<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
----------- -----------
COMMISSION FILE NUMBER 1-7120
---------------------
HARTE-HANKS COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 74-1677284
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
200 CONCORD PLAZA DRIVE 78216
SUITE 800 (ZIP CODE)
SAN ANTONIO, TEXAS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE -- 210-829-9000
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
---------------------------------- ----------------------------------
<S> <C>
Common Stock New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
------------------
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filings pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of the Company's voting stock held by non-affiliates
on March 13, 1995, based on the $18 7/8 per share closing price for the
Company's Common Stock on the New York Stock Exchange on such
date: approximately $156,584,943.
SHARES OUTSTANDING AT MARCH 13, 1995:
Common Stock -- 18,373,767 shares
DOCUMENTS INCORPORATED BY REFERENCE:
The Company's Annual Report to Stockholders for the year ended December 31,
1994 (incorporated in Part II to the extent provided in Items 5, 6, 7 and
8 hereof).
Definitive Proxy Statement for the Company's May 19, 1995 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 (incorporated in Part III to the extent provided in
Items 10, 11 and 12 hereof).
================================================================================
<PAGE> 2
2
Harte-Hanks Communications, Inc.
Table of Contents
Form 10-K Report
December 31, 1994
<TABLE>
<CAPTION>
Part I Page
------ ----
<S> <C> <C> <C>
Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security 18
Holders
Part II
-------
Item 5. Market for Registrant's Common Equity and 18
Related Stockholder Matters
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial 18
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants 18
on Accounting and Financial Disclosure
Part III
--------
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners 19
and Management
Item 13. Certain Relationships and Related Transactions 19
Part IV
-------
Item 14. Exhibits, Financial Statement Schedules and 19
Reports on Form 8-K.
Signatures 24
</TABLE>
<PAGE> 3
3
ITEM 1. BUSINESS and ITEM 2. PROPERTIES
INTRODUCTION
Harte-Hanks is a diversified communications company with operations
throughout the United States in four principal businesses -- direct marketing,
shoppers, newspapers and television. The Company's shopper, newspaper and
television businesses operate in local markets, while its direct marketing
business operates nationwide. The Company believes that its leadership
positions within its markets have resulted from offering high-quality products,
utilizing advanced technologies and innovative marketing strategies, and
establishing strong relationships with its readers, viewers and advertisers.
The Company's strategy is to increase revenues by building upon its existing
businesses and by applying its capabilities both across its businesses and to
new products and markets, enabling it to capitalize on trends in the media
industry toward the use of more direct, targeted marketing. Consistent with
this strategy, the Company is investing in advanced technologies, equipment and
personnel, introducing new products and services in existing markets, entering
new markets and making selective acquisitions. In 1994, the Company had
revenues of $513.6 million.
Harte-Hanks is the successor to a newspaper business begun in Texas in
the early 1920s by Houston Harte and Bernard Hanks. In 1972, the Company went
public and was listed on the NYSE. The Company went private in a leveraged
buyout initiated by management in 1984. In 1993, the Company again went public
and listed its common stock on the NYSE.
See Note H of Notes to Consolidated Financial Statements for certain
financial information by business segment.
DIRECT MARKETING
General
Harte-Hanks operates a nationwide direct marketing business offering a
broad range of specialized and coordinated services. The Company utilizes
advanced technologies to enable its customers to identify, target and reach
specific consumers or businesses mostly by mail. The Company's strategy is to
provide services either on an individual basis or as part of an integrated
marketing solution to achieve its customers' direct marketing objectives. The
Company believes that developments in computer technology and trends toward
more sophisticated marketing analysis and measurement will continue to result
in increased usage of direct marketing services. Harte-Hanks' direct marketing
customers include many of America's largest retailers, banks, mutual funds
companies, insurance companies and high technology firms, along with
international clients. Harte-Hanks provides five broad core service offerings
-- database, integrated direct marketing, response management, targeted
mail/data systems and transportation. In 1994, Harte-Hanks Direct Marketing
had revenues of $167.8 million, which accounted for approximately 33% of the
Company's revenues.
<PAGE> 4
4
Database
The Company's database services build sophisticated databases and
deliver them to clients on personal computers, networks and workstations.
These services provide user friendly software applications to allow customers
to identify consumers and businesses most likely to respond to a particular
offer. Databases are built using the Company's proprietary name and address
processing software to integrate the clients' customer files and other consumer
and business files with individual, demographic and lifestyle information. The
databases are delivered to clients on personal computers, networks or work
stations along with the Company's software. The Company's software then
examines the database for the desired characteristics, enabling customers to
make informed marketing decisions and to cost-effectively target consumers and
businesses likely to buy specific products. The database is updated to reflect
changes in customer status and response to a particular offer, thereby
increasing its effectiveness for future programs.
Database services are marketed to specific industries or markets with
software modifications tailored to each industry or market. Having established
the basic technological foundation for providing database services, the Company
is able to provide database services to new industries and markets by making
appropriate modifications to its existing database technology. The Company
currently provides database services to the banking, retail and insurance
industries and has expanded into the utilities, mutual fund, automotive and
business-to-business markets. The Company also provides database services in
Canada and the United Kingdom, primarily in the banking industry, and has
expanded into Europe, Asia, Latin America and New Zealand. Database services
are provided in part under the Company's trade name, Harte-Hanks Data
Technologies.
Integrated Direct Marketing
Integrated direct marketing applies the full range of direct marketing
capabilities to achieve focused marketing communications. Integrated direct
marketing uses market research, creative approaches, data processing, laser
printing and insertion technology to target consumers with personalized mail
appealing directly to them. The Company designs and creates personalized
communications that may be combined with other printed material from the
customer for mailing to consumers and businesses. The integrated direct
marketing process begins when a customer accesses a database and selects a
consumer file for mailing or when a market research study is completed. A
creative concept for that promotion is matched with the targeted consumer. A
personalized and individualized message is then produced. The Company's
services include graphics, printing promotional material and the outside and
inside envelopes, inserting the individual pieces into the outside envelope and
mailing. When the consumer responds to the targeted offer through purchases or
by other means, the database is updated with the response for later use.
Customer satisfaction surveys are also conducted. A customer may, based upon
its needs, use some components or all of the Company's integrated direct
marketing services.
<PAGE> 5
5
To complement its existing services, the Company acquired Steinert &
Associates, a New York City firm specializing in direct marketing
communications in January 1995.
Response Management
Response management became a core service offering in late 1994 with
the acquisition of Select Marketing, Inc. in Austin, Texas, and the continued
growth of Harte-Hanks Direct Marketing's Boston operation. The Company answers
inbound phone calls and receives faxes and electronic messages in response to
its customers' advertisements or marketing programs and fulfills the
respondents' needs for information. The Company then qualifies sales leads for
referrals and provides its customers with management reports based on data
received from the responding consumers or businesses. Response management
helps companies turn leads into sales, measure the return on their marketing
communications and make more informed marketing decisions.
With the Austin acquisition, Harte-Hanks entered the high technology
market with sales and marketing support services, including lead management,
database management, order processing, marketing program and seminar
management, marketing research, and inbound and followup telemarketing. The
Company currently serves more than 30 high technology companies. To
accommodate its rapid growth, the Austin operation will move to a new facility
in 1995, consolidating three present locations.
The Company's Boston operation provides similar services for mutual
funds clients and other companies. Dataview, an integrated reporting tool, was
introduced in 1994 to give clients direct access to their fulfillment data
along with reporting capability. Enhancements were also made to the Company's
two-year-old GOLD product, a freight forwarding system that optimizes delivery
of client materials.
Targeted Mail/Data Systems
Within this core service offering, the Company mails circulars,
preprints and other flat mail pieces, primarily for large national and regional
retailers. Data processing services are also provided, including the
maintenance of customer and outside lists and the use of list hygiene
procedures to ensure maximum deliverability. These lists, combined with
consumer purchase and demographic data, are segmented so that clients can
target their mailings. Harte-Hanks also identifies and updates changed
addresses through a nonexclusive license with the United States Postal Service.
The Company provides computerized addressing using impact, ink-jet or laser
printing at six mail production facilities. Targeted mail/data systems
services enable customers to distribute advertising materials to consumers
within a specified one to three-day delivery window.
Transportation
The Company arranges for the transportation of time-sensitive
advertising material such as dated advertising inserts and direct mail pieces
to postal facilities, newspapers and mail houses nationwide. The Company uses
its
<PAGE> 6
6
proprietary software system -- Transportation Optimization of Postal Savings --
to determine a transportation plan that optimizes each customer's postal costs
and improves on-time delivery. The transportation service maintains seven
warehouses as staging locations across the nation and has personnel located at
five of the Company's mail production facilities. The Company believes that it
benefits from the nationwide location of its facilities and its ability to
combine printed material destined for similar locations.
Sales and Marketing
Harte-Hanks' national direct marketing sales force is headquartered in
Cincinnati, Ohio, with sales offices maintained throughout the United States,
and in Toronto and London. The focus of the sales force is to position
Harte-Hanks as a single source solution for a customer's target marketing
needs. The sales force emphasizes cross-selling the range of direct marketing
services. For example, through its database and integrated direct marketing
services, the Company can define new markets for its customers and reach those
markets through the creation and delivery of personalized printed materials.
The sales force is supported by employees in each core service. In addition,
there are specialized sales forces for response management and database. The
Company generally charges transaction related fees each time it provides direct
marketing services. For certain database projects it charges a one-time,
negotiated fee to build a database, plus an additional fee each time the
database is updated.
Facilities
Database services are headquartered in Billerica, Massachusetts.
Database services have specialty sales and service offices in Austin, River
Edge (New Jersey), Toronto and London. Integrated direct marketing services
are performed at the Company's state-of-the-art facilities in Cincinnati and
Jacksonville, Florida. Response management services are conducted from
Brockton, Massachusetts and the recently acquired operation in Austin, Texas.
Targeted mail/data systems functions are primarily centralized in the Company's
Baltimore facility, with mail production at five additional facilities
nationwide. The transportation service maintains warehouses across the nation
and has personnel located at five of the Company's mail production plants.
Competition
Harte-Hanks' direct marketing business faces competition primarily
from other companies in each core service offering, as well as from print and
electronic media and other forms of advertising. Harte-Hanks believes that its
state-of-the-art database and response management capabilities, combined with
its national production capability and its ability to offer a full range of
integrated services (i.e., targeting and identification of potential markets,
and production and delivery of advertising materials), enable the Company to
compete effectively.
<PAGE> 7
7
SHOPPERS
General
Harte-Hanks is the largest publisher of shoppers in North America
based on weekly circulation and revenues, and is the only national media
company that focuses on shoppers as a core business. Shoppers are weekly
advertising publications delivered free by third-class saturation mail to all
households in a particular geographic area. Shoppers offer advertisers a
targeted, cost-effective local advertising system, with virtually 100%
penetration in their area of distribution. Shoppers are particularly effective
in large markets with high media fragmentation in which major metropolitan
newspapers generally have low penetration. As of December 31, 1994, shoppers
reached approximately 6.9 million households in four markets each week --
Southern California, Northern California, Miami/Ft. Lauderdale and Dallas/Fort
Worth. The Company's Southern California shopper, The Original PennySaver,
accounted for 62% of these households. The Flyer in Miami/Ft. Lauderdale and
Potpourri in Northern California each surpassed 1 million circulation during
1994.
Harte-Hanks publishes 574 individual shopper editions each week
distributed to zones of approximately 12,100 households each, allowing single
location, local advertisers to saturate a single geographic zone and allowing
multiple location advertisers to saturate multiple zones. The Company believes
that its zoning and marketing capabilities and production technologies have
enabled it to increase its share of the advertising expenditures in its
markets. The Company's strategy in its shopper business is to increase its
share of local advertising in its existing circulation areas, increase
circulation through expansion into contiguous areas and make selective
acquisitions. In 1994, Harte-Hanks shoppers had revenues of $176.5 million and
accounted for approximately 34% of the Company's revenues.
The combined circulation of the Company's four shoppers has grown from
approximately 5.8 million households at December 31, 1992 to 6.9 million
households at December 31, 1994. These 1.1 million households were added,
primarily in Southern California, Miami/Ft. Lauderdale and Dallas/Fort Worth,
through internal expansion. The Company believes that this expansion will
provide increased revenue and operating income as the publications in these
areas mature. The Company believes that expansion opportunities of
approximately 3.5 million additional households exist in areas contiguous to
current circulation areas.
Publications
Harte-Hanks shoppers are published in Southern California, Northern
California, Miami/Ft. Lauderdale and Dallas/Fort Worth. The Southern
California unit accounted for 69% of shopper revenues in 1994.
<PAGE> 8
8
The following table sets forth certain information with respect to
shopper publications:
<TABLE>
<CAPTION>
December 31,
1994 Number of
Market Publication Name Circulation Zones
------ ---------------- ----------- ---------
<S> <C> <C> <C>
Southern California The Original PennySaver 4,330,000 372
Northern California Potpourri 1,040,000 78
Miami/Ft. Lauderdale The Flyer 1,016,000 77
Dallas/Fort Worth Shopper's Guide 545,000 47
--------- ---
Total 6,931,000 574
</TABLE>
Shopper publications consist of classified and display advertising and
are delivered to consumers' homes by third-class saturation mail. The typical
shopper publication has 50 pages of classified and display advertising and is 7
by 9 1/2 inches in size. Each edition, or zone, is targeted around a natural
neighborhood marketing pattern. Shoppers also serve as a distribution vehicle
for a four-color proprietary product, MARQUEE, carrying multiple national and
regional advertisers; "print-and-deliver," single sheet inserts designed and
printed by the Company; coupon books; and preprinted inserts from major retail
chains. Harte-Hanks shopper publications also use audiotext "voice mail" in
both pay- per-call and free formats allowing readers to access prerecorded
advertising or personal messages, leave recorded messages or participate in
retail store surveys targeted around local retail locations, reader opinion
surveys and interactive reader contests.
