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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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, 1995
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)
Delaware 74-1677284
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Concord Plaza Drive, Suite 800, San Antonio, Texas 78216
- ------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
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 exchange on
Title of each class 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 filers 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 15, 1996, based on the $20 7/8 per share closing price for the Company's
Common Stock on the New York Stock Exchange on such date: approximately
$315,809,734.
Shares outstanding at March 15, 1996:
Common Stock - 30,047,781 shares
Documents incorporated by reference:
The Company's Annual Report to Stockholders for the year ended December
31, 1995 (incorporated in Part II to the extent provided in Items 5,
6, 7 and 8 hereof).
Definitive Proxy Statement for the Company's April 30, 1996 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, 1995
<TABLE>
<CAPTION>
Part I Page
- ------ ----
<S> <C> <C> <C>
Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security 17
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 18
Item 11. Executive Compensation 18
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 nationally and internationally. 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
advertising clients. The Company's strategy is to increase revenues by growing
its base businesses and by applying the capabilities of each business across
the other 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
1995, the Company had revenues of $532.9 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 New York Stock Exchange. 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 O of Notes to Consolidated Financial Statements for certain
financial information by business segment.
DIRECT MARKETING
General
Harte-Hanks operates a national and international 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. 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 a growing number of
international clients. In 1995, Harte-Hanks Direct Marketing had revenues of
$197.6 million, which accounted for approximately 37% of the Company's
revenues.
<PAGE> 4
4
Harte-Hanks Direct Marketing provides specialized services to assist its
customers in each step of the direct marketing process. 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. These services are outlined below:
Response Management
Harte-Hanks Response Management manages the inquiries clients receive from
their marketing efforts, whether it be from 1-800 numbers appearing in print or
broadcast ads or from trade shows, fax programs or World Wide Web sites. These
leads are qualified, tracked and distributed both to the appropriate sales
channels as well as to client management for analysis and decision making.
Using proprietary software, the Company also builds marketing databases for its
clients using the information gained from these response management activities.
These databases help clients measure the return on their marketing
communications and make more informed decisions about future marketing efforts.
In 1995, Internet services were developed for distributing sales leads,
creating and maintaining clients' Web pages, and developing seminar
registration forms. The Company also offers response management services in
Europe to its U.S. clients with international operations through a strategic
alliance with a firm in Hasselt, Belgium. An agreement reached in early 1995
gives Harte-Hanks the option to acquire the Belgian firm, Tele Support
Services.
The Company provides response management services in both its Austin and
Boston operations. The Austin operation serves primarily high technology
customers, while the Boston operation primarily serves the mutual fund
industry. Both operations expanded their facilities in 1995 to accommodate
growth.
Database
The Company builds customized marketing databases for specific clients and
provides them with easy-to-use tools to target and track their best customers
and prospects. Using proprietary name and address matching software, the
Company standardizes large numbers of customer records from multiple sources,
integrates them into a single database for each client and, if needed, appends
demographic and lifestyle information.
In most cases, these databases are delivered for use on clients' personal
computers, networks or workstations, where the Company's P/CIS(R) software
applications help clients predict the likely results of marketing promotions
and track recipients' behavior. In addition to building a client's database
and installing the software, Harte-Hanks Direct Marketing performs regular
database updates and operates as a service bureau for those clients who need
it. The Company also offers its stand-alone software Trillium(R) for clients
who want to integrate this capability into their data warehouses.
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5
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 modifying
its existing database technology. The Company currently provides database
services to the banking, retail, insurance, utilities, 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.
Marketing Planning and Analysis
Harte-Hanks Direct Marketing's newest specialized service offering
strengthens its ability to offer clients complete marketing solutions.
Marketing planning and analysis builds on the Company's existing strategic,
database and personalization offerings and serves as an extension of the
client's marketing arm. Specific products and services include tracking and
reporting, mailing analysis, modeling, database profiling, marketing
applications consulting and program development.
Research
Specializing in custom research for direct marketers, Harte-Hanks Market
Research provides clients an additional analytical tool to help define their
marketing objectives, develop effective programs, target the right prospects
and measure the results. Information gathered by the research operation can be
used to enrich clients' marketing databases integrating with the other services
provided by Harte-Hanks Direct Marketing's database, marketing planning and
analysis, and strategy service offerings.
Strategy
Harte-Hanks Direct Marketing helps businesses establish a strategic
framework for their marketing and communication programs combining the
capabilities of its research, creative and marketing planning and analysis
services. The Company develops customer acquisition, retention, activation and
ongoing frequency loyalty programs for its clients.
Creative
The Company provides full-service creative capabilities from developing
concepts to producing final layouts, copy and art. Direct marketing promotions
are created to meet specific client needs as well as ongoing direct marketing
programs. In both cases, emphasis is placed on measuring the results of
marketing communications.
Service Bureau
Harte-Hanks Direct Marketing prepares list selections, maximizes
deliverability and reduces clients' mailing costs through sophisticated postal
coding, elimination of duplicates and updating of addresses of people who move
through a non-exclusive National Change of Address license with the U.S.
<PAGE> 6
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Postal Service. The Company's service bureau offering also establishes the
framework for mailings to be personalized with individual messaging capability.
Media
In addition to being one of America's largest solo mailers, Harte-Hanks
Direct Marketing uses inbound telemarketing, the Internet and media planning
software to help clients develop the most effective media mix possible.
Print and Graphics
In addition to its creative capabilities, Harte-Hanks Direct Marketing
provides clients with full service print and graphic services, from typesetting
and production to laser form printing, envelope printing and sheetfed printing
of materials to be inserted into envelopes and mailed.
Personalization
Harte-Hanks Direct Marketing creates and delivers personalized
communication pieces to specific consumers and businesses selected from
clients' databases or other mailing lists, using sheetfed and continuous form
laser and inkjet printers.
Mail and Fulfillment
Six Harte-Hanks Direct Marketing production facilities across the nation
perform targeted mailing services for clients. The Company's mail tracking
ability helps ensure that client mailings reach their destinations on time.
Harte-Hanks Direct Marketing also operates fulfillment services to distribute
literature, product samples and other client materials to consumers who respond
to promotional campaigns or request information.
Logistics
Harte-Hanks Direct Marketing arranges the transportation of time-sensitive
advertising materials to post offices, newspapers and mail processing
facilities nationwide. By controlling this final stage of the print
distribution process, the Company maximizes the on-time delivery of its
clients' materials while keeping costs to a minimum. Proprietary software is
used to lower customers' transportation and postage costs by optimizing routes,
co-mingling freight and entering mail into the mailstream as close as possible
to its destination.
Sales and Marketing
Harte-Hanks' national direct marketing sales force is headquartered in
Cincinnati, Ohio, with database sales offices maintained throughout the United
States, and in Toronto, London and Sao Paulo, Brazil. 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. The sales force is supported by employees in each
<PAGE> 7
7
core service. 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
Direct marketing services are provided at the following facilities:
<TABLE>
<S> <C>
Billerica, Massachusetts (Boston) INTERNATIONAL SALES OFFICES
Brockton, Massachusetts (Boston) Toronto, Canada
Austin, Texas London, England
Jacksonville, Florida Sao Paulo, Brazil
Cincinnati, Ohio
River Edge, New Jersey REGIONAL SALES OFFICES
New York, New York Harrisburg, Pennsylvania
Baltimore, Maryland Chicago, Illinois
Forty Fort, Pennsylvania Plano, Texas
Dallas/Fort Worth, Texas Wilmington, Delaware
Fullerton, California Fredericksburg, Virginia
Deerfield Beach, Florida San Diego, California
Bloomfield, Connecticut
</TABLE>
The Company continued to support its growth with facility expansions at a
number of locations during 1995. In Boston, both the database and response
management operations expanded into nearby second facilities. The response
management operation in Austin moved into a state-of-the-art new building. In
Jacksonville, Florida, ground was broken on a new facility to house many of
Harte-Hanks Direct Marketing's service capabilities under one roof. The New
Jersey research operation moved into a larger facility. Outside the United
States, the Company's database service established a presence in a third
international market, Brazil. Meanwhile, the London area sales group
relocated to larger new offices.
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, its industry focus 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.
On February 4, 1996 the Company entered into a definitive agreement providing
for the merger of DiMark, Inc. with a wholly owned subsidiary of Harte-Hanks in
a stock-for-stock transaction. DiMark had net sales and net income of $73.4
million and $5.1 million, respectively, for the year ended February 28, 1995.
For the nine months ended November 30, 1995, DiMark had net sales of $56.6
million and net income of $3.6 million. The merger is expected to be
<PAGE> 8
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consummated in late spring 1996, subject to approval by the stockholders of
both companies. DiMark, Inc. provides a full range of outsource marketing and
database services to clients in the insurance, healthcare, pharmaceutical,
financial services and telecommunications industries, as well as direct
response printing services.
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, 1995, 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 63% of these households.
Harte-Hanks publishes 570 individual shopper editions each week
distributed to zones of approximately 12,100 households each. This allows
single-location, local advertisers to saturate a single geographic zone, while
enabling multiple-location advertisers to saturate multiple zones. This unique
delivery system gives large and small advertisers alike a cost-effective way to
reach their target markets. The Company believes that its zoning capabilities
and production technologies have enabled it to saturate and target geographic
areas allowing its advertisers to effectively target their customers. The
Company's strategy in its shopper business is to increase its share of local
advertising in its existing circulation areas, and, over time, increase
circulation through expansion into contiguous areas and make selective
acquisitions. In 1995, Harte-Hanks shoppers had revenues of $185.0 million and
accounted for approximately 35% of the Company's revenues.
