should be read in conjunction with Harte Hanks’ historical consolidated financial statements and related notes contained in Harte Hanks’ Annual Report on Form 10-K for the year ended December 31, 2016 and the unaudited condensed consolidated financial statements filed in Harte Hanks’ Quarterly Report on Form 10-Q for the nine month interim period ended September 30, 2017. The unaudited pro forma condensed consolidated financial information was prepared in accordance with Article 11 of Regulation S-X.




Exhibit 99.2

Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
In thousands, except per share and share amounts
 
Historical
September 30, 2017
 
3Q Digital
 
Pro Forma Adjustments
 
Notes
 
Pro Forma
September 30, 2017
 
 
2(a)
 
2(c)
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets
 
 

 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
11,403

 
$
—

 
$
3,928

 
2(d)
 
$
15,331

Accounts receivable (less allowance for doubtful accounts of $866 at September 30, 2017)
 
90,687

 
16,348

 
—

 
 
 
74,339

Inventory
 
796

 
—

 
—

 
 
 
796

Prepaid expenses
 
5,372

 
490

 
—

 
 
 
4,882

Prepaid taxes and income tax receivable
 
8,836

 
—

 
10,211

 
2(k)
 
19,047

Other current assets
 
4,424

 
—

 
—

 
 
 
4,424

Total current assets
 
121,518

 
16,838

 
14,139

 
 
 
118,819

Property, plant and equipment (less accumulated depreciation of $137,176 at September 30, 2017)
 
21,078

 
228

 
—

 
 
 
20,850

Goodwill
 
34,510

 
—

 
—

 
 
 
34,510

Other intangible assets (less accumulated amortization of $2,015 at September 30, 2017)
 
2,758

 
—

 
(2,758
)
 
2(e)
 
—

Other assets
 
2,877

 
572

 
500

 
2(d)
 
2,805

Total assets
 
$
182,741

 
$
17,638

 
$
11,881

 
 
 
$
176,984

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 
 
 
 
 
 
 
Current liabilities
 
 

 
 
 
 
 
 
 
 
Accounts payable
 
$
42,458

 
$
9,322

 
$
1,752

 
2(g)
 
34,888

Accrued payroll and related expenses
 
10,332

 
1,779

 
—

 
 
 
8,553

Deferred revenue and customer advances
 
6,889

 
1,168

 
—

 
 
 
5,721

Income taxes payable
 
655

 
32

 
—

 
 
 
623

Customer postage and program deposits
 
6,961

 
—

 
—

 
 
 
6,961

Other current liabilities
 
4,225

 
20

 
—

 
 
 
4,205

Total current liabilities
 
71,520

 
12,321

 
1,752

 
 
 
60,951

Long-term debt
 
12,000

 
—

 
—

 
 
 
12,000

Pensions
 
59,723

 
—

 
—

 
 
 
59,723

Contingent consideration
 
32,847

 
—

 
(32,847
)
 
2(f)
 
—

Deferred tax liabilities, net
 
9,893

 
—

 
(1,103
)
 
2(e)
 
8,790

Other long-term liabilities
 
3,154

 
—

 
—

 
 
 
3,154

Total liabilities
 
189,137

 
12,321

 
(32,198
)
 
 
 
144,618

Stockholders’ (deficit) equity
 
 

 
 
 
 
 
 
 
 
Common stock, $1 par value, 25,000,000 shares authorized 12,074,661 shares issued at September 30, 2017
 
12,075

 
—

 
—

 
 
 
12,075

Additional paid-in capital
 
456,831

 
—

 
—

 
 
 
456,831

Retained earnings
 
823,924

 
5,317

 
44,079

 
2(l)
 
862,686

Less treasury stock, 5,867,843 shares at cost at September 30, 2017
 
(1,254,889
)
 
—

 
—

 
 
 
(1,254,889
)
Accumulated other comprehensive loss
 
(44,337
)
 
—

 
—

 
 
 
(44,337
)
Total stockholders’ (deficit) equity
 
(6,396
)
 
5,317

 
44,079

 
 
 
32,366

Total liabilities and stockholders’ equity
 
$
182,741

 
$
17,638

 
$
11,881

 
 
 
$
176,984

Amounts may not add up due to rounding.