In 1994, a 104,000 circulation newsstand product was introduced in the
Company's Southern California market. This publication provides increased
market coverage through distribution in high traffic grocery and convenience
stores. The newsstand product was made possible with a new on-line pagination
system that allows for all ads from individual zoned editions to be grouped for
re-publication in the newsstand edition.
The Company has acquired, developed and applied innovative technology
and customized equipment to the publication of its shoppers, which have
contributed to efficiency and growth. A proprietary data processing, job
tracking and pagination system, jointly developed by the Company and a software
company, was installed in Southern California in 1994 and will become fully
operational for all ad zones in 1995. This computer controlled system, which
fully paginates both graphics and text, replaces manual pagination and
simplifies production of multiple zoned editions. It also will permit
designated types of advertisements to be pulled from the database, thereby
allowing production of specialized niche publications, such as automotive, real
estate and employment products, which may be mailed or distributed through
newsstands. Harte-Hanks has installed high speed automatic inserting
equipment that decreases production costs for work previously done largely by
hand.
<PAGE> 9
9
Sales and Marketing
The Company maintains local sales offices throughout its geographic
markets and employs more than 400 commissioned sales representatives who
develop both targeted and saturation advertising programs for customers. The
sales organization provides service to both national and local advertisers
through its telemarketing departments and its field sales representatives.
Shopper customers vary from individuals with a single item for sale to local
neighborhood advertisers to large multi-location advertisers. The core
customers continue to be local service businesses and small retailers. The
Company is increasingly focusing its marketing efforts on larger national
accounts by emphasizing its ability to deliver saturation advertising in
defined zones.
The Company has installed SAMS (Sales and Marketing System), a
proprietary order entry system on a Unix platform in its Southern California
sales offices. The Company typically processes approximately 19,000 customer
orders each week. SAMS speeds customer order entry and facilitates placement of
advertising in multiple zoned editions. The Company has expanded SAMS so that,
in addition to entering advertising information for immediate publication, it
will build a relational customer database, allowing sales personnel to access
customer history by designated variables, thereby identifying similar potential
customers and assisting follow-up with existing customers. The Company also
believes the relational customer database presents the opportunity for a new
revenue stream through the use of customer lists.
Facilities
Harte-Hanks shoppers are produced at owned or leased facilities in the
markets they serve. The Company has five production facilities, two in
Southern California and one in each of its other markets, and 22 sales offices.
Competition
Harte-Hanks shoppers compete primarily with metropolitan daily
newspapers, shared mail packages and other local advertising media. The Company
believes that its production systems and technology, which permit it to publish
separate editions in narrowly targeted zones, allow it to compete effectively,
particularly in large markets with high media fragmentation. Shoppers also
compete in varying degrees for advertisers and readers with magazines, radio,
broadcast and cable television, directories, other shoppers and other
communications media that operate in their markets.
HARTE-HANKS NEWSPAPERS
General
Harte-Hanks publishes the only daily newspaper in Abilene, Corpus
Christi, San Angelo and Wichita Falls, Texas and Anderson, South Carolina (the
"five principal newspapers"). The Company also publishes four daily
<PAGE> 10
10
newspapers and 17 nondaily newspapers in higher-income suburban areas of Boston
and Dallas (the "suburban newspapers"). In all of its daily newspaper markets,
the Company realizes additional revenue from niche publications and specialized
services (such as special interest publications and direct mail programs) aimed
at targeted consumer groups. Harte-Hanks' strategy in its newspaper business
is to build upon its strong local franchises, to offer complementary products
and services and to expand its market areas. The Company has entered into an
agreement to sell its suburban Boston publications. The sale is expected to
occur in early 1995.
The Company's five principal newspapers have achieved high levels of
household penetration. For 1994, daily circulation penetration in the city
zones for the five principal newspapers ranged from 49% to 72%, and Sunday
circulation penetration in the city zones for the five principal newspapers
ranged from 69% to 82%, providing advertisers with broad coverage of the five
principal newspapers' local markets. Based on Standard Rate & Data's
Circulation '94, the daily editions of the Company's newspapers in Abilene, San
Angelo and Wichita Falls ranked among the top 40 in the United States based on
household penetration in United States Census Bureau metropolitan statistical
areas. In addition, these same newspapers' Sunday editions rank in the top 15
in the United States based on household penetration. Harte-Hanks' suburban
newspapers concentrate on local news stories and other items of interest to
those communities. Harte-Hanks newspapers are recognized for their editorial
excellence and community leadership, with each newspaper edited locally to
reflect the views and interests of the particular market it serves. In 1994,
Harte-Hanks newspapers had revenues of $140.8 million and accounted for
approximately 27% of the Company's revenues.
Five Principal Newspapers
The Company believes that the high penetration levels of its five
principal newspapers are important to advertisers in their determination of
where to allocate advertising dollars as advertisers increasingly require
evidence that their messages are actually reaching consumers. The Company's
five principal newspapers, together with their related niche publications,
accounted for approximately 71% of revenues of Harte-Hanks' newspapers in 1994.
<PAGE> 11
11
The following table sets forth certain information with respect to the
Company's five principal newspapers for 1994:
<TABLE>
<CAPTION>
Average
Average Paid Circulation
Circulation(1) Penetration(2)
--------------- --------------
Publication Daily Sunday Daily Sunday
----------- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Corpus Christi Caller-Times 67,322 96,478 49% 69%
(Founded 1877)
Abilene Reporter-News 42,653 53,953 61% 77%
(Founded 1881)
Anderson Independent-Mail 42,817 48,953 72% 82%
(Founded 1899)
Wichita Falls Times Record News 39,385 48,000 64% 78%
(Founded 1907)
San Angelo Standard-Times 32,594 39,371 66% 82%
(Founded 1884)
</TABLE>
(1) In 1994, approximately 84% of daily circulation was home delivered, with
the remaining 16% derived from single copy sales.
(2) Penetration is average paid circulation in the city zone divided by the
number of households in the city zone.
The Corpus Christi Caller-Times is a morning newspaper serving Corpus
Christi, Texas and 17 surrounding counties in South Texas. For the years 1989,
1990, 1991, 1993 and 1994 the Dallas Press Club named the Caller-Times the best
daily newspaper in Texas with circulation under 100,000. Average circulation of
the Sunday edition of the Caller-Times increased from 87,475 in 1988 to 96,478
in 1994. Sunday circulation reached an all-time high of 100,910 in 1994. The
Corpus Christi metropolitan statistical area had an estimated population of
363,600 as of December 31, 1993. The Corpus Christi economy is based on
tourism, military, shipping, oil and gas production, petrochemicals, refining,
manufacturing, agriculture, higher education, regional health services and
regional retail services. Texas A&M University - Corpus Christi became a
four-year institution with graduate programs in 1994. The Port of Corpus
Christi is the nation's sixth largest in terms of shipping tonnage.
The Abilene Reporter-News is a morning newspaper serving Abilene, Texas
and its surrounding area. The Abilene metropolitan statistical area had an
estimated population of 119,400 as of December 31, 1993. Abilene was
recognized as one of ten All-America Cities in the United States by the
National Civic League in 1990 and is the heart of a 15-county regional trade
market located in Central West Texas. The Abilene economy is built around the
oil and gas industry, agriculture, light industry, military, regional health
services and higher education, including three universities located in Abilene.
<PAGE> 12
12
The Anderson Independent-Mail is a morning newspaper serving Anderson,
South Carolina and its surrounding area. The Independent-Mail has a five year
record of consistent product improvement and circulation growth. It has won
the National Headliner Award for outstanding news reporting among United States
newspapers under 60,000 circulation two of the last three years. The newspaper
won the 1994 JC Penney -- University of Missouri Award for Excellence in
Lifestyle sections and has placed among the Associated Press top 10 sports
sections in the United States in its circulation class in each of the last 5
years. Average paid circulation of the Sunday edition of the Anderson
Independent-Mail increased for the last five years, from 42,729 in 1989 to
48,953 in 1994. Anderson County had an estimated population of 148,700 as of
December 31, 1993. Anderson County is the retail and manufacturing center for
a 9 county area (which includes Clemson University) covering the northwest
corner of South Carolina and the northeast corner of Georgia. Other industries
include agriculture, healthcare, recreation and retirement services. Anderson
has benefitted recently from a Bavarian Motor Works (BMW) automobile plant
built near the area's regional airport. This is the German automaker's first
plant outside Germany.
The Wichita Falls Times Record News is a morning newspaper serving
Wichita Falls, Texas and 16 surrounding counties in North Texas and Southern
Oklahoma. The Times Record News is ranked second among all Texas daily
newspapers in penetration in its metropolitan statistical area in both Sunday
and daily circulation categories. The Wichita Falls metropolitan statistical
area had an estimated population of 129,600 as of December 31, 1993. The
Wichita Falls economy is diversified and consists of manufacturing, military,
agriculture, oil and gas and retail and wholesale trade. Sheppard Air Force
Base is a significant factor in the Wichita Falls economy. In 1995, the base
will complete a $250 million facility expansion, which will make it the largest
aircraft training center in the United States Air Force. The market will also
benefit from the construction of a $80 million Texas Department of Criminal
Justice unit to be completed in May 1995.
The San Angelo Standard-Times is a morning newspaper serving San Angelo,
Texas and its surrounding area. The San Angelo metropolitan statistical area
had an estimated population of 101,500 as of December 31, 1993. San Angelo has
a diversified economic base consisting of petroleum, military, regional health
services, agriculture, light industry and higher education. Angelo State
University will start construction in 1995 on a $26 million Computer Operations
Center and Disaster Recovery Center, which will serve as a disaster recovery
backup site for the State of Texas as well as a "hub site" for a proposed
statewide telecommunications center. Goodfellow Air Force Base in San Angelo
completed a $40 million facilities expansion in 1994.
Suburban Newspapers
The Company publishes four daily newspapers and 17 nondaily newspapers
in higher income suburban communities within metropolitan Boston and Dallas.
Harte-Hanks' suburban newspapers concentrate on local news stories and other
items of interest to the communities they serve and allow advertisers to target
consumers in these communities. The suburban newspapers typically compete with
daily newspapers published in the same large metropolitan area
<PAGE> 13
13
and local editions of some daily newspapers. Readers of the suburban
newspapers typically subscribe to one or more other newspapers. The Company's
nondaily suburban newspapers are published either once or twice a week, and
many of them are distributed free of charge. The Company's suburban
newspapers, together with their related niche publications, accounted for
approximately 29% of Harte-Hanks newspaper revenues in 1994.
The following table sets forth certain information with respect to the
Company's suburban newspapers for 1994:
<TABLE>
<CAPTION>
Type of Average
Location Publication Name Publication Circulation
-------- ---------------- ----------- -----------
<S> <C> <C> <C>
MASSACHUSETTS(a)
Framingham The Middlesex News Daily 34,127
Sunday 42,756
Waltham Waltham News Tribune Daily 8,868
Dedham Dedham Daily Transcript Daily 8,090
Other Boston Area Newton Graphic Nondaily 26,862
Communities Needham Chronicle Nondaily 11,359
Arlington Advocate Nondaily 10,582
Wellesley Townsman Nondaily 7,814
Belmont Citizen-Herald Nondaily 6,182
Wayland-Weston Town Crier Nondaily 5,516
Winchester Star Nondaily 5,478
West Roxbury Transcript Nondaily 5,013
Sudbury Town Crier Nondaily 3,522
Watertown Sun Nondaily 3,462
Roslindale Parkway Transcript Nondaily 3,458
TEXAS
Dallas Area Plano Star Courier Daily 13,017
Sunday 14,748
Mesquite News Nondaily 31,548
Lewisville Leader Nondaily 25,413
The Colony Leader Nondaily 8,575
McKinney Messenger Nondaily 8,016
Coppell Gazette Nondaily 7,205
Allen American Nondaily 3,942
</TABLE>
(a) The Company has announced plans to sell its Boston community newspapers
in early 1995.
Niche Publications and Services
In addition to its primary newspaper products, in all of its markets the
Company publishes numerous niche advertising and special interest publications
to achieve increased market coverage. The specialized publications include
newsstand products, total market coverage vehicles, guides covering specialized
subjects such as television and real estate, editions zoned to particular
geographic areas, weekly news products and military publications.
<PAGE> 14
14
The Company continues to expand into local direct marketing services by
offering direct mail services in each of its five principal newspaper markets.
The Corpus Christi market expanded its direct mail program in 1994 into the Rio
Grande Valley region of South Texas. The Company also direct mails The Money
Clip, a coupon publication featuring local advertisers, into the Abilene, San
Angelo and Wichita Falls markets. Harte-Hanks newspapers provide commercial
printing capabilities to their customers. In 1995, all five principal
newspapers will offer audiotext "voice mail" services, allowing readers to
access information and leave recorded messages for advertisers by telephone 24
hours a day.