Since the beginning of 1993, 1.0 million households were added through
internal expansion, primarily in Southern California, Miami/Ft. Lauderdale and
Northern California. The Company believes that this expansion will provide
increased revenue and operating income as the publications in these areas
mature.
Publications
Harte-Hanks shoppers are published in Southern California, Northern
California, Miami/Ft. Lauderdale and Dallas/Fort Worth. The Southern
California unit accounted for 70% of shopper revenues in 1995.
<PAGE> 9
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The following table sets forth certain information with respect to shopper
publications:
<TABLE>
<CAPTION>
December 31,
1995 Number of
Market Publication Name Circulation Zones
- ------ ---------------- ----------- ---------
<S> <C> <C> <C>
Southern California The Original PennySaver 4,344,000 372
Northern California Potpourri 1,052,000 79
Miami/Ft. Lauderdale The Flyer 1,052,000 83
Dallas/Fort Worth Shopper's Guide 421,000 36
--------- ---
Total 6,869,000 570
</TABLE>
Shopper publications consist of classified and display advertising and
are delivered to consumers' homes by third-class saturation mail. The typical
shopper publication contains over 40 pages 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 ads from 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 a
pay-per-call format.
The Company has acquired, developed and applied innovative technology
and customized equipment in the publication of its shoppers, contributing to
efficiency and growth. A proprietary pagination system, jointly developed by
the Company and a software company, became fully operational for the shoppers
in Southern California and Miami/Ft. Lauderdale in 1995. This software makes
it possible for the hundreds of weekly zoned editions to be designed, built and
output to plate-ready negatives in a paperless, digital environment.
Automating the production process in this manner saves on labor, newsprint and
overweight postage. This software also allows for better ad tracking,
immediate checks on individual zone and ad status, and more on-time press
starts with less manpower. In addition, the software allowed the shoppers to
group ads from individual zoned editions into newsstand products in Florida and
Southern California, providing customers an additional distribution channel and
creating a new revenue source.
In another example of technological innovation, Harte-Hanks Shoppers
expanded the ways its advertisers can reach prospective customers by
establishing World Wide Web sites for the Southern California PennySaver and
Northern California Potpourri. Both sites offer electronic access to ads from
that week's printed publications. Visitors to these sites can search the
overall database for specific types of products or services.
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
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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.
Shopper sales teams developed new ways to service advertisers with the
addition of sales specialists with expertise in key industries. These sales
specialists are being used to serve automotive, real estate, employment and
healthcare advertisers.
The Company utilizes a proprietary sales and marketing system (SAMS) to
enter customer orders directly from the field, instantly checking space
availability, ad costs and other pertinent information. A paperless order
entry system on a Unix platform, SAMS also has built-in error-reducing
safeguards, minimizing costly sales adjustments. In addition, SAMS facilitates
placement of advertising in multiple zoned editions. The Company has expanded
SAMS so that, in addition to allowing advertising information to be entered for
immediate publication, it will build a relational customer database, enabling
sales personnel to access customer history by designated variables, thereby
identifying similar potential customers and assisting follow-up with existing
customers.
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 21 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 one daily and seven
nondaily newspapers in higher-income suburban areas of Dallas. In all of its
daily newspaper markets, the Company realizes additional revenue from niche
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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 and customer base.
The Company's five principal newspapers have achieved high levels of
paid household penetration. For 1995, circulation penetration in the city
zones for the five principal newspapers ranged from 49% to 70% on a daily basis
and from 66% to 82% on Sunday, providing advertisers with broad coverage of
these local markets. According to Standard Rate & Data's Circulation '96, 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 20 in the
United States based on household penetration. Harte-Hanks' Community
Newspapers in suburban Dallas concentrate on local news stories and other items
of interest to those affluent 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 1995, Harte-Hanks newspapers had revenues of $125.1
million and accounted for approximately 23% 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 85% of Harte-Hanks' newspaper revenues in 1995.
The following table sets forth certain information with respect to the
Company's five principal newspapers for 1995:
<TABLE>
<CAPTION>
Average
Average Paid Circulation
Circulation(1) Penetration(2)
------------------- ----------------
Publication Daily Sunday Daily Sunday
- ----------- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Corpus Christi Caller-Times 66,724 94,614 49% 66%
(Founded 1877)
Abilene Reporter-News 42,606 52,881 60% 75%
(Founded 1881)
Anderson Independent-Mail 42,273 48,510 70% 79%
(Founded 1899)
Wichita Falls Times Record News 38,423 46,654 62% 76%
(Founded 1907)
San Angelo Standard-Times 32,833 39,472 66% 82%
(Founded 1884)
</TABLE>
(1) In 1995, approximately 86% of daily circulation was home-delivered, with
the remaining 14% 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.
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The Corpus Christi Caller-Times is a morning newspaper serving Corpus
Christi and 17 surrounding counties in South Texas. For the sixth time in the
past seven years, the Press Club of Dallas named the Caller-Times the best
daily newspaper in Texas with circulation under 100,000. Average Sunday
circulation of the Sunday edition of the Caller-Times increased from 87,745 in
1988 to 94,614 in 1995. The Corpus Christi metropolitan statistical area had
an estimated population of 378,900 as of December 31, 1994. 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. 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 and a
15-county regional trade market in Central West Texas. The Abilene
metropolitan statistical area had an estimated population of 122,200 as of
December 31, 1994. The Reporter-News was a finalist in the Press Club of
Dallas selections as best daily newspaper in Texas for its circulation size in
both 1994 and 1995. Individuals among the news staff won first place awards in
the same competition. The Abilene economy is built around the oil and gas
industry, agriculture, light industry, military, regional health services and
higher education.
The Anderson Independent-Mail is a morning newspaper serving Anderson,
South Carolina and its surrounding area. The Independent-Mail has a record of
product improvement and circulation growth spanning six years. The
Independent- Mail has won the National Headliner Award for outstanding
reporting in its circulation class in the United States two of the last four
years. In 1994, the newspaper won the J. C. Penney/University of Missouri
Lifestyle Award for excellence in lifestyle sections and has placed among the
Associated Press top 20 sports sections in the United States in its circulation
class in each of the last six years. Anderson County had an estimated
population of 153,600 as of December 31, 1994 and is the retail and
manufacturing center for a nine-county area covering the northeast corner of
Georgia and the northwest corner of South Carolina. The market, astride the
Interstate 85 business corridor between Atlanta, Georgia and Charlotte, North
Carolina, includes major industries producing rubber products, textiles and
automotive parts and supplies. Service industries focus on government,
healthcare, recreation and retirement. The market is also home to Clemson
University.
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 paid household penetration in its metropolitan statistical area
in both Sunday and daily circulation categories. The Wichita Falls
metropolitan statistical area had an estimated population of 133,000 as of
December 31, 1994. 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. The base has undergone a $250 million facility expansion, which has
made it the largest training center in the United States Air Force. The market
also benefits from the construction of an $80 million Texas Department of
Criminal Justice unit, which was completed in May 1995.
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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 102,800 as of December 31, 1994. San Angelo has
a diversified economic base consisting of petroleum, military, regional health
services, agriculture, light industry and higher education. Goodfellow Air
Force Base is a significant factor in the San Angelo economy. Currently, there
are over $11 million in building projects at Goodfellow, including a new civil
engineering complex and upgrading of all communications infrastructure which
will support further expansions of missions at the base. In late 1995, a
telecommunications company moved its largest field operation to San Angelo and
created 200 new jobs with more anticipated.
Harte-Hanks Community Newspapers
The Company publishes one daily and seven nondaily newspapers in the
higher income suburban communities of northern Dallas. Harte-Hanks Community
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 community newspapers compete with daily newspapers published
in the metropolitan Dallas area as well as zoned editions and other nondaily
products. The Company's nondaily newspapers are published either once or twice
a week, and many of them are distributed free of charge.
The following table sets forth certain information with respect to the
Company's community newspapers for 1995:
<TABLE>
<CAPTION>
Type of Average
Location Publication Name Publication Circulation
- -------- ---------------- ----------- -----------
<S> <C> <C> <C>
Dallas Area Plano Star Courier Daily 12,483
Sunday 13,874
Mesquite News Nondaily 30,800
Lewisville Leader Nondaily 26,500
McKinney Messenger Nondaily 8,016
Frisco Life Nondaily 4,500
The Colony Leader Nondaily 4,300
Coppell Gazette Nondaily 4,300
Allen American Nondaily 4,022
</TABLE>
Niche Publications and Services
In addition to its primary newspaper products, the Company publishes
numerous niche advertising and special interest publications in all of its
markets to achieve increased market coverage. The specialized publications
include newsstand publications, 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.
The Company's newspapers continue to grow their local direct marketing services
and will expand this in 1996 with the installation of specialized printing
equipment in each of the principal markets. The Company also offers audiotext
"voice mail" services to readers and advertisers, and each newspaper now
provides advertising and information services on the World Wide Web.
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Sales and Marketing
The Company maintains local sales offices in each of its newspaper
markets. Each office has commissioned sales representatives dedicated
specifically to advertising or circulation sales. In 1995 the Company launched
its Potential Based Marketing strategy which uses databases of information to
support growth by examining the "potential" of its customers, products,
services and people. Harte-Hanks uses marketing techniques including programs
whereby an advertiser purchases a package consisting of multiple advertisements
over a specified period of time for a fixed budget amount. Harte-Hanks offers
a combination of products and services as part of these advertising programs.