Exhibit 99.2

Pro Forma Condensed Consolidated Statements of Operations (Unaudited)
In thousands, except per share and share amounts
 
Historical Nine Months Ended
September 30, 2017
 
Pro Forma Adjustments for
3Q Digital
 
Notes
 
Proforma
 
 
2(a)
 
2(c)
 
 
 
 
Operating revenues
 
$
284,040

 
$
26,403

 
 
 
$
257,637

Operating expenses
 
 

 
 

 
 
 
 

Labor
 
172,500

 
19,036

 
 
 
153,464

Production and distribution
 
80,125

 
1,865

 
 
 
78,260

Advertising, selling, general and administrative
 
30,431

 
2,795

 
 
 
27,636

Depreciation, software and intangible asset amortization
 
8,166

 
732

 
2(h)
 
7,434

Total operating expenses
 
291,222

 
24,428

 
 
 
266,794

Operating income (loss)
 
(7,182
)
 
1,975

 
 
 
(9,157
)
Other expenses
 
 

 
 

 
 
 
 

Interest expense, net
 
3,543

 
3,121

 
2(i)
 
422

Other, net
 
5,087

 
—

 
 
 
5,087

Total other expenses
 
8,630

 
3,121

 
 
 
5,509

Loss from continuing operations before income taxes
 
(15,812
)
 
(1,146
)
 
 
 
(14,666
)
Income tax benefit
 
(3,293
)
 
1,103

 
 
 
(4,396
)
Loss from continuing operations
 
$
(12,519
)
 
$
(2,249
)
 
 
 
$
(10,270
)
 
 
 
 
 
 
 
 
 
Income from discontinued operations, net of income taxes
 
$
—

 
$
—

 
 
 
$
—

 
 
 
 
 
 
 
 
 
Net loss
 
$
(12,519
)
 
$
(2,249
)
 
 
 
$
(10,270
)
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
 
 
 
 
 
 
 
 
Continuing operations
 
$
(2.02
)
 


 
 
 
$
(1.66
)
Discontinued operations
 
—

 
 
 
 
 
—

Basic loss per common share
 
$
(2.02
)
 


 
 
 
$
(1.66
)
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
6,187

 
 
 
 
 
6,187

 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share
 
 
 
 
 
 
 
 
Continuing operations
 
$
(2.02
)
 


 
 
 
$
(1.66
)
Discontinued operations
 
—

 


 
 
 
—

Diluted loss per common share
 
$
(2.02
)
 


 
 
 
$
(1.66
)
 
 
 
 
 
 
 
 
 
Weighted-average common and common equivalent shares outstanding
 
6,187

 
 
 
 
 
6,187

Amounts may not add up due to rounding.





Exhibit 99.2

Pro Forma Condensed Consolidated Statements of Operations (Unaudited)
In thousands, except per share and share amounts
 
Historical Fiscal Year Ended
December 31, 2016
 
Pro Forma Adjustments for
3Q Digital
 
Notes
 
Proforma
 
 
2(b)
 
2(c)
 
 
 
 
Operating revenues
 
$
404,412

 
$
27,339

 
 
 
$
377,073

Operating expenses
 
 

 
 

 
 
 
 

Labor
 
245,298

 
20,335

 
 
 
224,963

Production and distribution
 
117,126

 
1,419

 
 
 
115,707

Advertising, selling, general and administrative
 
44,804

 
3,748

 
 
 
41,056

Impairment of goodwill
 
38,669

 
—

 
 
 
38,669

Depreciation, software and intangible asset amortization
 
12,352

 
1,050

 
2(h)
 
11,302

Total operating expenses
 
458,249

 
26,552

 
 
 
431,697

Operating income (loss)
 
(53,837
)
 
787

 
 
 
(54,624
)
Other expenses
 
 

 
 

 
 
 
 

Interest expense, net
 
3,454

 
2,427

 
2(i)
 
1,027

Other, net
 
11,857

 
7,019

 
2(j)
 
4,838

Total other expenses
 
15,311

 
9,446

 
 
 
5,865

Loss from continuing operations before income taxes
 
(69,148
)
 
(8,659
)
 
 
 
(60,489
)
Income tax benefit
 
20,630

 
—

 
 
 
20,630

Loss from continuing operations
 
$
(89,778
)
 
$
(8,659
)
 
 
 
$
(81,119
)
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of income taxes (including loss on disposal of $44,529)
 
$
(41,159
)
 
$
—

 
 
 
$
(41,159
)
 
 
 
 
 
 
 
 
 
Net loss
 
$
(130,937
)
 
$
(8,659
)
 
 
 
$
(122,278
)
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
 
 
 
 
 
 
 
 
Continuing operations
 
$
(14.60
)
 


 
 
 
$
(14.86
)
Discontinued operations
 
(6.69
)
 


 
 
 
(6.69
)
Basic loss per common share
 
$
(21.29
)
 


 
 
 
$
(21.56
)
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
6,149

 
 
 
 
 
6,149

 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share
 
 
 
 
 
 
 
 
Continuing operations
 
$
(14.60
)
 


 
 
 
$
(13.19
)
Discontinued operations
 
(6.69
)
 


 
 
 
(6.69
)
Diluted loss per common share
 
$
(21.29
)
 


 
 
 
$
(19.89
)
 
 
 
 
 
 
 
 
 
Weighted-average common and common equivalent shares outstanding
 
6,149

 
 
 
 
 
6,149

Amounts may not add up due to rounding.