Sales and Marketing
The Company maintains local sales offices in each of its principal
newspaper markets and in Boston and Dallas. Each office has commissioned sales
representatives dedicated specifically to advertising or circulation sales.
The Company uses its research capabilities and annual customer surveys to
communicate with customers, track media competition and assess changes in
advertising patterns and needs of customers. Harte-Hanks uses marketing
techniques including programs whereby an advertiser purchases a package
consisting of multiple advertisements over a specified time period for a fixed
budget amount. Harte-Hanks offers a combination of products and delivery
methods as part of these advertising programs. The niche publications and
services offers customers increased market coverage or the ability to target
specific consumer groups.
Facilities
Harte-Hanks newspaper operations are housed in modern facilities that
are owned by the Company in its five principal newspaper markets and are owned
or leased in its suburban newspaper markets. The Company installed a nine-unit
offset printing press in a newly expanded building in Corpus Christi in 1994.
The press was operational in July of 1994 and greatly expanded the newspaper's
production and color capacity.
Competition
There are no competing daily newspapers published in the markets where
the Company publishes its five principal newspapers. The Company's suburban
newspapers have faced increasing competition from strengthening daily
metropolitan newspapers in Boston and Dallas, including local editions of such
newspapers. Each of the Company's newspapers competes in varying degrees for
advertisers and readers with newspapers, magazines, radio, broadcast and cable
television, shoppers, directories, direct mail and other communications media
that operate in its markets.
TELEVISION
General
The Company owns and operates KENS, a CBS-affiliated VHF television
station in San Antonio, Texas, the 39th largest television market in the
<PAGE> 15
15
United States according to Nielsen Ratings Service. San Antonio is the
business and retail center for South Texas and has a growing, diversified
economy based on tourism, military, health care and international trade. In
all 1994 ratings sweeps, KENS' noon, 5 p.m., 6 p.m., 10 p.m. and weekend news
programs were the top-rated newscasts in their time slots. KENS' 10 p.m.
newscast finished 22 consecutive years as the top-rated late local newscast in
the San Antonio market. KENS has consistently received the highest ratings in
50-70% of the time periods it programs locally. The Company believes that its
market leadership results from strong local news programming and its highly
visible community involvement and public affairs projects. In 1994, Harte-Hanks
television had revenues of $28.6 million, which accounted for approximately 5%
of the Company's revenues.
According to the November 1994 Nielsen Ratings Index, KENS broadcasts to
a market of approximately 628,000 households, defined as the designated market
area (the "DMA"). The San Antonio DMA is served by 10 stations, including
stations affiliated with the other two national networks, a Fox affiliate, two
stations affiliated with Spanish language networks along with three additional
independent stations and one public broadcasting station. Cable penetration is
approximately 65% in the City of San Antonio. San Antonio is a growing
advertising market and historically has ranked higher in terms of total
television advertising dollars spent than its market ranking. Because of its
market ranking and ethnic diversity, San Antonio has experienced regional and
national advertising growth and frequently enjoys test-market status.
Network affiliation can have a significant impact on the revenues of a
television station because the popularity of a network's programming can affect
the rates at which a station can sell time for local and national advertising.
In 1994, CBS was the number one prime time network in February with the Winter
Olympics, but dropped to second place in the May ratings. The network tied for
second place in the November sweeps (Monday through Sunday), although it placed
third in the November sweeps (Monday through Friday). The KENS network
contract with CBS was renewed in January 1994 for a successive three-year term.
KENS has been affiliated with CBS since the station's inception.
Harte-Hanks' strategy is to maintain its leadership position in order to
continue to increase its television revenues and to capitalize on the station's
reputation and leadership position by providing additional products and
services for advertisers. The Company acquired an AM radio station in San
Antonio, which began broadcasting as KENS-AM on October 15, 1993. The Company
moved the radio station offices and studio to its KENS television facility.
KENS Radio features a news/talk format, capitalizing on the strong news
reputation and advertising sales staff of KENS-TV.
The Company also offers video production and graphics services in its
full-service production facility. Video production services are provided for
programming, commercial and industrial video applications and live satellite
uplinking, worldwide. Graphics services provide print advertisers and other
Harte-Hanks units with a full range of graphics capabilities such as ad design,
ad layout, typesetting and color separation.
<PAGE> 16
16
Sales and Marketing
Local advertising spots are sold by KENS sales personnel. National
advertising spots are sold by Katz Communications, an independent advertising
sales agent with offices throughout the United States. Generally, advertising
rates for national spot and local advertising are determined by the individual
station, which receives all of the revenues (less sales representatives
commissions). Rates are influenced both by the demand for advertising time and
the popularity of the station's programming. Most advertising during network
programs is sold by the network, which pays its affiliated stations negotiated
fees for broadcasting such programs. Advertising rates charged by a television
station are based primarily on the size of the market and the station's ability
to attract audiences as reflected in surveys made by national ratings services.
Rates are highest during the most desirable viewing hours. Normally a majority
of local affiliate station revenues comes from locally programmed dayparts,
particularly local newscasts.
Sales of advertising for KENS-AM and of graphics and production services
are handled by a separate sales staff working with KENS' television sales
staff.
Facilities
KENS owns a modern 50,000 square foot facility constructed in 1982. The
facility includes two video production studios with separate technical control
rooms, a graphics facility and a satellite uplink facility. The offices and
studio of KENS-AM radio are also located at this facility.
Competition
KENS has historically ranked as the number one television station in its
local market, which enhances KENS' ability to attract advertising. KENS
competes with other advertising media such as newspapers and magazines, and,
within its coverage areas, television and radio stations serving the same or
nearby areas. KENS also competes with the local cable television system, which
has 65% penetration in the City of San Antonio, according to a report published
by Nielsen Ratings in November 1994.
Regulation of Television and Radio
The FCC regulates television and radio stations under the Communications
Act of 1934, as amended (the "Communications Act"), which together with FCC
rules and policies thereunder governs the issuance, renewal and assignment of
licenses; technical operation; and, to a limited extent, program, employment
and commercial practices. Television broadcast station licenses are issued for
a maximum term of five years and are renewable upon application for additional
five-year terms. The KENS-TV broadcast station license was renewed in September
1993 for an additional five-year term expiring August 1, 1998. Radio broadcast
station licenses are issued for a maximum term of seven years and are renewable
upon application for additional seven-year terms. The license of the AM radio
station will expire August 1, 1997. Renewal applications are granted without
hearing if the licensee's qualifications are not materially
<PAGE> 17
17
challenged by either a third party or the FCC and if no competing applications
for the same facility are filed. Despite the relatively short term license
period, the broadcast industry has been characterized by stability. Harte-Hanks
has operated television broadcast stations since 1962, and to date its renewal
applications have been granted without hearing. Under the Communications Act, a
broadcast license may not be granted to or held by any corporation that has
more than one-fifth of its capital stock owned or voted by aliens or their
representatives, by foreign governments or their representatives, or by
non-U.S. corporations, or that has an alien as an officer or a director. Under
the Communications Act, a broadcast license also may not be granted to or held
by any corporation that is controlled, directly or indirectly, by any other
corporation that has an alien as an officer, more than one-fourth of whose
directors are aliens, or more than one-fourth of whose capital stock is owned
or voted by aliens or their representatives, by foreign governments or their
representatives, or by non-U.S. corporations, if the FCC finds that the public
interest will be served by the refusal or revocation of such license. The
Communications Act and FCC rules also generally prohibit the common ownership,
operation or control of a television broadcast station and a radio broadcast
station serving the same local market and of a broadcast station and a daily
newspaper serving the same local market. However, the FCC has waived this rule
as it applies to the ownership of KENS-TV and the recently acquired radio
station. The FCC generally applies its ownership limits to "attributable"
interests held by an individual, corporation, partnership or other association.
Employees
As of December 31, 1994, Harte-Hanks employed 5,281 full time employees
and 944 part time employees, as follows: newspapers -- 1,702 full time and 315
part time employees; shoppers -- 1,517 full time and 379 part time employees;
direct marketing -- 1,885 full time and 236 part time employees; television --
152 full time and 14 part time employees; and corporate office -- 25 full time
employees. None of the work force is represented by labor unions. The Company
considers its relations with its employees to be good.
Facilities
Harte-Hanks' executive offices are located in San Antonio, Texas and
occupy approximately 35,000 square feet in leased premises. The Company's
business is conducted in premises containing aggregate space of approximately
2.5 million square feet nationwide. Approximately 1.6 million square feet are
held under leases, which expire at dates through 2010. The balance of the
properties, which are used primarily in the Company's newspaper, Southern
California shopper and television operations, are owned by the Company.
<PAGE> 18
18
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time becomes involved in various claims and lawsuits
incidental to its businesses, including defamation actions. In the opinion of
management, after consultation with counsel, any ultimate liability arising out
of currently pending claims and lawsuits will not have a material effect on the
financial condition or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference from the Company's Annual Report to
Stockholders for the year ended December 31, 1994 at page 32.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from the Company's Annual Report to
Stockholders for the year ended December 31, 1994 at page 30.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference from the Company's Annual Report to
Stockholders for the year ended December 31, 1994 at pages 14 through 18.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information is set forth in the Company's Annual Report to
Stockholders for the year ended December 31, 1994, which is incorporated herein
by reference: All Consolidated Financial Statements (pages 19 through 22); all
Notes to Consolidated Financial Statements (pages 23 through 29); and the
"Independent Auditors' Report" (page 31). With the exception of the
information herein expressly incorporated by reference, the Company's Annual
Report to Stockholders for the year ended December 31, 1994 is not deemed filed
as part of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE> 19
19
ITEM 10. MANAGEMENT
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 30, 1995 for the May 19, 1995 Annual
Meeting of Stockholders under the caption "Management -- Directors and
Executive Officers" on pages 4 and 5.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 30, 1995 for the May 19, 1995 Annual
Meeting of Stockholders under the caption "Executive Compensation and Other
Information" on pages 5 through 7.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 30, 1995 for the May 19, 1995 Annual
Meeting of Stockholders under the caption "Security Ownership of Management and
Principal Stockholders" on pages 2 and 3.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are incorporated
by reference from the Company's Annual Report to Stockholders
for the year ended December 31, 1994 attached hereto:
Consolidated Balance Sheets, December 31, 1994 and 1993
Consolidated Statements of Operations, Years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows, Years ended December 31,
1994, 1993 and 1992
Consolidated Statements of Stockholders' Equity, Years ended
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Independent Auditors' Report
<PAGE> 20
20
(a)(2) The following accountants' report and financial schedule for
years ending December 31, 1994, 1993 and 1992 are submitted
herewith:
Independent Auditors' Report 10-K Schedule
Schedule VIII - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable.
<PAGE> 21
21
(a)(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
------- ---------------------------------------------------------- --------
<S> <C>
2(a) Certificate of Ownership and Merger (filed
as Exhibit 2(a) to the Company's Registration
Statement No. 33-69202 and incorporated by
reference herein).
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).
4(a) Long term debt instruments are not being filed
pursuant to Section (b)(4)(iii) of Item 601 of
Regulation S-K. Copies of such instruments will
be furnished to the Commission upon request.
10(a) 1984 Stock Option Plan (filed as Exhibit 10(d)
to the Company's Form 10-K for the year ended
December 31, 1984 and incorporated herein by
reference).
10(b) Registration Rights Agreement dated as of
September 11, 1984 among HHC Holding Inc. and
its stockholders (filed as Exhibit 10(b) to the
Company's Form 10-K for the year ended
December 31, 1993 and incorporated by reference
herein).
10(c) HHC Holding Inc. 1991 Stock Option Plan (filed as
Exhibit 10(1) to the Company's Form 10-K for the
year ended December 31, 1991 and incorporated by
reference herein).
10(d) Amendment to HHC Holding Inc. 1991 Stock Option Plan
(filed as Exhibit 10(1) to the Company's Form 10-K
for the year ended December 31, 1992 and incorporated
by reference herein).
10(e) Third Amended and Restated Loan Agreement dated May 19,
1993 among the Company, The Toronto-Dominion Bank,
NationsBank of Texas, N.A., National Westminster Bank USA,
The First National Bank of Boston, Bank of Hawaii,
Corestates Bank, N.A., The Bank of Nova Scotia, CIBC Inc.,
and National Bank of Canada; and Toronto-Dominion (Texas),
Inc., as agent (filed as Exhibit 10(1) to the Company's
10-Q for the quarter ended June 30, 1993 and incorporated
by reference herein).
</TABLE>
<PAGE> 22
22
(a)(3) Exhibits (continued).
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
------- -------------------------------------------------------- --------
<S> <C>
10(f) Note Purchase Agreement by and between HHC Holding
Inc. and The Goldman Sachs Group, L.P. (filed as
Exhibit 10(f) to the Company's Registration
Statement No. 33-69202 and incorporated by
reference herein).
10(g) Severance Agreement between Harte-Hanks
Communications, Inc. and Larry Franklin, dated
as of July 23, 1993 (filed as Exhibit 10(f) to
the Company's Registration Statement No. 33-69202
and incorporated by reference herein).