The niche publications and services offer 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 leased
facilities in suburban Dallas. The Company made substantial investments in
prepress systems and equipment in 1995. These investments are expected to
increase productivity and shorten manufacturing time, allowing for later news
and advertising deadlines.
Competition
There are no competing daily newspapers in the markets where the Company
publishes its five principal newspapers. The Company's community newspapers
face increasing competition from the strong metropolitan daily newspaper in
Dallas, including its local editions. 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-TV, a CBS-affiliated VHF station in
San Antonio, Texas, the 37th largest television market in the United States
according to Nielsen Ratings Service. San Antonio is the business and retail
center for South Texas and has a diversified economy based on tourism,
military, healthcare and international trade. In 1995, Harte-Hanks Television
had revenues of $25.1 million, which accounted for approximately 5% of the
Company's revenues.
The Company believes that its market leadership results from strong
local news programming and highly visible community involvement and public
affairs projects. In 1995, KENS added a 5:30 a.m. newscast preceding its
existing weekday morning local news hour. Another half-hour local newscast
premiered at 4:30 p.m. weekdays in January, 1996. Altogether, KENS programs 24
hours a week of live, local news.
<PAGE> 15
15
KENS has been affiliated with CBS since the station's inception. In
1995, CBS placed third among the major networks in the primetime ratings. KENS
renegotiated its contract with CBS in September 1995 for a 10-year term.
Despite CBS's weak prime time performance Monday through Friday, KENS' late
night newscast finished 1995 as San Antonio's top rated newscast for the 23rd
consecutive year, growing its ratings 85% over the CBS prime time average. The
station was the only CBS affiliate in the 33 major metered markets to place
first in late news in the November 1995 rating sweeps, also ranking as the
network's highest rated late news affiliate in these markets.
According to the November 1995 Nielsen Ratings Index, KENS broadcasts to
a market of approximately 652,000 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 major national networks, a Fox
affiliate, two stations affiliated with Spanish language networks, three
independent stations and one public broadcasting station. Cable penetration in
the City of San Antonio is approximately 66%. San Antonio 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.
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. KENS-AM's
news and information format features simulcasts of KENS-TV's "Eyewitness News"
along with call-in talk shows, issues-oriented programming and expanded
advertiser information programs. Harte-Hanks expanded its radio commitment in
1995 by doubling KENS-AM's signal power.
The Company also offers video production and graphic services in its
full-service production facility. Video production services are provided for
programming, commercial and industrial applications and live satellite
uplinking, worldwide. KENS also operates a high-end print graphics facility,
providing print advertisers with complete ad design, production, color
separation and film output capabilities. KENS also offers CD-ROM production
and World Wide Web page design.
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 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
<PAGE> 16
16
are based primarily on the size of the market and the station's ability to
attract audiences as reflected in surveys made by national rating 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 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 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 66% penetration in the City of San Antonio,
according to a report published by Nielsen Ratings in November 1995.
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. The recently enacted Telecommunications Act of 1996
("Telecommunications Act") effected sweeping changes in the Communications Act,
many of which will influence the Company's broadcasting operations. Under the
Telecommunications Act, television and radio broadcast station licenses are
issued for a maximum term of eight years and are renewable upon application for
additional eight-year terms. The KENS-TV broadcast station license was renewed
in September 1993 for a term expiring August 1, 1998. 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 challenged
by either a third party or the FCC. 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, as amended by the Telecommunications Act, a broadcast
license may not be granted to or held by a corporation if more than one-fifth
of its capital stock is owned or voted by aliens or their representatives, by
foreign governments or their representatives, or by non-U.S. corporations; or a
broadcast license also may not be granted to or held by corporation that is
controlled, directly or indirectly, by any other corporation if more than
one-fourth of capital stock of the parent corporation is owned or voted by
aliens or their
<PAGE> 17
17
representatives, by foreign governments or their representatives, or by
non-U.S. corporations unless the FCC finds that the public interest will be
served. 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
Company's AM 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, 1995, Harte-Hanks employed 4,957 full-time employees
and 670 part-time employees, as follows: direct marketing -- 2,076 full-time
and 221 part-time employees; shoppers -- 1,443 full-time and 259 part-time
employees; newspapers -- 1,267 full-time and 178 part-time employees;
television -- 146 full-time and 12 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 facilities nationwide containing aggregate space of
approximately 2.5 million square feet. Approximately 1.7 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, television and
Southern California shopper operations, are owned by the Company.
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, 1995 at page 32.
<PAGE> 18
18
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from the Company's Annual Report to
Stockholders for the year ended December 31, 1995 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, 1995 at pages 13 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, 1995, 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, 1995 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.
ITEM 10. MANAGEMENT
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 29, 1996 for the April 30, 1996 Annual
Meeting of Stockholders under the caption "Management -- Directors and
Executive Officers" on pages 54 and 55.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 29, 1996 for the April 30, 1996 Annual
Meeting of Stockholders under the caption "Executive Compensation and Other
Information" on pages 56 through 60.
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 29, 1996 for the April 30, 1996 Annual
Meeting of Stockholders under the caption "Security Ownership of Management and
Principal Stockholders" on pages 61 and 62.
<PAGE> 19
19
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, 1995 attached hereto:
Consolidated Balance Sheets, December 31, 1995 and 1994
Consolidated Statements of Operations, Years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows, Years ended December 31,
1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity, Years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) The following accountants' report and financial schedule for
years ending December 31, 1995, 1994 and 1993 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> 20
20
(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(l) 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(l) 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(l) to the Company's
10-Q for the quarter ended June 30, 1993 and incorporated
by reference herein).
</TABLE>
<PAGE> 21
21
(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(l) 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(l) to the Company's Form 10-Q for the quarter
ended September 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> <C>
10(l) 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(l) 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).
10(n) Second Amendment to Third Amended and Restated Loan
Agreement dated as of February 2, 1995 among the
Company, NationsBank of Texas, N.A., National
Westminster Bank USA, The Bank of Nova Scotia, The
First National Bank of Boston, Bank of Hawaii, The
Bank of Tokyo, LTD., Dallas Agency, Corestates Bank,
N.A. and CIBC Inc. and Toronto-Dominion (Texas), Inc.
in its Individual Capacity and as Agent (filed as
Exhibit 10(n) to the Company's Form 10-Q for the quarter
ended March 31, 1995 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. 48
*23 Consent of KPMG Peat Marwick. 49
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. 50
</TABLE>
____________________
*Filed herewith.
<PAGE> 23
23
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth
quarter of 1995.
(c) Exhibits -- The response to this portion of Item 14 is
submitted as separate section of this report on pages 27 to
50.
(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 27, 1996
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 24, 1996, except as to Note M of the consolidated
financial statements, which is as of February 4, 1996, we reported on the
consolidated balance sheets of Harte-Hanks Communications, Inc. and
subsidiaries as of December 31, 1995 and 1994 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, 1995, as contained in the
1995 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 1995. 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.
KPMG Peat Marwick LLP
San Antonio, Texas
January 24, 1996
<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, 1995... $2,910 $3,362 $3,988 $2,284
====== ====== ====== ======
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
====== ====== ====== ======
</TABLE>
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11 - Statement Regarding Computation of Net Income (Loss) Per
Common Share.
13 - Annual Report to Securityholders.
21 - Subsidiaries of the Company.
23 - Consent of KPMG Peat Marwick.
27 - Financial Data Schedule
</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,
---------------------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Income before extraordinary item.......... $33,985 $23,822 $(45,472)
Extraordinary item........................ -- -- (7,393)
------- ------- --------
Net income (loss)......................... $33,985 $23,822 $(52,865)
======= ======= ========
Shares used in net earnings per
share computations...................... 30,280 28,569 19,557
======= ======= ========
Per share:
Income before extraordinary item.......... $ 1.12 $ 0.83 $ (2.33)
Extraordinary item........................ -- -- (.37)
------- ------- --------
Net income (loss)......................... $ 1.12 $ 0.83 $ (2.70)
======= ======= ========
</TABLE>
COMPUTATION OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Average outstanding common shares......... 28,928 27,335 19,310
Average common equivalent shares --
dilutive effect of option shares........ 1,352 1,234 --
Dilutive effect of options issued in
the preceding twelve months prior
to the initial public offering.......... -- -- 247
------ ------ -------
Shares used in net earnings
per share computations.................. 30,280 28,569 19,557
====== ====== ========
</TABLE>
FULLY DILUTED
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Income before extraordinary item.......... $33,985 $23,822 $(45,472)
Extraordinary item........................ -- -- (7,393)
------- ------- --------
Net income (loss)......................... $33,985 $23,822 $(52,865)
======= ======= ========
Adjusted net income (loss)
for interest on convertible note........ $34,297 $24,572 $(52,865)
======= ======= ========
Shares used in net earnings
per share computations.................. 31,197 30,732 19,557
======= ======= ========
Per share:
Income before extraordinary item.......... $ 1.10 $ 0.80 $ (2.33)
Extraordinary item........................ -- -- (.37)
------- ------- --------
Net income (loss)......................... $ 1.10 $ 0.80 $ (2.70)
======= ======= ========
</TABLE>
COMPUTATION OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Average outstanding common shares......... 28,928 27,335 19,310
Average common equivalent shares --
dilutive effect of option shares........ 1,405 1,254 --
Dilutive effect of convertible note....... 864 2,143 --
Dilutive effect of options issued
in the preceding twelve months prior
to the initial public offering.......... -- -- 247
------ ------ ------
Shares used in net earnings
per share computations.................. 31,197 30,732 19,557
====== ====== =======
</TABLE>
Note: All share and per share amounts have been restated retroactively to
reflect a 3 for 2 stock split effected as a 50% stock dividend on
December 15, 1995.