Exhibit 99.2

Harte Hanks, Inc.
Notes to Pro Forma Condensed Consolidated Financial Statements

Note 1 — Basis of Presentation

The accompanying unaudited pro forma condensed consolidated balance sheet as of September 30, 2017 is based on Harte Hanks’ balance sheet as of September 30, 2017, after giving effect to the Transaction as of September 30, 2017. Pro forma financial information is also presented for the condensed consolidated statement of operations for the nine months ended September 30, 2017, and for the year ended December 31, 2016. The unaudited and condensed consolidated statements of operations for the periods presented assume the Transaction was consummated on the first day of the period presented, giving full effect to Transaction for the periods presented.
 
The following are descriptions of the columns included in the accompanying unaudited pro forma condensed consolidated financial statements:
 
Historical - Represents the historical condensed consolidated balance sheet of Harte Hanks as of September 30, 2017, and the historical condensed consolidated statements of operations of Harte Hanks for the nine months ended September 30, 2017 and for the year ended December 31, 2016.
 
Pro Forma Adjustments - Represents the adjustments to the historical condensed consolidated balance sheet of Harte Hanks required to derive the pro forma financial position of Harte Hanks as of September 30, 2017, assuming the transaction occurred as of September 30, 2017 and the adjustments to the historical condensed consolidated statements of operations of Harte Hanks required to derive the pro forma operating results for the nine months ended September 30, 2017 and for the year ended December 31, 2016, assuming the Transaction was consummated on the first day of the period presented.

Note 2 — Pro Forma Adjustments

The following is a summary of the proforma adjustments reflected in the unaudited Pro Forma Condensed Consolidated Financial Statements based on preliminary estimates, which may change as additional information is obtained:
(a)
 
Reflects Harte Hanks' Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Comprehensive Loss as of and for the nine months ended September 30, 2017, as contained in the financial statements in the Company's Quarterly Report on Form 10-Q and as filed with the SEC on November 8, 2017.
 
 
 
 
(b)
 
Reflects Harte Hanks' Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2016, as contained in the Company's Annual Report on Form 10-K and as filed with the SEC on June 16, 2017.
 
 
 
 
(c)
 
Represents the elimination of the assets or liabilities associated with the 3Q Digital business as of September 30, 2017 and the elimination of revenue and expenses related to the 3Q Digital business for the nine months ended September 30, 2017 and the twelve months ended December 31, 2016.
 
 
 
 
(d)
 
Represents the estimated cash received by the Company, net of closing costs, as if the Transaction occurred on September 30, 2017. $0.5 million of consideration has been deposited in escrow and is included in other assets on the Pro Forma balance sheet.
 
 
 
 
(e)
 
Represents the fair value of intangibles with definite useful lives related to contact databases, client relationships, and non-compete agreements and the related deferred tax liability recorded in connection with the acquisition of 3Q Digital.
 
 
 
 
(f)
 
Represents the fair value of the contingent consideration assigned to the buyer in connection with the Transaction.
 
 
 
 
(g)
 
Includes estimated transaction fees associated with the Transaction.
 
 
 
 
(h)
 
Includes amortization of intangible assets with definite lives related to contact databases, client relationships, and non-compete agreements recorded in connection with the acquisition of 3Q Digital.
 
 
 
 
(i)
 
Includes interest accretion recorded in connection with the 3Q Digital contingent consideration.
 
 
 
 
(j)
 
Includes a $7.0 million adjustment to the fair value of the contingent consideration for the year ended December 31, 2016.
 
 
 
 
(k)
 
Represents the income tax receivable due to the taxable loss on the sale of 3Q Digital, as if the 3Q Digital sale occurred on September 30, 2017. This amount is an estimate and is subject to change.
 
 
 
 
(l)
 
Represents the estimated gain on sale, net of closing costs, of $28.6 million and a tax benefit equal to the estimated federal tax refund of $10.2 million, due to the taxable loss generated by the Transaction as if it had occurred on September 30, 2017. Note that these estimates may be different from the amounts that will be recorded in March of 2018.


HARTE HANKS INC Reports