10(h) Form of Severance Agreement between Harte-Hanks
Communications, Inc. and certain Executive
Officers of the Company, dated as of July 23,
1993 (filed as Exhibit 10(h) to the Company's
Registration Statement No. 33-69202 and
incorporated by reference herein).
10(i) Amendment No. 2 to HHC Holding Inc. 1991 Stock
Option Plan (filed as Exhibit 10(1) to the
Company's Registration Statement No. 33-69202
and incorporated by reference herein).
10(j) Harte-Hanks Communications, Inc. Pension
Restoration Plan (filed as Exhibit 10(j) to
the Company's Registration Statement No.
33-69202 and incorporated by reference herein).
10(k) First Amendment, dated as of November 3, 1993 to
Third Amended and Restated Loan Agreement dated
May 19, 1993 among the Company, The Toronto-Dominion
Bank, NationsBank of Texas, N.A., National Westminster
Bank USA, The First National Bank of Boston, Bank of
Hawaii, Corestates Bank, N.A., The Bank of Nova Scotia,
CIBC Inc., and National Bank of Canada; and Toronto-
Dominion (Texas), Inc., as agent (filed as Exhibit
10(1) to the Company's Form 10-Q for the quarter
ended September 30, 1993 and incorporated by
reference herein).
</TABLE>
<PAGE> 23
23
(a)(3) Exhibits (continued).
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
------- ----------------------------------------------------- --------
<S> <C> <C>
10(1) Amendment No. 1, dated as of November 10, 1993 to
Note Purchase Agreement by and between Harte-Hanks
Communications, Inc. and GS Capital Partners, L.P.,
Stone Street Fund 1992, L.P. and Bridge Street Fund
1992, L.P. (filed as Exhibit 10(1) to the Company's
Form 10-Q for the quarter ended September 30, 1993
and incorporated by reference herein).
10(m) Harte-Hanks Communications, Inc. Incentive Bonus Plan
(filed as Exhibit 10(m) to the Company's Form 10-K
for the year ended December 31, 1993 and incorporated
by reference herein).
*11 Statement Regarding Computation of Net Income (Loss) 27
Per Common Share.
*13 Annual Report to Securityholders (only those portions 28
incorporated by reference into the Form 10-K are
filed herewith).
*21 Subsidiaries of the Company. 47
*23 Consent of KPMG Peat Marwick. 48
24 Power of Attorney (included on the signature page of
the Registration Statement on Form S-2 filed with the
Commission on September 23, 1993).
*27 Financial Data Schedule. 49
</TABLE>
____________________
*Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth
quarter of 1994.
(c) Exhibits -- The response to this portion of Item 14 is
submitted as separate section of this report on pages 27
to 49.
(d) Financial Statement Schedule -- The response to this
portion of Item 14 is submitted as a separate section of
this report on page 26.
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.
<PAGE> 24
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Harte-Hanks Communications, Inc.
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HARTE-HANKS COMMUNICATIONS, INC.
By: /s/ Larry D. Franklin
---------------------------------
Larry D. Franklin
President & Chief Executive
Officer
By: /s/ Richard L. Ritchie
---------------------------------
Richard L. Ritchie
Senior Vice President,
Finance & Chief Financial and
Accounting Officer
Date: March 29, 1995
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities indicated.
/s/ Houston H. Harte /s/ Dr. Peter T. Flawn
-------------------------------- -------------------------------
Houston H. Harte, Chairman Dr. Peter T. Flawn, Director
/s/ Larry D. Franklin /s/ Christopher M. Harte
------------------------------- -------------------------------
Larry D. Franklin, Director Christopher M. Harte, Director
/s/ Edward H. Harte /s/ James L. Johnson
--------------------------------- -------------------------------
Edward H. Harte, Director James L. Johnson, Director
/s/ Andrew B. Shelton
---------------------------------
Andrew B. Shelton, Director
<PAGE> 25
25
INDEPENDENT AUDITORS' REPORT 10-K SCHEDULES
The Board of Directors and Stockholders
Harte-Hanks Communications, Inc.:
Under date of January 25, 1995, we reported on the consolidated balance sheets
of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1994
and 1993 and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the years in the three-year period ended
December 31, 1994, as contained in the 1994 annual report to stockholders.
These consolidated financial statements and our report thereon are incorporated
by reference in the annual report on Form 10-K for the year 1994. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in Item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
KMPG PEAT MARWICK LLP
San Antonio, Texas
January 25, 1995
<PAGE> 26
26
Harte-Hanks Communications, Inc. and Subsidiaries
Financial Statement Schedules
Schedule VIII
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions of Year
-------------------------------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1994... $2,025 $4,839 $3,954 $2,910
====== ====== ====== ======
Year ended December 31, 1993... $2,512 $4,160 $4,647 $2,025
====== ====== ====== ======
Year ended December 31, 1992... $2,620 $3,649 $3,757 $2,512
====== ====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 11
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(in thousands, except per share data)
PRIMARY
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Income before extraordinary item ..................... $23,822 $(45,472) $ 2,336
Extraordinary item ................................... -- (7,393) --
------- -------- -------
Net income (loss) .................................... $23,822 $(52,865) $ 2,336
======= ======== =======
Shares used in net earnings per
share computations ................................ 19,046 13,038 12,124
======= ======== =======
Per share:
Income before extraordinary item ..................... $ 1.25 $ (3.49) $ .19
Extraordinary item ................................... -- (.56) --
------- -------- -------
Net income (loss) .................................... $ 1.25 $ (4.05) $ .19
======= ======== =======
</TABLE>
COMPUTATIONS OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1994 1993 1992
------- -------- -------
<S> <C> <C> <C>
Average outstanding common shares .................... 18,223 12,873 11,910
Average common equivalent shares --
dilutive effect of option shares ................... 823 -- 175
Dilutive effect of options issued in
the preceding twelve months prior
to the initial public offering ..................... -- 165 129
------- -------- -------
Shares used in net earnings
per share computations.............................. 19,046 13,038 12,214
======= ======== =======
</TABLE>
FULLY DILUTED
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Income before extraordinary item ..................... $23,822 $(45,472) $ 2,336
Extraordinary item ................................... -- (7,393) --
------- -------- -------
Net income (loss) .................................... $23,822 $(52,865) $ 2,336
======= ======== =======
Adjusted net income (loss)
for interest on convertible note.................... $24,572 $(52,865) $ 2,336
======= ======== =======
Shares used in net earnings per
share computations ................................ 20,488 13,038 12,124
======= ======== =======
Per share:
Income before extrarodinary item ..................... $ 1.20 $ (3.49) $ .19
Extraordinary item ................................... -- (.56) --
------- -------- -------
Net income (loss) .................................... $ 1.20 $ (4.05) $ .19
======= ======== =======
</TABLE>
COMPUTATIONS OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1994 1993 1992
------- -------- -------
<S> <C> <C> <C>
Average outstanding common shares .................... 18,223 12,873 11,910
Average common equivalent shares --
dilutive effect of option shares ................... 836 -- 175
Dilutive effect of convertible note .................. 1,429 -- --
Dilutive effect of options issued in
the preceding twelve months prior
to the initial public offering ..................... -- 165 129
------- -------- -------
Shares used in net earnings
per share computations.............................. 20,488 13,038 12,214
======= ======== =======
27
</TABLE>
<PAGE> 1
FINANCIAL CONTENTS
<TABLE>
<S> <C>
Management's Discussion and Analysis........................... 14
Consolidated Balance Sheets.................................... 19
Consolidated Statements of Operations.......................... 20
Consolidated Statements of Cash Flows.......................... 21
Consolidated Statements of Stockholders' Equity................ 22
Notes to Consolidated Financial Statements..................... 23
Five-Year Financial Summary ................................... 30
Independent Auditors' Report................................... 31
Directors, Officers and Corporate Information.................. 32
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Since 1992, the Company has pursued a growth strategy designed to take
advantage of the opportunities in the businesses and markets in which it
operates. This has led to increased investments in technology, equipment and
personnel; the introduction of new products and services in existing markets;
entry into new markets and several acquisitions. In late 1993, the Company
issued shares of its common stock in an initial public offering. This offering
enabled the Company to increase its financial flexibility and reduce debt. As a
result of its growth strategy and improving economies in some of the Company's
markets, revenues grew 21%, or $90.3 million, from $423.3 million in 1992 to
$513.6 million in 1994. At the same time, operating income, excluding the
goodwill write-down discussed under "Goodwill Write-Down" (page 17), increased
36%, or $16.8 million, from $47.2 million in 1992 to $64.0 million in 1994.
In 1993, the Company redeemed all of its $200 million principal amount
11 7/8% Subordinated Debentures. A portion of this redemption ($100 million) was
funded in August 1993 with borrowings under the Company's credit facility. The
remaining $100 million redemption in December 1993 was funded primarily with
proceeds from the Company's initial public offering in November 1993, which
generated net proceeds of $95.3 million. In 1994, the Company further reduced
its debt and funded capital expenditures and an acquisition with cash flow
generated from operating activities. As a result, the Company reduced its total
borrowings from $394.0 million at December 31, 1992 to $293.3 million at
December 31, 1994, while funding $35.7 million of capital investments and four
acquisitions.
Harte-Hanks derives the majority of its revenues from the sale of
advertising and direct marketing services. In addition, the Company's newspapers
earn revenues from paid circulation. The Company's newspapers, shoppers and
television station operate in local markets and are affected by the strength of
the local economies as well as by national trends that affect these local
economies. As a national business, direct marketing is affected to a greater
extent by general national economic trends and developments in national markets
for its services and products. The Company's principal expense items are
payroll, postage and newsprint. Newsprint prices were low by historical
standards during 1992 and 1993. In 1994, there were three newsprint price
increases, and additional price increases will occur in 1995. Postal rates,
which typically increase every three to four years, increased 14% in January
1995.
28
<PAGE> 2
RESULTS OF OPERATIONS
Operating results, excluding the effect of the 1993 goodwill write-down
and extraordinary items, were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
IN THOUSANDS 1994 CHANGE 1993 Change 1992
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $513,630 10.8% $463,510 9.5% $423,296
Operating expenses 449,616 9.2% 411,587 9.5% 376,048
-------- -------- --------
Operating income $ 64,014 23.3% $ 51,923 9.9% $ 47,248
======== ======== ========
Net income $ 23,822 138.4% $ 9,991 327.7% $ 2,336
======== ======== ========
</TABLE>
Each business segment contributed to the Company's revenue and operating
income growth in 1994. In particular, the direct marketing business contributed
significantly with revenue growth of 29.4% and operating income growth of 51.0%.
Overall growth resulted from development of new products and services, new
customers, acquisitions, shopper circulation expansion and generally improving
economic conditions. The same growth factors also caused operating expenses to
increase in 1994. Revenue and expense growth were also affected by the
divestiture of the Company's smallest shopper, located in Tucson.
Revenues also grew in all business segments in 1993, influenced by the
development of new products and services, as well as investments in shopper
circulation expansion. The acquisition of a direct marketing company in April
1993 also was a factor, as were improving economies in some of the Company's
markets. The same factors also caused operating expenses to increase in 1993.
--------------------------------------------------------------------------------
DIRECT MARKETING
Direct marketing operating results were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
IN THOUSANDS 1994 CHANGE 1993 Change 1992
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $167,779 29.4% $129,626 20.7% $107,351
Operating expenses 148,418 27.1% 116,806 21.1% 96,439
-------- -------- --------
Operating income $ 19,361 51.0% $ 12,820 17.5% $ 10,912
======== ======== ========
</TABLE>
Direct marketing revenues increased $38.2 million, or 29.4%, in 1994
when compared to 1993. Revenues rose in all core service offerings, with the
largest increases occurring in integrated direct marketing, database,
transportation and response management services. Overall, revenue growth
resulted from increased business with both new and existing customers,
particularly in services and products provided to the retail, banking and mutual
funds industries, as well as other financial institutions and
business-to-business customers.
Direct marketing revenue growth in 1994 was also enhanced by the
acquisitions made in April 1993 and October 1994. The Company acquired Direct
Market Concepts, Inc. in April 1993 and Select Marketing, Inc. in October 1994.
Direct Market Concepts provides integrated direct marketing services primarily
to financial institutions, while Select Marketing offers response management
services to business-to-business clients in the high technology industry, a new
market for Harte-Hanks in 1994.
Direct marketing operating expenses grew $31.6 million, or 27.1%, in
1994 when compared to 1993. Payroll costs and production and distribution costs
increased to support revenue growth. Depreciation increased primarily as a
result of increased capital investments made during late 1993 and 1994. The
increase in total operating expenses was also impacted by the acquisitions.
The 1993 direct marketing revenue growth of $22.3 million, or 20.7%, was
a result of continued development and marketing of database and customized data
processing services and products. The development and marketing activities
resulted in increased sales to existing customers, the addition of new customers
and expansion into international markets. In addition, the Company purchased
technology to grow its integrated direct marketing business, which contributed
to 1993 revenue growth. Another factor in the revenue growth was the April 1993
acquisition.
Payroll costs in 1993 rose as a result of an increased customer base and
investments in new product development and sales force infrastructure. In
addition, the Company incurred operating costs associated with the move of its
Cincinnati direct marketing operation, as well as startup costs associated with
its integrated direct marketing business. The April 1993 acquisition also caused
operating expenses to increase.