27
<PAGE> 1
EXHIBIT 13
[FINANCIAL CONTENTS]
<TABLE>
<S> <C>
Management's Discussion and Analysis . . . . . . . . . 13
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
The Company's overall performance reflects its commitment to its
growth strategy of being a market leader, introducing new products and entering
new markets, investing in technology and people and increasing shareholder
value. The pursuit of this growth strategy was accelerated in 1993 when the
Company issued shares of its common stock in an initial public offering.
Proceeds from the offering enabled the Company to increase its financial
flexibility and reduce debt levels. As a result of this growth strategy, the
Company's revenues have grown 37% since December 31, 1992, excluding the
results of the units sold by the Company during that time. On the same basis,
operating income increased 56%.
In 1993, the Company redeemed all of its $200 million principal amount
11 7/8% Subordinated Debentures. Half of this redemption 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. In addition, in May 1995, the Company's 61C4% Convertible
Notes due 2002 in the principal amount of $20 million were converted into
2,142,857 shares of common stock, resulting in annual interest expense savings
of $1.3 million. As a result of these redemptions, cash flow generated from
operations and the net proceeds from the sale of the Boston community
newspapers, the Company reduced its total borrowings from $394.0 million at
December 31, 1992 to $220.4 million at December 31, 1995, while funding $77.6
million of capital investments and acquisitions.
On February 4, 1996 the Company entered into a definitive agreement
providing for the merger with DiMark, Inc. with a wholly owned subsidiary of
Harte-Hanks in a stock-for-stock transaction. DiMark had net sales and net
income of $73.4 million and $5.1 million, respectively, for the year ended
February 28, 1995. For the nine months ended November 30, 1995, DiMark had net
sales of $56.6 million and net income of $3.6 million. The merger is expected
to be consummated in late spring 1996, subject to approval by the stockholders
of both companies.
Harte-Hanks derives the majority of its revenues from the sale of
advertising and direct marketing services. In addition, the Company's
newspapers generate 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 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 and, to a lesser
extent, in the industries that it serves. The Company's principal expense items
are payroll, postage and paper. Paper prices increased in both 1994 and 1995,
and the Company will experience the effects of those increases and possibly
others in 1996. 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 1995 CHANGE 1994 CHANGE 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 532,852 3.7% $ 513,630 10.8% $ 463,510
Operating expenses 458,818 2.0% 449,616 9.2% 411,587
---------- ---------- -----------
Operating income $ 74,034 15.7% $ 64,014 23.3% $ 51,923
========== ========== ===========
Net income $ 33,985 42.7% $ 23,822 138.4% $ 9,991
========== ========== ===========
Earnings per share - fully diluted $ 1.10 37.5% $ .80 70.2% $ .47
========== ========== ===========
</TABLE>
Overall growth in the Company's 1995 revenues and operating income
resulted from increased business with both new and existing customers, new
products and services as well as advertising and circulation rate increases.
The most dramatic growth occurred in the direct marketing business segment with
revenue and operating income increases of 17.8% and 44.0%, respectively.
Included in 1995 results is the effect of the sales of the Company's suburban
Boston newspapers and a local hand distribution advertising business in the
first and third quarters of 1995, respectively. The divestitures resulted in
gains of $3.1 million, net of $10.6 million in income taxes. Excluding these
net gains on divestitures, net income was $30.9 million, or $1.00 per share in
1995. All earnings per share and share information have been restated to
reflect the three-for-two stock split effected December 15, 1995 in the form of
a dividend.
Excluding the results of the Boston community newspapers sold on March
31, 1995 (See Note B - Divestitures in Notes to Consolidated Financial
Statements), 1995 consolidated revenues grew 8.6% and operating income grew
18.2%. Operating expenses, excluding the results of the Boston newspapers,
rose correspondingly with the growth in overall business as well as due to
higher paper prices and postal rates experienced throughout the year.
Each business segment contributed to the Company's revenue and
operating income growth in 1994 as compared to 1993. 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
also were affected by the February 1994 divestiture of the Company's smallest
shopper, located in Tucson.
================================================================================
DIRECT MARKETING
Direct marketing operating results were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
IN THOUSANDS 1995 CHANGE 1994 CHANGE 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 197,598 17.8% $ 167,779 29.4% $ 129,626
Operating expenses 169,726 14.4% 148,418 27.1% 116,806
---------- ---------- -----------
Operating income $ 27,872 44.0% $ 19,361 51.0% $ 12,820
========== ========== ===========
</TABLE>
Direct marketing's revenue growth of $29.8 million, or 17.8%, was
generated primarily through the sale of database and response management
products and services along with other services to customers in the financial
services, high technology and retail industries. Management and coordination of
mailings outsourced for certain clients also contributed to revenue growth. The
addition of new customers, increased business with existing customers through
new products and services, cross-selling of services and the leveraging of the
Company's expertise in the international arena were also factors in 1995's
growth performance. Although the majority of direct marketing's revenue growth
came from existing operations, a portion of the increase was attributable to
the acquisitions of Select Marketing, Inc., an Austin, Texas response
management company that serves the high technology industry, and Steinert &
Associates, a New York City advertising and marketing communications firm, in
October 1994 and January 1995, respectively. The increase was partially offset
by the absence of a local hand distribution advertising business sold in July
1995.
Operating expenses rose $21.3 million, or 14.4%, during 1995 due
primarily to revenue growth. Payroll costs were up $11.4 million, or 17.5%, as
a result of increased hiring. In addition, production and distribution costs
increased $5.2 million, or 8.3%, due to increased production levels. Also
contributing to higher operating expenses were $3.2 million of additional
general and administrative costs and increased depre-
29
<PAGE> 3
ciation expense of $1.2 million, supporting direct marketing's growth. Expanded
facilities and upgraded technology to support current and anticipated growth
also contributed to increased expenses. The acquisitions noted above were
another contributing factor. Slightly offsetting these cost increases were
decreased costs related to the July 1995 divestiture.
Direct marketing revenues increased $38.2 million, or 29.4%, in 1994
when compared to 1993. Revenue growth resulted from increased business with
both new and existing customers, particularly in services and products provided
to the retail, financial services and high technology industries. Revenue
growth was also enhanced by the acquisition of Direct Market Concepts, Inc. in
Jacksonville, Florida in April 1993 and the October 1994 response management
acquisition previously noted. Direct Market Concepts provides various direct
marketing services, primarily to financial institutions.
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.
Operating expenses were also impacted by the acquisitions.
On February 4, 1996 the Company entered into a definitive agreement
providing for the merger with DiMark, Inc. DiMark, Inc. provides a full range
of outsource marketing and database services to clients in the insurance,
healthcare, pharmaceutical, financial services and telecommunications
industries, as well as direct response printing services.
SHOPPERS
Shopper operating results, excluding the effect of the 1993 goodwill
write-down discussed below, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
IN THOUSANDS 1995 CHANGE 1994 CHANGE 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 185,045 4.9% $ 176,461 1.1 % $ 174,521
Operating expenses 165,025 4.0% 158,718 (0.2)% 159,080
---------- ---------- -----------
Operating income $ 20,020 12.8% $ 17,743 14.9 % $ 15,441
========== ========== ===========
</TABLE>
Revenues for the shopper business segment grew $8.6 million, or 4.9%,
in 1995 when compared to 1994. Excluding revenues from the Company's small
Tucson shopper that was sold in February 1994, revenues increased $9.5 million,
or 5.4%, as compared to 1994. Revenue growth was primarily attributable to
increased advertising rates in existing circulation zones, and, to a lesser
degree, increased volumes of the newsstand products now being produced in
portions of the Southern California, Northern California and Miami/Ft.
Lauderdale markets. At December 31, 1995, total weekly shopper household
circulation was 6.9 million.
Excluding operating expenses from the divested Tucson shopper, 1995
operating costs increased $7.1 million, or 4.5%. Postage costs rose $4.5
million due primarily to a 14% postage rate increase in January 1995. In
addition, higher paper and color printing costs contributed to higher operating
expenses. Paper costs increased $2.6 million due to price increases partially
offset by reduced volumes due to new pagination technology used by the
Company's Southern California and Miami shoppers. Pagination technology permits
a more efficient publication design, reducing the overall number of pages.
Color printing costs increased $1.5 million due to higher rates and increased
color volumes. Partially offsetting the increased operating costs was a
reduction in payroll costs of $1.7 million due to reduced headcount, primarily
as a result of investments in technology and changes in commission plans.
Excluding revenues from the divested Tucson shopper, 1994 revenues
grew $7.0 million, or 4.1%, over 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. 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.
30
<PAGE> 4
NEWSPAPERS
Newspaper operating results, excluding the effect of the 1993 goodwill
write-down discussed below, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
IN THOUSANDS 1995 CHANGE 1994 CHANGE 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 125,077 (11.1)% $ 140,761 7.0% $ 131,545
Operating expenses 97,796 (14.5)% 114,398 4.2% 109,812
---------- ---------- -----------
Operating income $ 27,281 3.5 % $ 26,363 21.3% $ 21,733
========== ========== ===========
</TABLE>
Newspaper revenues decreased $15.7 million, or 11.1%, in 1995 when
compared to 1994. This decrease was due to the March 1995 divestiture of the
Company's Boston community newspapers. Excluding the results of the Boston
newspapers, 1995 revenues increased $6.8 million, or 6.1%, as compared to 1994.
Classified advertising revenues grew 8.4% as a result of increases both in
volumes and rates. The classified revenue growth was fueled by increases in
display advertising, particularly in the help wanted and automotive categories.
Retail advertising revenues were flat. Insert revenues increased 5.5% as a
result of higher volumes. In addition, niche and specialty product revenues
grew primarily due to a direct mail initiative into the Rio Grande Valley,
begun in 1994, and, to a lesser extent, audiotext services which represented a
new revenue stream for the newspapers in 1994. Circulation revenues increased
9.8% in 1995, reflecting home-delivery price increases implemented in the fall
of 1994 and, to a lesser degree, home-delivery price increases in the fall of
1995.
Newspaper operating expenses decreased $16.6 million, or 14.5%, for
1995 as compared to 1994. Excluding the divested Boston newspapers, operating
expenses increased $4.4 million, or 5.2%, over comparable 1994 levels.
Newsprint costs increased $3.1 million, or 22.8%, over 1994 as a result of
higher average newsprint prices offset slightly by reduced volumes. The
reduction in volumes was attributable to reduced commercial printing volumes as
well as to newsprint savings from a new press installed in July 1994 at the
Corpus Christi Caller-Times and various operating initiatives to control
newsprint consumption. In addition, costs associated with the direct mail
program rose due to increased volumes as well as higher postage costs resulting
from the January 1995 postal rate increase.
Newspaper revenues increased $9.2 million, or 7.0%, in 1994 when
compared to 1993. Classified advertising revenues increased 13.6% as a result
of both higher volumes and rates. In particular, classified revenue growth was
led by strong automotive volumes and, to a lesser extent, help wanted volumes
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 revenues from the direct mail program in
the Rio Grande Valley established in 1994. Circulation revenues grew 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 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.
31
<PAGE> 5
TELEVISION
Television operating results were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
IN THOUSANDS 1995 CHANGE 1994 CHANGE 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 25,132 (12.2)% $ 28,629 2.9% $ 27,818
Operating expenses 17,753 (9.8)% 19,683 0.2% 19,654
---------- ---------- -----------
Operating income $ 7,379 (17.5)% $ 8,946 9.6% $ 8,164
========== ========== ===========
</TABLE>
Television revenues decreased $3.5 million, or 12.2%, in 1995 when
compared to 1994. Contributing to these results were lower national advertising
revenues and the effects of weak CBS network performance. In addition, the
first quarter of 1994 benefitted from CBS coverage of the National Football
League playoffs and winter Olympics, while the full year 1994 benefitted from
political advertising. Television revenues were also affected by the absence of
a direct mail publication in 1995. Slightly offsetting the decreases were
increased network revenues resulting from a newly negotiated network
affiliation agreement.
Operating expenses decreased $1.9 million, or 9.8%, when compared to
1994. The decrease was attributable to lower revenue related payroll costs and
direct mail publication production costs. Also contributing to the decrease
were lower film costs.
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 revenue 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.
================================================================================
GAINS ON DIVESTITURES
In March and July 1995, respectively, the Company sold its suburban
Boston community newspapers and a small local hand distribution advertising
business. As a result of these transactions, the Company recognized gains on
divestitures of $3.1 million, or 10 cents per share, net of $10.6 million of
income taxes. See Note B of Notes to Consolidated Financial Statements.
INTEREST EXPENSE
Interest expense decreased $0.7 million in 1995 as compared to 1994
due primarily to lower debt levels partially offset by higher interest rates
experienced during 1995. In May 1995, the Company's 6-1/4% Convertible Notes due
2002 in the principal amount of $20 million were converted into 2,142,857
shares of common stock, resulting in annual interest savings of $1.3 million.
Interest expense decreased $13.5 million in 1994 primarily as a result
of 1993 redemptions of the Company's 11-7/8% Subordinated Debentures. In August
1993, $100 million of the Debentures were redeemed 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 increased $14.5 million in 1995 when
compared to 1994. Income tax expense for 1995 included $10.6 million of income
taxes relating to the gains on divestitures. The remaining increase in income
tax expense during 1995 and the increase of $11.5 million in income tax expense
relating to income before extraordinary items in 1994 were due to increased
income levels experienced during each of those periods.
GOODWILL WRITE-DOWN
In connection with the Company's review of the carrying amount of its
investments, including assigned goodwill, during the second quarter of 1993,
the Company determined that goodwill associated with certain of its investments
should be written down. That decision resulted in a charge of $55.5 million.
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. These projections were compared to corresponding
net book values of fixed assets and unamortized goodwill balances. For
investments with projected undiscounted cash flows less than net book values of
fixed assets and unamortized goodwill balances, the net goodwill balances were
reduced 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 trends of historical performance and management's estimate of future
performance of the
32
<PAGE> 6
investments, as well as existing and anticipated competitive and economic
conditions. 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 1995 included $23.2 million for capital
expenditures and an acquisition. The capital expenditures consisted primarily
of new computer systems for the direct marketing business to increase capacity
to support a growing customer base. The Company also invested in laser printing
equipment as well as the expansion of its database and response management
facilities and other locations. Other expenditures included investments in
pagination technology and order-entry systems at its shopper in Miami/Ft.
Lauderdale and classified advertising systems and distribution center
expansions in its newspaper business.
The investments in 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for 1995 was $36.5 million. Net
cash inflows for investing activities were $17.9 million for 1995. Investing
activities consist primarily of capital expenditures, acquisitions and
divestitures. Included in investing activities was $42.9 million in proceeds
from the sale of property, plant and equipment and divested assets. See above
discussion of capital expenditures under "Capital Investments." Cash provided
from operating activities and the sale of the Boston community newspapers was
used to reduce borrowing under the Company's credit facility and to make
capital investments.
Cash provided by operating activities for 1994 and 1993 was $49.0
million and $26.4 million, respectively. Net cash outflows for investing
activities in 1994 and 1993 were $23.6 million and $34.7 million, respectively,
and consisted principally of the purchase of equipment and acquisitions.
Capital resources are also available for and provided through the
Company's unsecured credit facility. On February 2, 1995, the Company entered
into a $320 million variable rate revolving loan commitment that decreases by
$70.4 million in 1998, $76.8 million in 1999, $83.2 million in 2000 and $89.6
million in 2001. The February 1995 agreement amended the $320 million credit
facility consisting of a $220 million revolving loan commitment that was to
expire December 31, 1999 and a $100 million term loan. The Company realized
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, 1995, the Company had $106 million of
unused borrowing capacity under its credit facility, of which $4.7 million was
reserved to serve as backup for the Company's other short-term borrowing
facilities.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which requires adoption of the disclosure provisions
no later than fiscal years beginning after December 15, 1995. Companies are
permitted to continue to account for such transactions under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
but will be required to disclose in a note to the financial statements pro
forma net income and, if presented, earnings per share as if the company had
applied the new method of accounting, as outlined in SFAS No. 123. The Company
has not yet determined the effect the new standard will have on net income and
earnings per share should it elect to make such a change. Adoption of the new
standard will have no effect on the Company's cash flows.
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 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 N to Consolidated Financial
Statements.
PENDING MERGER
On February 4, 1996 the Company entered into a definitive agreement
with DiMark, Inc. providing for the merger of DiMark with a wholly owned
subsidiary of the Company in a stock-for-stock transaction to be accounted for
as pooling of interests. DiMark stockholders will receive, in a fixed exchange
ratio, .656 of a share of Harte-Hanks common stock for each share of DiMark
common stock.