On January 31, 1995, the Company acquired Steinert & Associates, a New
York City firm specializing in direct marketing communications and advertising.
29
<PAGE> 3
SHOPPERS
Shopper operating results, excluding the effect of the 1993 goodwill
write-down, were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
IN THOUSANDS 1994 CHANGE 1993 Change 1992
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $176,461 1.1% $174,521 6.4 % $164,021
Operating expenses 158,718 (0.2)% 159,080 7.1 % 148,504
-------- -------- --------
Operating income $ 17,743 14.9 % $ 15,441 (0.5)% $ 15,517
======== ======== ========
</TABLE>
Excluding revenues from the Company's smallest shopper, sold in February
1994, shopper revenues grew $7.0 million, or 4.1%, in 1994 when compared to
1993. Revenue growth was primarily due to circulation expansion and, to a lesser
extent, increased advertising in existing circulation zones and increased
newsstand product volumes. A newsstand product, which takes ads in one or more
related product categories from individual zoned editions and groups them for
re-publication, was introduced in the Southern California market in late 1993.
Circulation expansion in all four shopper markets brought total weekly
circulation to 6.9 million households at December 31, 1994.
Excluding operating expenses from the divested shopper, operating
expenses increased $5.3 million, or 3.5%. Payroll costs increased $2.2 million,
or 3.9%, while general and administrative costs rose $0.4 million, or 2.7%.
Postage costs grew $1.5 million, or 3.5%, due to higher circulation. Newsprint
costs increased $0.3 million, or 2.5%, due to higher volumes as a result of
circulation growth offset by average price declines.
Shopper revenues grew 6.4% in 1993, primarily as a result of increased
circulation. Total shopper circulation grew 0.9 million households to 7.0
million households at December 31, 1993. This circulation growth occurred in the
Southern California, Miami/Ft. Lauderdale and Dallas/Fort Worth markets. The
shopper divested in 1994 accounted for 0.3 million of these households. Higher
insert volumes in existing zones and restored circulation in the Company's Miami
shopper, which was negatively impacted by Hurricane Andrew in August 1992, also
contributed to the 1993 revenue growth. Also, shoppers' 1993 results reflect the
fact that there was one less publishing week in 1993 than in 1992.
In 1993, postage costs increased $5.1 million, or 12.6%, and newsprint
costs increased $1.6 million, or 13.8%. Other expense categories, except
payroll, also rose due to the increase in shopper advertising volumes. Postage
costs increased due to higher circulation and higher insert volumes, which
result in increased postage costs due to the application of the overweight
postal rate. Newsprint costs rose as a result of increased circulation in
expansion zones as well as higher ad volumes in existing zones. While increased
circulation caused postage and newsprint costs to rise, payroll costs remained
relatively flat due to the Company's use of automatic inserting technology and
other cost control measures.
--------------------------------------------------------------------------------
NEWSPAPERS
Newspaper operating results, excluding the effect of the 1993 goodwill
write-down, were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
IN THOUSANDS 1994 CHANGE 1993 Change 1992
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $140,761 7.0% $131,545 4.2% $126,222
Operating expenses 114,398 4.2% 109,812 4.3% 105,249
-------- -------- --------
Operating income $ 26,363 21.3% $ 21,733 3.6% $ 20,973
======== ======== ========
</TABLE>
Newspaper revenues increased $9.2 million, or 7.0%, in 1994 when
compared to 1993. Overall advertising revenues grew $7.9 million, or 8.1%,
primarily as a result of increased volumes and, to a lesser extent, increases in
average effective rates. Classified advertising revenues, in particular,
increased 13.6% led by strong automotive volumes and, to a lesser extent, help
wanted revenues in the Company's suburban markets. Retail advertising revenues
increased 4.1%, while insert revenues rose 1.4%. In addition, niche and
specialty product revenues grew, in part due to higher direct mail revenues from
a direct mail program into 150,000 households in the Rio Grande Valley
established in 1994. Circulation revenues grew $1.8 million, or 5.8%, primarily
reflecting home-delivery price increases in the fall of 1993 and, to a lesser
degree, home-delivery price increases in the fall of 1994.
Newspaper operating expenses grew $4.6 million, or 4.2%, in 1994 when
compared to 1993. Payroll costs rose $3.2 million, or 6.1%, due to increased
sales commissions on higher advertising volumes, normal payroll increases and
higher incentive compensation. In addition, general and administrative costs
rose $1.5 million, or 10.9%, primarily
30
<PAGE> 4
due to increased promotional activity and other costs associated with producing
higher revenues. Production and distribution costs rose $0.7 million, or 2.0%,
due to higher production costs caused by increased volumes offset by decreased
newsprint costs of $0.1 million. Newsprint expense was flat as a result of lower
average newsprint prices offset by higher volumes. Goodwill amortization
decreased $0.8 million due to the second quarter 1993 goodwill write-down
relating to the Company's suburban newspapers in Boston and Dallas.
In November 1994, the Company announced that it had signed an agreement
to sell its community newspapers in suburban Boston. The sale is expected to
close in early 1995. The anticipated gain, net of income taxes, is not expected
to be significant.
Advertising revenues rose $4.1 million, or 4.4%, in 1993 due to
increased volumes and new products. Retail and classified advertising revenues
grew 2.5% and 7.8%, respectively. In addition, circulation revenues grew $1.0
million, or 3.3%, primarily due to higher rates.
In 1993, payroll costs increased $2.9 million, or 5.9%, resulting
primarily from normal payroll increases as well as investments made to develop
niche publications and specialized services. Higher volumes and, to a lesser
extent, price increases caused newsprint costs to increase by $1.7 million, or
11.2%.
--------------------------------------------------------------------------------
TELEVISION
Television operating results were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
IN THOUSANDS 1994 CHANGE 1993 Change 1992
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $28,629 2.9% $27,818 8.2% $25,702
Operating expenses 19,683 0.2% 19,654 0.5% 19,562
------- ------- -------
Operating income $ 8,946 9.6% $ 8,164 33.0% $ 6,140
======= ======= =======
</TABLE>
Revenues for the television segment increased $0.8 million, or 2.9% in
1994 when compared to 1993. Revenues from the television station operation
increased $1.0 million, or 3.9%, primarily due to increased political
advertising. Increased production activity as well as a direct mail product and
radio station introduced in 1993 also generated additional revenues in 1994.
These increases were offset by a revenue decline from the segment's print
graphics operation, which was restructured during the year.
Television operating expenses remained flat during 1994 when compared to
1993. Film programming cost decreases during 1994 were offset by slight
increases in other expense categories.
In 1993, television advertising revenues grew $1.5 million, or 6.9%. In
addition, the station introduced a direct mail product, which influenced revenue
growth. Television advertising revenues grew due to increased volumes, higher
rates and increased demand resulting from the station's continued leadership
position in a healthy San Antonio economy and the 1992 closure of one of San
Antonio's two competing daily newspapers. Political revenues decreased $0.4
million in 1993, which partially offset these revenue increases. Payroll costs
and production costs related to the direct mail product increased in 1993 but
were offset by decreases in film programming costs.
--------------------------------------------------------------------------------
INTEREST EXPENSE
Interest expense decreased $13.5 million in 1994 and $6.1 million in
1993, primarily 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 the Company's credit
facility. The remaining $100 million redemption in December 1993 was funded
primarily with proceeds from the Company's initial public offering.
INCOME TAXES
The Company's income tax expense relating to income before extraordinary
items increased $11.5 million in 1994 and $1.8 million in 1993 as a result of
increased income. The 1993 increase included a benefit of $1.0 million as a
result of the Company's recognition of a deferred tax asset, which resulted from
state net operating loss carryforwards.
GOODWILL WRITE-DOWN
In connection with the Company's review of the carrying amount of its
investments, including assigned goodwill, the Company determined that goodwill
associated with certain of its investments should be written down. That resulted
in a charge of $55.5 million in the second quarter of 1993. The write-down was
solely related to daily, semi-weekly and weekly newspapers in suburban markets
in Boston, Massachusetts ($43.9 million) and in Dallas, Texas ($8.8 million) and
to the Company's shopper publication in Tucson, Arizona ($2.8 million).
In connection with its review, the Company projected undiscounted cash
flows for each of its investments over the investment's associated remaining
goodwill amortization period. After these projections were compared to
corresponding net book values of fixed assets and unamortized goodwill balances,
the net goodwill balances were reduced
31
<PAGE> 5
such that the net fixed assets and unamortized goodwill values assigned to these
investments were equal to the projected future cash flows discounted at the
Company's incremental borrowing rate.
The cash flow projections were based on economic conditions in those
markets and the historical financial performance of these investments, as well
as recent changes in competitive conditions in those markets. Management
believes operating performance and growth opportunities for each of these
investments have been permanently affected. See Note K of Notes to Consolidated
Financial Statements.
EXTRAORDINARY ITEMS
As a result of the 1993 redemptions discussed under "Interest Expense,"
the Company incurred extraordinary losses totaling $7.4 million, net of income
tax benefits of $4.3 million, from the payment of redemption premiums and the
write-off of related unamortized financing costs and issuance costs.
CAPITAL INVESTMENTS
Investing activities for 1994 included $21.8 million for capital
expenditures and an acquisition. In the direct marketing business, the capital
expenditures consisted of new computer systems to increase capacity and new
equipment to support its growing customer base. The Company's other expenditures
included shopper inserting equipment and imagesetter technology; the final
expenditures to complete the purchase of a nine-unit offset printing press and
related building for the Company's newspaper in Corpus Christi, Texas; newspaper
imagesetter technology and investments in television production equipment. These
investments were funded by cash provided by operating activities.
The investments in 1994 were a continuation of growth strategy
investments made in 1993, when the Company spent $32.6 million for capital
expenditures and acquisitions. The 1993 acquisitions consisted of the purchases
of a direct marketing company, a radio station in San Antonio, Texas (KENS-AM)
and a West Texas direct mail coupon publication. These acquisitions and capital
expenditures were funded from cash provided by operating activities and the
issuance of $20 million of Convertible Notes in September 1992, proceeds of
which were used initially to reduce bank debt.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for 1994 was $49.0 million. Net
cash outflows for investing activities, which consist primarily of capital
expenditures and acquisitions, were $23.6 million for 1994 as compared to $34.7
million for 1993. See above discussion of capital expenditures under "Capital
Investments."
Cash provided by operating activities for 1993 and 1992 was $26.4
million and $23.8 million, respectively. For 1993 and 1992, capital expenditures
were $21.7 million and $6.9 million, respectively, and consisted principally of
the purchase of equipment.
Capital resources are also available from and provided through the
Company's unsecured credit facility. On February 2, 1995, the Company amended
its $320 million credit facility. The credit facility consisted of a $220
million revolving loan commitment that was to expire December 31, 1999 and a
$100 million term loan. The $100 million term loan required repayments of $10
million in 1995, $20 million in both 1996 and 1997, and $25 million in both 1998
and 1999. The amended credit facility is a $320 million variable rate revolving
loan commitment that requires mandatory reductions of $70.4 million in 1998,
$76.8 million in 1999, $83.2 million in 2000 and $89.6 million in 2001. The
Company will realize savings both in interest and commitment fees due to more
favorable terms in the amended credit facility agreement.
Management believes that its credit facility, together with cash
provided by operating activities, will be sufficient to fund operations,
anticipated capital expenditures and debt service requirements for the
foreseeable future. As of December 31, 1994, the company had $185.4 million of
unused borrowing capacity under its credit facility, of which $136.5 million was
reserved to serve as backup for the Company's outstanding commercial paper and
other short-term borrowing facilities.
SEASONALITY AND CYCLICALITY
The Company's businesses tend to be seasonal, with higher revenues and
profits occurring in the second through the fourth quarters due to the increased
advertising activity during these periods. In addition, the Company's television
operation experiences higher revenues and profits during those years when
political elections are held. See Note M of Notes to Consolidated Financial
Statements.
32
<PAGE> 6
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS 1994 1993
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash......................................................................... $ 4,391 $ 4,392
Accounts receivable (less allowance for doubtful
accounts of $2,910 in 1994 and $2,025 in 1993)............................ 70,929 61,130
Inventory.................................................................... 13,454 8,032
Prepaid expenses............................................................. 5,904 5,385
Current deferred income tax benefit.......................................... 6,808 4,549
Other current assets......................................................... 4,143 3,765
-------- --------
Total current assets..................................................... 105,629 87,253
-------- --------
Property, plant and equipment
Land......................................................................... 10,352 10,679
Buildings and improvements................................................... 42,701 42,230
Equipment and furniture...................................................... 140,175 130,733
-------- --------
193,228 183,642
Less accumulated depreciation................................................ 104,283 99,721
-------- --------
88,945 83,921
Construction and equipment installations in progress......................... 2,333 6,888
-------- --------
Net property, plant and equipment........................................ 91,278 90,809
-------- --------
Intangible and other assets
Goodwill (less accumulated amortization
of $104,557 in 1994 and $95,996 in 1993)................................. 290,335 292,944
Other assets................................................................. 9,656 7,932
-------- --------
Total intangible and other assets........................................ 299,991 300,876
-------- --------
Total assets............................................................. $496,898 $478,938
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................. $ 31,229 $ 24,422
Accrued payroll and related expenses......................................... 17,996 12,607
Accrued interest............................................................. 731 950
Prepaid subscriptions........................................................ 3,978 3,753
Current portion of film contracts............................................ 1,717 1,233
Income taxes payable......................................................... 1,867 235
Other current liabilities.................................................... 13,165 10,765
Current portion of long term debt............................................ 469 977
-------- --------
Total current liabilities................................................ 71,152 54,942
Long term debt....................................................................... 292,858 320,087
Other long term liabilities (including deferred
income taxes of $8,901 in 1994 and $10,424 in 1993).......................... 25,248 20,045
-------- --------
Total liabilities........................................................ 389,258 395,074
-------- --------
Stockholders' equity
Common stock, $1 par value, authorized
50,000,000 shares. Issued and outstanding
1994: 18,342,503 shares; 1993: 18,129,400 shares......................... 18,342 18,129
Additional paid-in capital................................................... 144,350 142,664
Accumulated deficit.......................................................... (53,107) (76,929)
Minimum pension liability adjustment......................................... (1,945) --
-------- --------
Total stockholders' equity............................................... 107,640 83,864
-------- --------
Total liabilities and stockholders' equity............................... $496,898 $478,938
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
33
<PAGE> 7
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues........................................................... $513,630 $463,510 $423,296
Operating expenses
Payroll.................................................... 193,874 174,557 160,241
Production and distribution................................ 179,699 165,993 147,853
Advertising, selling, general and administrative........... 54,083 49,355 44,982
Depreciation............................................... 12,508 11,506 12,184
Goodwill amortization...................................... 9,452 10,176 10,788
Goodwill write-down........................................ -- 55,463 --
-------- -------- --------
449,616 467,050 376,048
-------- -------- --------
Operating income (loss)............................................ 64,014 (3,540) 47,248
-------- -------- --------
Other expenses (income)
Interest expense........................................... 17,364 30,872 37,015
Interest income............................................ (154) (160) (522)
Other, net................................................. 1,142 865 (101)
-------- -------- --------
18,352 31,577 36,392
-------- -------- --------
Income (loss) before income taxes.................................. 45,662 (35,117) 10,856
Income tax expense................................................. 21,840 10,355 8,520
-------- -------- --------
Income (loss) before extraordinary item............................ 23,822 (45,472) 2,336
Extraordinary item - Loss due to early extinguishment of debt,
net of income tax benefit of $4,319........................ -- (7,393) --
-------- -------- --------
Net income (loss).................................................. $ 23,822 $(52,865) $ 2,336
======== ======== ========
Earnings (loss) per common share - primary
Income (loss) before extraordinary item.................... $ 1.25 $ (3.49) $ .19
Extraordinary item......................................... -- (.56) --
-------- -------- --------
Net income (loss).......................................... $ 1.25 $ (4.05) $ .19
======== ======== =======
Weighted average common and
common equivalent shares outstanding................... 19,046 13,038 12,214
======== ========= =========
Earnings (loss) per common share - fully diluted
Income (loss) before extraordinary item.................... $ 1.20 $ (3.49) $ .19
Extraordinary item......................................... -- (.56) --
-------- -------- --------
Net income (loss).......................................... $ 1.20 $ (4.05) $ .19
======== ======== ========
Weighted average common and
common equivalent shares............................... 20,488 13,038 12,214
======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE> 8
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss).......................................... $ 23,822 $ (52,865) $ 2,336
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation......................................... 12,508 11,506 12,184
Goodwill amortization................................ 9,452 10,176 10,788
Amortization of option related compensation.......... 1,605 1,228 505
Film amortization.................................... 2,746 3,293 4,209
Deferred income taxes................................ (2,219) (585) (694)
Other, net........................................... 728 (223) 280
Goodwill write-down.................................. -- 55,463 --
Extraordinary loss due to early
extinguishment of debt........................... -- 11,712 --
Changes in operating assets and liabilities,
net of effects from acquisitions:
Increase in accounts receivable, net................. (7,898) (5,043) (9,192)
(Increase) decrease in inventory..................... (5,543) (46) 3,544
(Increase) decrease in prepaid expenses
and other current assets (648) (346) 574
Increase in accounts payable......................... 6,010 1,784 791
Increase (decrease) in other accrued
expenses and other liabilities 8,129 (8,500) (1,462)
Other, net........................................... 262 (1,125) (25)
--------- --------- ---------
Net cash provided by operating activities.................. 48,954 26,429 23,838
--------- --------- ---------
Cash Flows from Investing Activities
Acquisitions............................................... (7,800) (10,896) (1,550)
Purchases of property, plant and equipment................. (13,985) (21,689) (6,886)
Proceeds from the sale of property, plant
and equipment 357 1,101 1,942
Payments on film contracts................................. (2,122) (3,182) (3,800)
--------- --------- ---------
Net cash used in investing activities...................... (23,550) (34,666) (10,294)
--------- --------- ---------
Cash Flows from Financing Activities
Long term debt borrowings.................................. 657,695 580,615 163,385
Payments on debt, including current
maturities and financing costs......................... (684,675) (659,663) (174,140)
Issuance of common stock................................... 1,575 95,305 --
Payment of premium on early extinguishment of debt......... -- (6,892) --
Purchase of treasury stock................................. -- (15) (2,258)
Sale of treasury stock..................................... -- -- 5
--------- --------- ---------
Net cash provided by (used in) financing activities........ (25,405) 9,350 (13,008)
--------- --------- ---------
Net increase (decrease) in cash............................ (1) 1,113 536
Cash at beginning of period................................ 4,392 3,279 2,743
--------- --------- ---------
Cash at end of period...................................... $ 4,391 $ 4,392 $ 3,279
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE> 9
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL MINIMUM TOTAL
COMMON PAID-IN ACCUMULATED PENSION LIABILITY STOCKHOLDERS'
IN THOUSANDS STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1992....................... $12,136 $ 54,634 $(25,414) $ -- $ 41,356
Purchase of treasury stock....................... (256) (1,023) (979) -- (2,258)
Sale of treasury stock........................... 1 4 -- -- 5
Net income....................................... -- -- 2,336 -- 2,336
------- -------- -------- ------- ---------
Balance at December 31, 1992..................... 11,881 53,615 (24,057) -- 41,439
Common stock issuance............................ 6,250 89,055 -- -- 95,305
Purchase of treasury stock....................... (2) (6) (7) -- (15)
Net loss......................................... -- -- (52,865) -- (52,865)
------- -------- -------- ------- ---------
Balance at December 31, 1993..................... 18,129 142,664 (76,929) -- 83,864
Common stock issued - employee benefit plans..... 33 502 -- -- 535
Exercise of stock options ....................... 180 1,184 -- -- 1,364
Adjustment for minimum pension liability, net of
income taxes of $1.3 million ................ -- -- -- (1,945) (1,945)
Net income....................................... -- -- 23,822 -- 23,822
------- -------- -------- ------- ---------
BALANCE AT DECEMBER 31, 1994..................... $18,342 $144,350 $(53,107) $(1,945) $107,640
======= ======== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE> 10
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements present the financial
position of Harte-Hanks Communications, Inc. and subsidiaries (the "Company").
Harte-Hanks Communications, Inc. is the successor of HHC Holding Inc., the
former parent company of Harte-Hanks Communications, Inc., which was merged into
Harte-Hanks Communications, Inc. on October 7, 1993. All of the stock of HHC
Holding Inc. was converted, on a share-for-share basis, into stock of
Harte-Hanks Communications, Inc.
All intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified for comparative
purposes.
TELEVISION REVENUES
Television revenues are presented net of advertising agency commissions.
INVENTORY
Inventory, consisting primarily of newsprint and operating supplies, is stated
at the lower of cost (first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Depreciation of
buildings and equipment is computed generally on the straight-line method at
rates calculated to amortize the cost of the assets over their useful lives. The
general ranges of estimated useful lives are:
Buildings and improvements...... 10 to 40 years
Equipment and furniture.......... 4 to 20 years
GOODWILL
Goodwill is stated on the basis of cost, adjusted as discussed below, and is
amortized on a straight-line basis over 40-year periods.
For each of its investments, the Company assesses the recoverability of its
goodwill by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through projected undiscounted future cash
flows over the remaining amortization period. If projected future cash flows
indicate that unamortized goodwill will not be recovered, an adjustment is made
to reduce the net goodwill to an amount consistent with projected future cash
flows discounted at the Company's incremental borrowing rate. Cash flow
projections are based on trends of historical performance and management's
estimate of future performance, giving consideration to existing and anticipated
competitive and economic conditions.
FILM CONTRACTS
Film contract rights represent agreements with film syndicators for television
program material. When a program or film becomes available for telecasting, the
cost of the contract is recorded as an asset and the corresponding contractual
obligation as a liability. The cost is amortized over the expected number of
telecasts. The portions of the cost to be amortized within one year and after
one year are reflected in the consolidated balance sheets as current and
noncurrent other assets, respectively. The payments under these contracts due
within one year and after one year are similarly classified as current and
noncurrent liabilities.
INCOME TAXES
Income taxes are calculated using the asset and liability method required by
Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred income
taxes are recognized for the tax consequences resulting from "temporary
differences" by applying enacted statutory tax rates applicable to future years.
These "temporary differences" are associated with differences between the
financial statement amounts and the tax bases of existing assets and
liabilities. Under SFAS No. 109, a statutory change in tax rates will be
recognized immediately in deferred taxes and income.
EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per common share is based upon the weighted average
number of common shares outstanding and dilutive common stock equivalents from
the assumed exercise of stock options using the treasury stock method. Fully
diluted earnings (loss) per common share is based upon the weighted average
number of common shares outstanding, dilutive common stock equivalents from the
assumed exercise of stock options and assumed conversion of convertible notes.
For 1993 and 1992, fully diluted earnings (loss) per common share is the same as
primary earnings (loss) per share because the effect of the Company's 6 1/4%
Convertible Notes due 2002 (the "Convertible Notes") is antidilutive for the
applicable periods presented. Stock options issued within one year of the
Company's initial public offering in 1993 were considered outstanding for all
periods in accordance with the rules of the Securities and Exchange Commission.
37
<PAGE> 11
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
DECEMBER 31,
IN THOUSANDS 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C>
Revolving loan commitment, various
interest rates (effective rate of 7.1%
at December 31, 1994), due in
mandatory reductions beginning
June 30, 1996 through
December 31, 1999................ $ 34,600 $169,800
Term loan, various interest rates
(effective rate of 6.9% at
December 31, 1994), due in
mandatory reductions beginning
June 30, 1995 through
June 30, 1999.................... 100,000 100,000
Commercial paper (effective rate of
7.1% at December 31, 1994)....... 41,538 28,220
Bank lines, various interest rates
(effective rates ranging from 6.9%
to 7.4% at December 31, 1994) ... 95,000 --
6 1/4% Convertible Notes due
September 15, 2002............... 20,000 20,000
Miscellaneous notes payable, interest
rates ranging from 7.3% to 8%, due
on various dates through 1998.... 2,189 3,044
-------- --------
293,327 321,064
Less current maturities.............. 469 977
-------- --------
$292,858 $320,087
======== ========
</TABLE>
CREDIT FACILITY
On February 2, 1995, the Company amended its $320 million credit facility. The
credit facility consisted of a $220 million revolving loan commitment that would
have expired December 31, 1999. It also consisted of a $100 million term loan
that required repayments of $10 million in 1995, $20 million in both 1996 and
1997, and $25 million in both 1998 and 1999. The amended credit facility is a
$320 million revolving commitment that requires mandatory reductions of $70.4
million in 1998, $76.8 million in 1999, $83.2 million in 2000 and $89.6 million
in 2001. The Company pays a commitment fee of .1875% to .3750% on the unused
portion of the commitment. As of December 31, 1994, the Company had $185.4
million of unused borrowing capacity under its credit facility, of which $136.5
million was reserved to serve as backup for the Company's outstanding commercial
paper and other short term borrowings.
COMMERCIAL PAPER
The Company maintains unused and available credit under its credit facility in
an amount equal to its outstanding commercial paper borrowings.
BANK LINES
In 1994, the Company entered into three separate short term borrowing
arrangements. Under these arrangements, the Company can borrow up to a maximum
of $160 million. These short term borrowings are classified as long term debt
since it is the Company's intent to renew or replace these borrowings with its
revolving credit commitment.
6 1/4% CONVERTIBLE NOTES
The Convertible Notes bear interest at 6 1/4%, payable on March 15 and September
15 of each year. The Convertible Notes are convertible into shares of common
stock at a conversion price of $14.00. The Convertible Notes may be called at
par after March 15, 1996 or at any earlier time that the closing price of the
Company's common stock equals or exceeds $21.00 per share for at least 20 out of
the previous 30 trading days.
OTHER DEBT INFORMATION
As of December 31, 1994, the minimum annual maturities of long term debt
(excluding the borrowings under the Company's credit facility in effect December
31, 1994) for each of the following years ending December 31 are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
IN THOUSANDS
-----------------------------------------------------------------
<S> <C>
1995............................. $ 469
1996............................. 380
1997............................. 100
1998............................. 1,240
</TABLE>
Cash payments for interest were $17.6 million, $40.8 million and $37.5 million
for the years ended December 31, 1994, 1993 and 1992, respectively.
The Company's credit facility and Convertible Notes purchase agreement contain
certain restrictive covenants, including limitations on additional indebtedness
and payment of dividends, and require the Company to maintain certain financial
ratios.