33
<PAGE> 7
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,710 $ 4,391
Accounts receivable (less allowance for doubtful
accounts of $2,284 in 1995 and $2,910 in 1994) . . . . . . . . . . . . . . 69,995 70,929
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,285 13,454
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,973 5,904
Current deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . 6,809 6,808
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,423 4,143
---------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,195 105,629
---------- -----------
Property, plant and equipment
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,260 10,352
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . 38,618 42,701
Equipment and furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,119 140,175
---------- -----------
184,997 193,228
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . 98,263 104,283
---------- -----------
86,734 88,945
Construction and equipment installations in progress . . . . . . . . . . . . 1,174 2,333
---------- -----------
Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . 87,908 91,278
---------- -----------
Intangible and other assets
Goodwill (less accumulated amortization
of $98,201 in 1995 and $104,557 in 1994) . . . . . . . . . . . . . . . . . 271,511 290,335
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,101 9,656
---------- -----------
Total intangible and other assets . . . . . . . . . . . . . . . . . . . . 276,612 299,991
---------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 477,715 $ 496,898
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,029 $ 31,229
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . . 19,057 17,996
Customer deposits and unearned revenue . . . . . . . . . . . . . . . . . . . 11,585 12,527
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762 1,867
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 6,947 7,533
---------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 70,380 71,152
Long term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,040 292,858
Other long term liabilities (including deferred
income taxes of $9,914 in 1995 and $8,901 in 1994) . . . . . . . . . . . . . 22,201 25,248
---------- -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312,621 389,258
---------- -----------
Stockholders' equity
Common stock, $1 par value, authorized
50,000,000 shares. Issued and outstanding
1995: 29,991,709 shares; 1994: 18,342,503 shares . . . . . . . . . . . . . 29,992 18,342
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 156,192 144,350
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,090) (53,107)
Minimum pension liability adjustment . . . . . . . . . . . . . . . . . . . . - (1,945)
---------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 165,094 107,640
---------- -----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . $ 477,715 $ 496,898
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE> 8
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 532,852 $ 513,630 $ 463,510
Operating expenses
Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,843 193,874 174,557
Production and distribution . . . . . . . . . . . . . . . . . 189,692 179,699 165,993
Advertising, selling, general and administrative . . . . . . . 54,317 54,083 49,355
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 13,645 12,508 11,506
Goodwill amortization . . . . . . . . . . . . . . . . . . . . 9,321 9,452 10,176
Goodwill write-down . . . . . . . . . . . . . . . . . . . . . - - 55,463
----------- ---------- -----------
458,818 449,616 467,050
----------- ---------- -----------
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . 74,034 64,014 (3,540)
----------- ---------- -----------
Other expenses (income)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . 16,675 17,364 30,872
Interest income . . . . . . . . . . . . . . . . . . . . . . . (246) (154) (160)
Gains on divestitures . . . . . . . . . . . . . . . . . . . . (13,747) - -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 1,044 1,142 865
----------- ---------- -----------
3,726 18,352 31,577
----------- ---------- -----------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . 70,308 45,662 (35,117)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . 36,323 21,840 10,355
----------- ---------- -----------
Income (loss) before extraordinary item . . . . . . . . . . . . . . 33,985 23,822 (45,472)
Extraordinary item - Loss due to early extinguishment of debt,
net of income tax benefit of $4,319 . . . . . . . . . . . . . - - (7,393)
----------- ---------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,985 $ 23,822 $ (52,865)
=========== ========== ===========
Earnings (loss) per common share - primary
Income (loss) before extraordinary item . . . . . . . . . . . $ 1.12 $ .83 $ (2.33)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . - - (.37)
----------- ---------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 1.12 $ .83 $ (2.70)
=========== ========== ===========
Weighted average common and
common equivalent shares outstanding . . . . . . . . . . . 30,280 28,569 19,557
=========== ========== ===========
Earnings (loss) per common share - fully diluted
Income (loss) before extraordinary item . . . . . . . . . . . $ 1.10 $ .80 $ (2.33)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . - - (.37)
----------- ---------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 1.10 $ .80 $ (2.70)
=========== ========== ===========
Weighted average common and
common equivalent shares outstanding . . . . . . . . . . . 31,197 30,732 19,557
=========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE> 9
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 33,985 $ 23,822 $ (52,865)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . 13,645 12,508 11,506
Goodwill amortization . . . . . . . . . . . . . . . . . . 9,321 9,452 10,176
Amortization of option related compensation . . . . . . . 1,786 1,605 1,228
Film amortization . . . . . . . . . . . . . . . . . . . . 2,188 2,746 3,293
Deferred income taxes . . . . . . . . . . . . . . . . . . (285) (2,219) (585)
Other, net . . . . . . . . . . . . . . . . . . . . . . . 355 728 (223)
Gains on divestitures . . . . . . . . . . . . . . . . . . (13,747) - -
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 and divestitures:
Increase in accounts receivable, net . . . . . . . . . . (2,570) (7,898) (5,043)
Increase in inventory . . . . . . . . . . . . . . . . . . (9,095) (5,543) (46)
Increase in prepaid expenses
and other current assets . . . . . . . . . . . . . . . . (917) (648) (346)
Increase in accounts payable . . . . . . . . . . . . . . 262 6,010 1,784
Increase (decrease) in other accrued
expenses and other liabilities . . . . . . . . . . . . . (562) 8,129 (8,500)
Other, net . . . . . . . . . . . . . . . . . . . . . . . 2,107 262 (1,125)
----------- ---------- -----------
Net cash provided by operating activities . . . . . . . . . . . . . 36,473 48,954 26,429
----------- ---------- -----------
Cash Flows from Investing Activities
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . (5,760) (7,800) (10,896)
Purchases of property, plant and equipment . . . . . . . . . . . (17,424) (13,985) (21,689)
Proceeds from the sale of property, plant
and equipment and divested assets . . . . . . . . . . . . . 42,946 357 1,101
Payments on film contracts . . . . . . . . . . . . . . . . . . . (1,817) (2,122) (3,182)
----------- ---------- -----------
Net cash provided by (used in) investing activities . . . . . . 17,945 (23,550) (34,666)
----------- ---------- -----------
Cash Flows from Financing Activities
Long term debt borrowings . . . . . . . . . . . . . . . . . . . 895,464 657,695 580,615
Payments on debt, including current
maturities and financing costs . . . . . . . . . . . . . . . (948,371) (684,675) (659,663)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . 2,776 1,575 95,305
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . (1,968) - -
Payment of premium on early extinguishment of debt . . . . . . . - - (6,892)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . - - (15)
----------- ---------- -----------
Net cash provided by (used in) financing activities . . . . . . (52,099) (25,405) 9,350
----------- ---------- -----------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . 2,319 (1) 1,113
Cash at beginning of period . . . . . . . . . . . . . . . . . . 4,391 4,392 3,279
----------- ---------- -----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . $ 6,710 $ 4,391 $ 4,392
=========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE> 10
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, 1993 . . . . . . . . $ 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 $1.3 million . . - - - (1,945) (1,945)
Net income . . . . . . . . . . . . . . . . - - 23,822 - 23,822
-------- --------- -------- -------- ---------
Balance at December 31, 1994 . . . . . . . 18,342 144,350 (53,107) (1,945) 107,640
Common stock issued -- employee benefit
plans . . . . . . . . . . . . . . . . . . 94 1,836 - - 1,930
Exercise of stock options . . . . . . . . . 133 1,475 - - 1,608
Conversion of 6 1/4% convertible notes . . 1,429 18,525 - - 19,954
Dividends paid ($.067 per share) . . . . . - - (1,968) - (1,968)
Net income . . . . . . . . . . . . . . . . - - 33,985 - 33,985
Reduction of minimum pension liability . . - - - 1,945 1,945
Three-for-two stock split . . . . . . . . . 9,994 (9,994) - - -
-------- --------- -------- -------- ---------
Balance at December 31, 1995 . . . . . . . $ 29,992 $ 156,192 $(21,090) $ - $ 165,094
======== ========= ======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE> 11
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 stock of HHC
Holding Inc. was converted, on a share-for-share basis, into stock of
Harte-Hanks Communications, Inc.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods.
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:
<TABLE>
<S> <C>
Buildings and improvements . . . . 10 to 40 years
Equipment and furniture . . . . . 4 to 20 years
</TABLE>
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 undiscounted future
cash flows indicate that unamortized goodwill and the net book value of
long-lived assets will not be recovered, net goodwill is adjusted to an amount
consistent with projected discounted future cash flows. 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. The capitalized costs of film rights are recorded when the
licensed period begins and the film rights are available for use. 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
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 and the tax basis 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 the 61C4%
Convertible Notes due 2002 until May 1995, at which time the Company issued
shares of its common stock upon conversion of the notes. For 1993, fully
diluted and primary earnings (loss) per common share are the same because the
effect of the convertible notes was antidilutive.
STOCK SPLIT
In December 1995 the Company effected a three-for-two stock split in the form
of a dividend. All share, per share and average share information in the
Consolidated Financial Statements and the Notes thereto have been restated to
reflect the stock split.
38
<PAGE> 12
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE B - DIVESTITURES
In March and July 1995, respectively, the Company sold its suburban Boston
community newspapers and a small local hand distribution advertising business.
These sales resulted in gains on divestitures of $3.1 million, or 10 cents per
share, net of $10.6 million of income taxes.
NOTE C - LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
IN THOUSANDS 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving loan commitment, various
interest rates (effective rate of 6.2%
at December 31, 1995), due in
mandatory reductions beginning
June 30, 1998 through
December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $214,000 $ 34,600
Term loan, various interest rates . . . . . . . . . . . . . . . . . . . . . . . . - 100,000
Bank lines, various interest rates
(effective rates of 6.3% at
December 31, 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,700 95,000
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 41,538
61C4% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 20,000
Miscellaneous notes payable, interest
rates ranging from 7.3% to 8%, due
on various dates through 1998 . . . . . . . . . . . . . . . . . . . . . . . . 1,720 2,189
-------- ---------
220,420 293,327
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380 469
-------- ---------
$220,040 $ 292,858
======== =========
</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 decreases by $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% on the unused portion of the
commitment. As of December 31, 1995, the Company had $106 million of unused
borrowing capacity under its credit facility, of which $4.7 million was
reserved to serve as backup for the Company's outstanding 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
The Company has three separate short term borrowing arrangements. Under these
arrangements, the Company can borrow up to a maximum of $170 million. These
short term borrowings are classified as long term debt since it is the
Company's intent to maintain unused and available credit under its credit
facility in an amount equal to its outstanding short term borrowings.
6 1/4% CONVERTIBLE NOTES
In May 1995, the Company issued 2,142,857 shares of common stock upon
conversion of the $20 million principal amount of the Company's 61C4%
Convertible Notes. Accordingly, the Company transferred $20 million, less $0.1
million of unamortized issue costs, to stockholders' equity.
OTHER DEBT INFORMATION
As of December 31, 1995, the minimum annual maturities of long term debt
(excluding the borrowings under the Company's credit facility in effect
December 31, 1995) for each of the following years ending December 31 are as
follows:
<TABLE>
<CAPTION>
----------------------------------------------
IN THOUSANDS
----------------------------------------------
<S> <C>
1996 . . . . . . . . . . . . . . . $ 380
1997 . . . . . . . . . . . . . . . 100
1998 . . . . . . . . . . . . . . . 1,240
</TABLE>
Cash payments for interest were $16.6 million, $17.6 million and $40.8 million
for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company's credit facility contains certain restrictive covenants, including
limitations on additional indebtedness and payment of dividends, and requires
the Company to maintain certain financial ratios.
39
<PAGE> 13
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE D - INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,677 $ 20,719 $ 9,438
State and local . . . . . . . . . . . . . . . . . . . . . . . 4,931 3,413 1,210
----------- ---------- -----------
Total current . . . . . . . . . . . . . . . . . . . . . . . $ 36,608 $ 24,132 $ 10,648
=========== ========== ===========
Deferred
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,901) $ (2,377) $ 1,395
State and local . . . . . . . . . . . . . . . . . . . . . . . 1,616 85 (1,688)
----------- ---------- -----------
Total deferred . . . . . . . . . . . . . . . . . . . . . . $ (285) $ (2,292) $ (293)
=========== ========== ===========
</TABLE>
Included in income tax expense for 1995 is $10.6 million related to the gains
on divestitures. Included in 1993 income tax expense is an adjustment for
changes in federal tax laws of $0.1 million. 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 117C8% 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 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed expected income tax expense . . . . . . $24,608 35% $15,982 35% $(12,291) 35%
Effect of goodwill amortization . . . . . . . . . 3,165 5% 3,262 7% 3,528 (10)%
Net effect of state income taxes . . . . . . . . 4,178 6% 2,303 5% 656 (2)%
Effect of goodwill related to divestiture . . . . 4,307 6% - - - -
Change in the beginning of the year balance of the
valuation allowance . . . . . . . . . . . . 119 - (30) - (967) 3%
Effect of goodwill write-down . . . . . . . . . . - - - - 19,412 (55)%
Other, net . . . . . . . . . . . . . . . . . . . (54) - 323 1% 17 -
------- --- ------- --- -------- -----
Income tax expense for the period . . . . . . . . $36,323 52% $21,840 48% $ 10,355 (29)%
======= === ======= === ======== =====
</TABLE>
Excluding the effects of the gains on divestitures, the effective income tax
rate for 1995 was 45.4%.
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 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
State net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85 $ 2,736
Accrued benefit costs, primarily pension and vacation pay . . . . . . . . . . . 4,612 6,095
Accrued casualty and health insurance expense . . . . . . . . . . . . . . . . . 2,830 2,302
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793 1,018
State income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 849 656
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 315
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . 9,688 13,122
-------- --------
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . (60) (1,592)
-------- --------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,628 11,530
-------- --------
Deferred tax liabilities:
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . (12,484) (13,100)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (249) (523)
-------- --------
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . (12,733) (13,623)
-------- --------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,105) $ (2,093)
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1994 was $2.5
million. The valuation allowance at December 31, 1995 and 1994 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.
Cash payments for income taxes were $37.3 million, $22.2 million and $8.4
million in 1995, 1994 and 1993, respectively.
40
<PAGE> 14
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE E - EMPLOYEE BENEFIT PLANS
Under the Company's defined benefit pension plans, benefits are based on years
of service and the 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.
Net pension cost for all plans included the following components:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period . . . . . . . . . . . . . . . . . . . . . . $ 3,282 $ 3,572 $ 2,861
Interest cost on projected
benefit obligation . . . . . . . . . . . . . . . . . . . . . . 4,801 4,608 4,283
Actual return on plan assets . . . . . . . . . . . . . . . . . . . (10,786) 1,493 (3,700)
Net deferrals and amortization . . . . . . . . . . . . . . . . . . 6,171 (5,872) (685)
----------- ---------- -----------
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . $ 3,468 $ 3,801 $ 2,759
=========== ========== ===========
</TABLE>
In determining the 1995, 1994 and 1993 actuarial present value of benefit
obligations, discount rates of 71C4%, 8% and 71C2% were used, respectively. The
assumed annual rates of increase in future compensation levels was 4%, and 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 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
QUALIFIED NON-QUALIFIED QUALIFIED NON-QUALIFIED
PLAN PLAN PLAN PLAN
-------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested . . . . . . . . . . . . . . . . . . . . . . . . $ 49,673 $ - $ 49,722 $ -
Non-vested . . . . . . . . . . . . . . . . . . . . . . 4,945 871 4,376 1,204
-------- -------- -------- --------
Total accumulated benefit obligations . . . . . . . . 54,618 871 54,098 1,204
Additional obligation related to projected
salary increases . . . . . . . . . . . . . . . . . . . 16,260 977 7,330 345
-------- -------- -------- --------
Projected benefit obligations for service
rendered to date . . . . . . . . . . . . . . . . . . . 70,878 1,848 61,428 1,549
Fair value of plan assets, primarily listed stocks and
government securities . . . . . . . . . . . . . . . . (56,763) - (45,331) -
-------- -------- -------- --------
Projected benefit obligation in excess of plan assets . . 14,115 1,848 16,097 1,549
Unrecognized net loss from past experience different
from that assumed . . . . . . . . . . . . . . . . . . (10,211) (238) (11,702) 131
Unrecognized prior service costs . . . . . . . . . . . . (52) (1,000) - (1,358)
Unrecognized net assets at January 1, 1987 being
recognized over average expected remaining service
period of employees . . . . . . . . . . . . . . . . . 950 - 1,075 -
Adjustment to recognize minimum liability . . . . . . . . - 261 3,299 880
-------- -------- -------- --------
Recorded pension liability . . . . . . . . . . . . . . . $ 4,802 $ 871 $ 8,769 $ 1,202
======== ======== ======== ========
</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 contributions upon three years of service.
In 1994, the Company adopted the 1994 Employee Stock Purchase Plan, which
provides for a total of 450,000 shares to be sold to participating employees at
85% of the fair market value at specified quarterly investment dates. Shares
available for sale totaled 259,803 at December 31, 1995.
41
<PAGE> 15
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE F - STOCKHOLDERS' EQUITY
On December 15, 1995, the Company effected a three-for-two stock split, in the
form of a stock dividend, payable to shareholders of record on December 1,
1995. A total of 9,994,490 shares of common stock were issued in connection
with the split. The shares issued were reclassified from the Company's
additional paid-in-capital account to the Company's common stock account. All
share and per share amounts have been restated to retroactively reflect the
stock split.
On May 26, 1995, the Company issued 2,142,857 shares of common stock upon
conversion of the $20 million principal amount of the Company's 6-1/4%
Convertible Notes. Accordingly, the Company transferred $20 million, less $0.1
million of unamortized issue costs, to stockholders' equity.
On November 3, 1993, the Company issued 9,375,000 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 G - STOCK OPTION PLANS
1984 PLAN
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, 1995, 1994 and 1993, options to
purchase 657,900 shares, 810,300 shares and 1,083,450 shares, respectively, were
outstanding under the 1984 Plan, with exercise prices ranging from $3.33 to
$6.67 per share. No additional options will be granted under the 1984 Plan.
1991 PLAN
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 3,000,000
shares of common stock. Options have been granted at prices equal to the
market price on the grant date ("market price options") and at $0.67 per share
("performance options"). As of December 31, 1995, 1994 and 1993, market price
options to purchase 1,678,275 shares, 1,394,400 shares and 1,239,000 shares,
respectively, were outstanding with exercise prices ranging from $6.67 to
$17.08 per share. Market price options become exercisable after the fifth
anniversary of their date of grant.
At December 31, 1995, performance options to purchase 557,775 shares, 544,050
shares and 481,500 shares, respectively, were outstanding with an exercise
price of $0.67 per share. 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. That
portion of the performance options which does not become exercisable on the
third anniversary of the date of grant becomes exercisable after the ninth
anniversary of the date of grant. Compensation expense of $1.8 million, $1.6
million and $1.2 million was recognized for the performance options for the
years ended December 31, 1995, 1994 and 1993, respectively.
The following summarizes stock option plans activity during 1995, 1994 and
1993:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
NUMBER RANGE OF
IN THOUSANDS OF SHARES OPTION PRICE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at January 1, 1993 . . . . 1,907,475
Granted . . . . . . . . . . . . . . . . . . . . 933,225 $0.67 - $ 6.67
Cancelled . . . . . . . . . . . . . . . . . . . (36,750) $0.67 - $ 6.67
---------
Options outstanding at December 31, 1993 . . . 2,803,950
Granted . . . . . . . . . . . . . . . . . . . . 282,300 $0.67 - $13.42
Exercised . . . . . . . . . . . . . . . . . . . (270,150) $0.67 - $ 5.83
Cancelled . . . . . . . . . . . . . . . . . . . (67,350) $0.67 - $12.83
---------
Options outstanding at December 31, 1994 . . . 2,748,750
Granted . . . . . . . . . . . . . . . . . . . . 450,225 $0.67 - $17.08
Exercised . . . . . . . . . . . . . . . . . . . (194,775) $0.67 - $ 6.67
Cancelled . . . . . . . . . . . . . . . . . . . (110,250) $0.67 - $12.83
---------
Options outstanding at December 31, 1995 . . . 2,893,950
=========
Exercisable at December 31, 1995 . . . . . . . 715,650
=========
</TABLE>
NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS
Because of their maturities and/or interest rates, the Company's 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.