38
<PAGE> 12
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1994 1993 1992
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal................ $20,719 $ 9,438 $ 7,840
State and local........ 3,413 1,210 1,361
------- ------- -------
Total current....... $24,132 $10,648 $ 9,201
======= ======= =======
Deferred
Federal................ $(2,377) $ 1,395 $ (935)
State and local........ 85 (1,688) 254
------- -------- -------
Total deferred...... $(2,292) $ (293) $ (681)
======= ======== =======
</TABLE>
Included in income tax expense is an adjustment for changes in federal tax laws
of $0.1 million in 1993. Of the $1.7 million recognized as a deferred state
income tax benefit in 1993, $1.0 million represents an adjustment to the
beginning of the year valuation allowance due to the realization of benefits
from state operating loss carryforwards. The Company also recognized $4.1
million of current income tax benefits and $0.2 million of deferred income tax
benefits related to the extraordinary loss resulting from the redemption of all
of its 11 7/8% Subordinated Debentures in 1993.
The differences between total income tax expense and the amount computed by
applying the statutory Federal income tax rate to income before income taxes
were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1994 1993 1992
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed expected
income tax
expense . . . . . . . $15,982 35% $(12,291) 35% $3,691 34%
Effect of goodwill
amortization. . . . . 3,262 7% 3,528 (10)% 3,668 34%
Net effect of state
income taxes. . . . . 2,303 5% 656 (2)% 1,066 10%
Effect of goodwill
write-down. . . . . . -- -- 19,412 (55)% -- --
Change in the beginning
of the year balance
of the valuation
allowance . . . . . . (30) -- (967) 3% -- --
Other, net. . . . . . . . 323 1% 17 -- 95 --
------- --- -------- ---- ------- ---
Income tax expense
for the period. . . . $21,840 48% $ 10,355 (29)% $ 8,520 78%
======= === ======== ===== ======= ===
</TABLE>
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
DECEMBER 31,
IN THOUSANDS 1994 1993
------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
State net operating losses............. $ 2,736 $ 4,048
Accrued benefit costs, primarily
pension and vacation pay............. 6,095 3,798
Accrued casualty and health
insurance expense.................... 2,302 1,278
Accounts receivable, net............... 1,018 708
State income tax....................... 656 52
Other, net............................. 315 316
-------- --------
Total gross deferred tax assets...... 13,122 10,200
Less valuation allowance............. (1,592) (2,461)
-------- --------
Net deferred tax assets.............. 11,530 7,739
-------- --------
Deferred tax liabilities:
Property, plant and equipment.......... (13,100) (13,038)
Other, net............................. (523) (576)
-------- --------
Total gross deferred tax liabilities (13,623) (13,614)
-------- --------
Net deferred tax liability............. $ (2,093) $ (5,875)
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1993 was $3.0
million. The valuation allowance at December 31, 1994 and 1993 related to state
net operating losses, which are not expected to be realized.
The net deferred tax liability is recorded both as a current deferred income tax
benefit and as other long term liabilities based upon the classification of the
related temporary difference.
As of December 31, 1994, the Company has net state loss carryforwards, which are
available to offset future taxable income. These carryforwards are expected to
generate state income tax savings of $1.1 million and will expire by the year
1999. The Company has recognized a deferred tax asset relating to these
carryforwards.
Cash payments for income taxes were $22.2 million, $8.4 million and $7.2 million
in 1994, 1993 and 1992, respectively.
39
<PAGE> 13
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- EMPLOYEE BENEFIT PLANS
Under the Company's defined benefit pension plans, benefits are based on years
of service and an employee's compensation for the five highest consecutive years
of salary during the last ten years of service. Benefits vest to the
participants upon completion of five years of service or upon reaching age 65,
whichever is earlier. Harte-Hanks' policy is to accrue as expense an amount
computed by its actuary and to fund at least the minimum amount required by
ERISA.
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 amounts that would have been payable from the Company's
principal pension plans if it were not for limitations imposed by income tax
regulations. The projected benefit obligation relating to this unfunded plan was
$1.6 million at December 31, 1994, and related pension expense was $0.3 million
in 1994.
Net pension cost for all plans included the following components:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1994 1993 1992
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned
during the period...... $ 3,572 $ 2,861 $ 2,639
Interest cost on projected
benefit obligation..... 4,608 4,283 3,862
Actual return on plan assets 1,493 (3,700) (2,920)
Net deferrals and amortization (5,872) (685) (991)
------- ------- -------
Net periodic pension cost.. $ 3,801 $ 2,759 $ 2,590
======= ======= =======
</TABLE>
In determining the 1994, 1993 and 1992 actuarial present value of benefit
obligations, discount rates of 8.0%, 7.5% and 9.0% were used, respectively.
Annual rates of increase in future compensation levels of 4% in 1994 and 1993
and 5% in 1992 were used. The expected long term rate of return on plan assets
was 10%.
The status of Harte-Hanks' employee retirement plans at year-end was as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
DECEMBER 31,
IN THOUSANDS 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value
of benefit obligations:
Vested....................... $ 49,722 $ 43,961
Non-vested................... 5,580 4,442
-------- --------
Total accumulated
benefit obligations........ 55,302 48,403
Additional obligation
related to projected
salary increases............. 7,675 13,722
-------- --------
Projected benefit
obligations for service .....
rendered to date............. 62,977 62,125
Fair value of plan assets,
primarily listed stocks and
government securities ....... (45,331) (46,244)
-------- --------
Projected benefit obligation
in excess of plan assets..... 17,646 15,881
Unrecognized net loss from
past experience different
from that assumed............ (11,571) (11,458)
Unrecognized prior
service costs................ (1,358) (63)
Unrecognized net assets
at January 1, 1987
being recognized
over average expected
remaining service period
of employees................. 1,075 1,201
Adjustment to recognize
minimum liability............ 4,179 --
-------- --------
Recorded pension liability....... $ 9,971 $ 5,561
======== ========
</TABLE>
The Company also sponsors a 401(k) plan to provide employees with additional
income upon retirement. The Company matches a portion of employees' voluntary
before tax contributions. Employees are fully vested in their own contributions
and vest in the Company's matching contribution upon three years of service.
40
<PAGE> 14
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1994, the Company adopted the 1994 Employee Stock Purchase Plan, which
provides for a total of 300,000 shares to be sold to participating employees at
85% of the fair market value at specified quarterly investment dates. Shares
available for sale totaled 266,997 at December 31, 1994.
NOTE E -- STOCKHOLDERS' EQUITY
On November 3, 1993, the Company issued 6,250,000 shares of its common stock in
an initial public offering for net cash proceeds of approximately $95.3 million.
These proceeds were used to redeem the remainder of its outstanding 11 7/8%
Subordinated Debentures in the aggregate principal amount of $100 million, at
the redemption price of 103.446% of principal plus accrued interest.
On October 4, 1993, the Company amended its Certificate of Incorporation to
increase its total authorized capitalization to 50,000,000 shares of common
stock and 1,000,000 shares of preferred stock.
NOTE F -- STOCK OPTION PLANS
In 1984, the Company adopted a Stock Option Plan ("1984 Plan") pursuant to which
it issued to officers and key employees options to purchase shares of common
stock at prices equal to the market price on the grant date. Market price was
determined by the Board of Directors for purposes of granting stock options and
making repurchase offers. Options granted under the 1984 Plan become exercisable
five years after date of grant. At December 31, 1994, 1993 and 1992, options to
purchase 540,200 shares, 722,300 shares and 732,300 shares, respectively, were
outstanding under the 1984 Plan, with exercise prices ranging from $5 to $10 per
share. No additional options will be granted under the 1984 Plan. At December
31, 1994, 323,200 options under the 1984 plan were exercisable.
The Company adopted the 1991 Stock Option Plan ("1991 Plan") pursuant to which
it may issue to officers and key employees options to purchase up to 2,000,000
shares of common stock. Options have been granted at prices equal to the market
price on the grant date ("market price options") and at $1.00 per share
("performance options"). As of December 31, 1994, 1993 and 1992, market price
options to purchase 929,600 shares, 826,000 shares and 341,100 shares,
respectively, were outstanding with exercise prices ranging from $10.00 to
$20.125 per share, and performance options to purchase 362,700 shares, 321,000
shares and 198,250 shares, respectively, were outstanding with an exercise price
of $1 per share. Market price options become exercisable after the fifth
anniversary of their date of grant. The performance options become exercisable
after the third anniversary of their date of grant, and the extent to which they
become exercisable at that time depends upon the extent to which the Company
achieves certain goals which are established at the time the options are
granted. Compensation expense of $1.6 million, $1.2 million and $0.5 million was
recognized for the performance options for the years ended December 31, 1994,
1993 and 1992, respectively. At December 31, 1994, 87,250 options under the 1991
Plan were exercisable.
The following summarizes stock option plans activity during 1994, 1993 and
1992:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
NUMBER RANGE OF
IN THOUSANDS OF SHARES OPTION PRICE
----------------------------------------------------------------------
<S> <C> <C>
Options outstanding
at January 1, 1992 1,044,050
Granted.................... 285,600 $1.00 - $10.00
Exercised.................. (1,000) $ 5.00
Cancelled.................. (57,000) $1.00 - $10.00
----------
Options outstanding
at December 31, 1992 1,271,650
Granted.................... 622,150 $1.00 - $10.00
Cancelled.................. (24,500) $1.00 - $10.00
----------
Options outstanding
at December 31, 1993 1,869,300
Granted.................... 188,200 $1.00 - $20.13
Exercised.................. (180,100) $1.00 - $ 8.75
Cancelled.................. (44,900) $1.00 - $19.25
----------
Options outstanding
at December 31, 1994 1,832,500
==========
</TABLE>
NOTE G -- LEASES
The Company leases certain real estate and equipment under various operating
leases. Most of the leases contain renewal options for varying periods of time.
The total rent expense under all operating leases was $10.4 million for the year
ended December 31, 1994 and $9.7 million for the years ended December 31, 1993
and 1992.
The future minimum rental commitments for all non- cancellable operating leases
with terms in excess of one year as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------
IN THOUSANDS
----------------------------------------------------------
<S> <C>
1995............................................ $ 8,131
1996............................................ 6,519
1997............................................ 3,774
1998............................................ 1,886
1999............................................ 1,623
After 1999...................................... 8,596
-------
Total future minimum rental payments............ $30,529
=======
</TABLE>
41
<PAGE> 15
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- BUSINESS SEGMENTS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues
Direct marketing........................................... $167,779 $129,626 $107,351
Shoppers................................................... 176,461 174,521 164,021
Newspapers1................................................ 140,761 131,545 126,222
Television................................................. 28,629 27,818 25,702
-------- -------- --------
Total operating revenues............................... $513,630 $463,510 $423,296
======== ======== ========
Operating income (loss)2
Direct marketing........................................... $ 19,361 $ 12,820 $ 10,912
Shoppers2.................................................. 17,743 12,685 15,517
Newspapers1,2.............................................. 26,363 (30,974) 20,973
Television................................................. 8,946 8,164 6,140
General corporate expense, net............................. (8,399) (6,235) (6,294)
-------- -------- --------
Total operating income (loss).......................... $ 64,014 $ (3,540) $ 47,248
======== ======== ========
Identifiable assets
Direct marketing........................................... $ 84,965 $ 66,164 $ 43,488
Shoppers................................................... 104,528 107,617 111,823
Newspapers1................................................ 223,632 224,280 276,891
Television................................................. 70,333 71,729 72,408
General corporate.......................................... 13,440 9,148 10,869
-------- -------- --------
Total identifiable assets.............................. $496,898 $478,938 $515,479
======== ======== ========
Depreciation
Direct marketing........................................... $ 2,948 $ 2,160 $ 1,898
Shoppers................................................... 3,905 3,659 3,807
Newspapers1................................................ 4,510 4,499 5,040
Television................................................. 1,041 1,041 1,234
General corporate.......................................... 104 147 205
-------- -------- --------
Total depreciation..................................... $ 12,508 $ 11,506 $ 12,184
======== ======== ========
Goodwill amortization
Direct marketing........................................... $ 648 $ 537 $ 344
Shoppers................................................... 1,867 1,920 1,926
Newspapers1................................................ 5,189 5,990 6,788
Television................................................. 1,748 1,729 1,730
-------- -------- --------
Total goodwill amortization............................ $ 9,452 $ 10,176 $ 10,788
======== ======== ========
Capital expenditures
Direct marketing........................................... $ 5,334 $ 5,498 $ 2,520
Shoppers................................................... 3,316 5,857 3,176
Newspapers1................................................ 4,409 9,744 1,387
Television................................................. 883 573 1,036
General corporate.......................................... 43 17 21
-------- -------- --------
Total capital expenditures3............................ $ 13,985 $ 21,689 $ 8,140
======== ======== ========
</TABLE>
1 In November 1994, the Company signed an agreement to sell its community
newspapers in suburban Boston. The sale is expected to close in early 1995.
The anticipated gain, net of income taxes, is not expected to be significant.
2 Year ended December 31, 1993 includes goodwill write-down of $55.5 million.
As a result of this write-down, 1993 newspaper and shopper operating income
was reduced by $52.7 million and $2.8 million, respectively.
3 Includes $1.2 million of capitalized expenditures purchased under capital
leases for the period ended December 31, 1992.
42
<PAGE> 16
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- COMMITMENTS AND CONTINGENCIES
At December 31, 1994, the Company had outstanding letters of credit in the
amount of $5.7 million. These letters of credit exist to support the Company's
insurance programs relating to worker's compensation, automobile and general
liability.
NOTE J -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires
the disclosure of the fair value of financial instruments.
The Convertible Notes, issued in September 1992, are not publicly traded. Based
on the market value of the common stock at December 31, 1994, the estimated fair
value of the Convertible Notes was $27.9 million at December 31 , 1994.
Because of their maturities and/or interest rates, the Company's other financial
instruments have a fair value approximating their carrying value. These
instruments include accounts receivable, revolving credit borrowings, commercial
paper, trade and film payables, and miscellaneous notes receivable and payable.
NOTE K -- GOODWILL WRITE-DOWN
In connection with its review of the carrying amount, including assigned
goodwill, of its investments, the Company determined, based on management's
estimate of future cash flows from its properties, that goodwill associated with
certain of its investments should be written down. This resulted in a charge of
$55.5 million in the second quarter of 1993. The write-down was solely related
to daily, semi-weekly and weekly newspapers in suburban markets in Boston,
Massachusetts ($43.9 million), Dallas, Texas ($8.8 million) and a shopper
publication in Tucson, Arizona ($2.8 million). See Note A of Notes to
Consolidated Financial Statements.
NOTE L -- EXTRAORDINARY LOSS
During 1993, the Company redeemed all of its $200 million principal amount
Subordinated Debentures at the redemption percentage of 103.446% plus accrued
interest, which resulted in an extraordinary loss of $7.4 million, net of $4.3
million of income tax benefits, from the payment of premiums and the write-off
of related unamortized financing costs and original issue discount.
NOTE M -- SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Quarter Ended
In thousands, except per share amounts December 31 September 30 June 30 March 31
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
Revenues...................................... $143,216 $128,433 $126,866 $115,115
Operating income.............................. 20,972 16,843 17,760 8,439
Net income.................................... 8,367 6,249 6,939 2,267
Earnings per common share - primary........... .44 .33 .36 .12
Earnings per common share - fully diluted..... .42 .31 .35 .12
1993
Revenues...................................... $129,369 $117,512 $116,011 $100,618
Operating income (loss)....................... 17,836 13,478 (40,822)1 5,968
Income (loss) before
extraordinary item......................... 6,650 2,167 (53,167)1 (1,122)
Extraordinary loss due to early
extinguishment of debt,
net of income taxes......................... (3,543)2 (3,850)2 -- --
Net income (loss)............................. 3,107 (1,683) (53,167)1 (1,122)
Earnings (loss) before extraordinary
items per common share...................... .40 .17 (4.43)1 (.09)
Earnings (loss) per common share.............. .19 (.14) (4.43)1 (.09)
</TABLE>
1 Includes a goodwill write-down of $55.5 million. See Notes A,H and K of Notes
to Consolidated Financial Statements.
2 Represents extraordinary losses from the redemption of all of the Company's
11 7/8% Subordinated Debentures.
See Note L of Notes to Consolidated Financial Statements.
43
<PAGE> 17
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1994 1993 1 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Revenues..................................... $513,630 $463,510 $423,296 $416,227 $426,280
Operating expenses
Payroll, production and distribution...... 373,573 340,550 308,094 308,942 314,526
Selling, general and administrative....... 54,083 49,355 44,982 45,203 48,498
Depreciation.............................. 12,508 11,506 12,184 12,969 15,062
Goodwill amortization..................... 9,452 10,176 10,788 10,785 10,785
Goodwill write-down....................... -- 55,463 -- -- --
-------- -------- -------- -------- --------
Total operating expenses.............. 449,616 467,050 376,048 377,899 388,871
Operating income (loss)...................... 64,014 (3,540) 47,248 38,328 37,409
Interest expense, net........................ 17,210 30,712 36,493 40,879 47,230
Income (loss) from continuing operations 2... 23,822 (45,472) 2,336 (7,052) (9,279)
Net income (loss)............................ 23,822 (52,865) 3 2,336 (3,938) 4 (18,257) 5
Earnings (loss) from continuing operations
per common share - fully diluted 2......... 1.20 (3.49) .19 (.57) (.70)
Earnings (loss) per common share -
fully diluted.............................. 1.20 (4.05) 6 .19 (.32) (1.37)
Weighted average common and common
equivalent shares outstanding -
fully diluted.............................. 20,488 13,038 12,214 12,343 13,301
Segment Data
Revenues
Direct Marketing........................... $167,779 $129,626 $107,351 $100,930 $ 95,120
Shoppers................................... 176,461 174,521 164,021 164,928 171,864
Newspapers................................. 140,761 131,545 126,222 127,061 134,613
Television................................. 28,629 27,818 25,702 23,308 24,683
-------- -------- -------- -------- --------
Total revenues............................. $513,630 $463,510 $423,296 $416,227 $426,280
Operating income (loss)
Direct Marketing............................. $ 19,361 $ 12,820 $ 10,912 $ 7,531 $ 6,602
Shoppers................................... 17,743 12,685 15,517 16,234 20,330
Newspapers................................. 26,363 (30,974) 20,973 16,664 15,058
Television................................. 8,946 8,164 6,140 4,419 5,225
General corporate.......................... (8,399) (6,235) (6,294) (6,520) (9,806)
-------- -------- -------- -------- --------
Total operating income (loss).............. $ 64,014 $ (3,540) $ 47,248 $ 38,328 $ 37,409
Other Data
Operating cash flow 7........................ $ 85,974 $ 73,605 $ 70,220 $ 62,082 $ 63,256
Capital expenditures......................... 13,985 21,689 8,140 4,453 11,884
Balance Sheet Data (at end of period)
Property, plant and equipment, net........... $ 91,278 $ 90,809 $ 78,210 $ 83,114 $ 93,423
Goodwill, net................................ 290,335 292,944 347,105 356,511 367,294
Total assets................................. 496,898 478,938 515,479 526,908 556,129
Total long term debt......................... 292,858 320,087 218,828 8 399,243 415,994
Total stockholders' equity 9................. 107,640 83,864 10 41,439 41,356 51,231
</TABLE>
1 Includes goodwill write-down of $55.5 million ($4.25 per share). Newspaper
and shopper operating income was affected by $52.7 million and $2.8 million,
respectively. See Notes A, H and K of Notes to Consolidated Financial
Statements.
2 Represents income (loss) and income (loss) per common share before
extraordinary item and cumulative effect of change in accounting method.
3 Includes extraordinary loss from the early extinguishment of debt of
$7.4 million, net of $4.3 million income tax benefit.
4 Includes the cumulative favorable effect of change in method of accounting
for income taxes of $3.1 million.
5 Includes extraordinary loss resulting from the early extinguishment of debt
of $9.0 million, net of $4.6 million income tax benefit.
6 Excluding the goodwill write-down and extraordinary items, earnings per
share on a fully diluted basis were 71 cents per share.
7 Operating cash flow is defined as operating income plus depreciation,
goodwill amortization and goodwill write-down. Operating cash flow is not
intended to represent cash flow or any other measure of performance in
accordance with generally accepted accounting principles.
8 Long term debt in 1992 excludes $174.7 million of borrowings under the
Company's revolving credit commitment and commercial paper borrowings
classified as current maturities.
9 There were no dividends declared in periods presented.
10 Includes the net proceeds from issuance of 6,250,000 shares of the Company's
common stock at $16.50 per share in an initial public offering in November
1993.
44
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Harte-Hanks Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Harte-Hanks
Communications, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, cash flows, and stockholders'
equity for each of the years in the three-year period ended December 31, 1994.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harte-Hanks
Communications, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
January 25, 1995
45
<PAGE> 19
DIRECTORS
DR. PETER T. FLAWN
President Emeritus,
The University of Texas at Austin;
Chairman, Audit Committee
LARRY FRANKLIN
President and Chief Executive Officer
CHRISTOPHER M. HARTE
Private Investor
EDWARD H. HARTE
Retired Publisher, CORPUS CHRISTI CALLER-TIMES
HOUSTON H. HARTE
Chairman of the Board
JAMES L. JOHNSON
Chairman Emeritus, GTE Corporation;
Chairman, Compensation Committee
ANDREW B. SHELTON
Chairman of the Board, ABILENE REPORTER-NEWS
OFFICERS
LARRY FRANKLIN
President and Chief Executive Officer
HARRY J. BUCKEL
Senior Vice President, Shoppers
MICHAEL J. CONLY
Senior Vice President, Television
DONALD R. CREWS
Senior Vice President, Legal and Secretary
RICHARD M. HOCHHAUSER
Senior Vice President, Direct Marketing
RICHARD L. RITCHIE
Senior Vice President, Finance
and Chief Financial Officer
STEPHEN W. SULLIVAN
Senior Vice President, Newspapers
KEVIN J. BARRY
Vice President, Newspapers
CRAIG COMBEST
Vice President, Direct Marketing
CHARLES DALL'ACQUA
Vice President, Direct Marketing
PETER E. GORMAN
Vice President, Shoppers
BILL R. GULLEDGE
Vice President, Newspapers
FRANK PUCKETT, JR.
Vice President, Newspapers
TED SHERWIN
Vice President, Direct Marketing
CORPORATE INFORMATION
COMMON STOCK
The Company's common stock is listed on the New York Stock Exchange (symbol:
HHS). During the period November 4 through December 31, 1993, the high and
low sales price was $19 1/2 and $15 1/8, respectively. The quarterly stock
price range for 1994 was as follows:
--------------------------------------------------------
1994 HIGH LOW
--------------------------------------------------------
First Quarter 21 1/4 17 7/8
Second Quarter 20 18 1/2
Third Quarter 19 7/8 18 1/8
Fourth Quarter 19 7/8 17 3/4
There are approximately 1,180 holders of record.
TRANSFER AGENT AND REGISTRAR
Bank of Boston
Mail Stop 45-02-09
P.O. Box 644
Boston, Massachusetts 02102-0644
ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders will be held at 10 a.m. May 19, 1995, at
the Harte-Hanks corporate office, 200 Concord Plaza Drive, Suite 800, San
Antonio, Texas.
FORM 10-K ANNUAL REPORT
A copy of the Company's annual report to the Securities and Exchange
Commission on Form 10-K may be obtained, without charge, upon written request
to:
Donald R. Crews, Secretary
Harte-Hanks Communications, Inc.
P.O. Box 269
San Antonio, Texas 78291-0269
Design and Production: Harte-Hanks Graphics
Customer Photography: Mark Langford
Printing: Avon-Behren Printing
Printed on Recycled Paper
46
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF % OF VOTING
NAME OF CORPORATION INCORPORATION SECURITIES OWNED
------------------- ------------- ----------------
<S> <C> <C>
Advertising Distributors of Maryland, Inc. Maryland 100
Direct Market Concepts, Inc. Florida 100
The Flyer Publishing Corporation Florida 100
Harte-Hanks Agency, Inc. Delaware 100
HTS, Inc. Connecticut 100
Harte-Hanks Shoppers, Inc. California 100
Harte-Hanks Community Newspapers, Inc. Texas 100
Harte-Hanks Direct Mail/California, Inc. California 100
Harte-Hanks Limited (1) United Kingdom 100
Harte-Hanks Television, Inc. Delaware 100
Independent Publishing Company South Carolina 100
Jordan Dennis Company, Inc. Massachusetts 100
Mid-America CDM, Inc. Ohio 100
NSO, Inc. Ohio 100
Northern Comprint Co. California 100
Pennysaver Publications, Inc. Texas 100
Potpourri Shopper, Inc. California 100
RMH Research, Inc. New Jersey 100
Select Marketing, Inc. Texas 100
Southern Comprint Co. California 100
Urban Data Processing, Inc. Massachusetts 100
</TABLE>
(1) Owned by Urban Data Processing, Inc.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Harte-Hanks Communications, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-51723 and No. 33-54303) on Form S-8 of Harte-Hanks Communications, Inc. of
our report dated January 25, 1995, relating to the consolidated balance sheets
of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1994
and 1993, and the ralated consolidated statements of operations, cash flows,
and stockholders' equity for each of the years in the three-year period ended
December 31, 1994, which report appears in the 1994 annual report to
shareholders which is incorporated by reference in the December 31, 1994
annual report on Form 10-K of Harte-Hanks Communications, Inc. and our report
dated January 25, 1995, relating to the related financial statement schedule as
of and for each of the years in the three-year period ended December 31, 1994,
which report appears in the December 31, 1994 annual report on Form 10-K of the
Company.
KPMG PEAT MARWICK LLP
San Antonio, Texas
March 27, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 4391
<SECURITIES> 0
<RECEIVABLES> 73839
<ALLOWANCES> 2910
<INVENTORY> 13454
<CURRENT-ASSETS> 105629
<PP&E> 195561
<DEPRECIATION> 104283
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<COMMON> 18342
0
0
<OTHER-SE> 89298
<TOTAL-LIABILITY-AND-EQUITY> 496898
<SALES> 513630
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<CGS> 373573
<TOTAL-COSTS> 449616
<OTHER-EXPENSES> 1142
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17364
<INCOME-PRETAX> 45662
<INCOME-TAX> 21840
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23822
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.20
</TABLE>