42
<PAGE> 16
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE I - COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Company had outstanding letters of credit in the
amount of $4.5 million. These letters of credit exist to support the Company's
insurance programs relating to worker's compensation, automobile and general
liability.
NOTE J - 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 $10.8 million, $10.4
million and $9.7 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
The future minimum rental commitments for all non-cancellable operating leases
with terms in excess of one year as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------
In thousands
----------------------------------------------------------
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . $ 7,828
1997 . . . . . . . . . . . . . . . . . . . 5,473
1998 . . . . . . . . . . . . . . . . . . . 3,726
1999 . . . . . . . . . . . . . . . . . . . 3,098
2000 . . . . . . . . . . . . . . . . . . . 2,345
After 2000 . . . . . . . . . . . . . . . . 8,523
-------
Total future minimum rental payments . . . $30,993
=======
</TABLE>
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 - PENDING MERGER
On February 4, 1996, the Company entered into a definitive agreement with
DiMark, Inc. providing for the merger of DiMark with a wholly owned subsidiary
of the Company in a stock-for-stock transaction to be accounted for as a
pooling of interests. DiMark stockholders will receive, in a fixed exchange
ratio, .656 of a share of Harte-Hanks common stock for each share of DiMark
common stock. DiMark had net sales and net income of $73.4 million and $5.1
million, respectively, for the year ended February 28, 1995. For the nine
months ended November 30, 1995, DiMark had net sales of $56.6 million and net
income of $3.6 million.
NOTE - N 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>
1995
Revenues . . . . . . . . . . . . . . . . . . . . . $138,688 $130,178 $133,808 $130,178
Operating income . . . . . . . . . . . . . . . . . 21,849 18,766 20,821 12,598
Net income . . . . . . . . . . . . . . . . . . . . 10,224 8,923(1) 8,728 6,110(2)
Earnings per common share - primary . . . . . . . .33 .29(1) .29 .21(2)
Earnings per common share - fully diluted . . . . .33 .29(1) .28 .20(2)
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 . . . . . . . .29 .22 .24 .08
Earnings per common share - fully diluted . . . . .28 .21 .23 .08
</TABLE>
(1) Includes a net gain on divestiture of $0.8 million, or 3 cents per
share.
(2) Includes a net gain on divestiture of $2.3 million, or 7 cents per
share.
43
<PAGE> 17
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE O - BUSINESS SEGMENTS
Harte-Hanks Communications, Inc. is a diversified communications company with
operations throughout the United States in four principal businesses - direct
marketing, shoppers, newspapers and television. Harte-Hanks Direct Marketing is
a nationwide business that serves customers primarily in the retail, financial
services, insurance and high technology industries. The Company's other
businesses operate in local markets and serve the retail, automotive, real
estate and other service industries.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
IN THOUSANDS 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues
Direct marketing . . . . . . . . . . . . . . . . . . . . . . . $ 197,598 $ 167,779 $ 129,626
Shoppers . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,045 176,461 174,521
Newspapers1 . . . . . . . . . . . . . . . . . . . . . . . . . 125,077 140,761 131,545
Television . . . . . . . . . . . . . . . . . . . . . . . . . . 25,132 28,629 27,818
----------- ---------- -----------
Total operating revenues . . . . . . . . . . . . . . . . . $ 532,852 $ 513,630 $ 463,510
=========== ========== ===========
Operating income (loss)2
Direct marketing . . . . . . . . . . . . . . . . . . . . . . . $ 27,872 $ 19,361 $ 12,820
Shoppers2 . . . . . . . . . . . . . . . . . . . . . . . . . . 20,020 17,743 12,685
Newspapers1,2 . . . . . . . . . . . . . . . . . . . . . . . . 27,281 26,363 (30,974)
Television . . . . . . . . . . . . . . . . . . . . . . . . . . 7,379 8,946 8,164
General corporate expense, net . . . . . . . . . . . . . . . . (8,518) (8,399) (6,235)
----------- ---------- -----------
Total operating income (loss) . . . . . . . . . . . . . . . $ 74,034 $ 64,014 $ (3,540)
=========== ========== ===========
Identifiable assets
Direct marketing . . . . . . . . . . . . . . . . . . . . . . . $ 98,291 $ 84,965 $ 66,164
Shoppers . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,743 104,528 107,617
Newspapers1 . . . . . . . . . . . . . . . . . . . . . . . . . 192,607 223,632 224,280
Television . . . . . . . . . . . . . . . . . . . . . . . . . . 66,754 70,333 71,729
General corporate . . . . . . . . . . . . . . . . . . . . . . 11,320 13,440 9,148
----------- ---------- -----------
Total identifiable assets . . . . . . . . . . . . . . . . . $ 477,715 $ 496,898 $ 478,938
=========== ========== ===========
Depreciation
Direct marketing . . . . . . . . . . . . . . . . . . . . . . . $ 4,127 $ 2,948 $ 2,160
Shoppers . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,410 3,905 3,659
Newspapers1 . . . . . . . . . . . . . . . . . . . . . . . . . 4,010 4,510 4,499
Television . . . . . . . . . . . . . . . . . . . . . . . . . . 1,066 1,041 1,041
General corporate . . . . . . . . . . . . . . . . . . . . . . 32 104 147
----------- ---------- -----------
Total depreciation . . . . . . . . . . . . . . . . . . . . $ 13,645 $ 12,508 $ 11,506
=========== ========== ===========
Goodwill amortization
Direct marketing . . . . . . . . . . . . . . . . . . . . . . . $ 930 $ 648 $ 537
Shoppers . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,867 1,867 1,920
Newspapers1 . . . . . . . . . . . . . . . . . . . . . . . . . 4,776 5,189 5,990
Television . . . . . . . . . . . . . . . . . . . . . . . . . . 1,748 1,748 1,729
----------- ---------- -----------
Total goodwill amortization . . . . . . . . . . . . . . . . $ 9,321 $ 9,452 $ 10,176
=========== ========== ===========
Capital expenditures
Direct marketing . . . . . . . . . . . . . . . . . . . . . . . $ 9,909 $ 5,334 $ 5,498
Shoppers . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,724 3,316 5,857
Newspapers1 . . . . . . . . . . . . . . . . . . . . . . . . . 3,609 4,409 9,744
Television. . . . . . . . . . . . . . . . . . . . . . . . . . 1,060 883 573
General corporate . . . . . . . . . . . . . . . . . . . . . . 122 43 17
----------- ---------- -----------
Total capital expenditures . . . . . . . . . . . . . . . . $ 17,424 $ 13,985 $ 21,689
=========== ========== ===========
</TABLE>
(1) In March 1995, the Company sold its suburban Boston newspapers. See Note
B of Notes to Consolidated Financial Statements.
(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.
44
<PAGE> 18
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1995 1994 1993(1) 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Revenues . . . . . . . . . . . . . . . . . . . $ 532,852 $ 513,630 $463,510 $423,296 $416,227
Operating expenses
Payroll, production and distribution . . . 191,843 373,573 340,550 308,094 308,942
Selling, general and administrative . . . . 244,009 54,083 49,355 44,982 45,203
Depreciation . . . . . . . . . . . . . . . 13,645 12,508 11,506 12,184 12,969
Goodwill amortization . . . . . . . . . . . 9,321 9,452 10,176 10,788 10,785
Goodwill write-down . . . . . . . . . . . . - - 55,463 - -
--------- -------- -------- -------- --------
Total operating expenses . . . . . . . . 458,818 449,616 467,050 376,048 377,899
--------- -------- -------- -------- --------
Operating income (loss) . . . . . . . . . . . 74,034 64,014 (3,540) 47,248 38,328
Interest expense, net . . . . . . . . . . . . 16,429 17,210 30,712 36,493 40,879
Income (loss) from continuing operations(2) . 33,985 (3) 23,822 (45,472) 2,336 (7,052)
Net income (loss) . . . . . . . . . . . . . . 33,985 (3) 23,822 (52,865)(4) 2,336 (3,938)(5)
Earnings (loss) from continuing operations
per common share - fully diluted(2),(6) . . 1.10 (3) .80 (2.33) .13 (.38)
Earnings (loss) per common share -
fully diluted(6) . . . . . . . . . . . . . 1.10 (3) .80 (2.70)(7) .13 (.21)
Cash dividends per common share(6) . . . . . . .07 - - - -
Weighted average common and common equivalent
shares outstanding - fully diluted . . . . 31,197 30,732 19,557 18,321 18,515
Segment Data
Revenues
Direct Marketing . . . . . . . . . . . . . $ 197,598 $ 167,779 $129,626 $107,351 $100,930
Shoppers . . . . . . . . . . . . . . . . . 185,045 176,461 174,521 164,021 164,928
Newspapers(8) . . . . . . . . . . . . . . . 125,077 140,761 131,545 126,222 127,061
Television . . . . . . . . . . . . . . . . 25,132 28,629 27,818 25,702 23,308
--------- -------- -------- -------- --------
Total revenues . . . . . . . . . . . . . . $ 532,852 $513,630 $463,510 $423,296 $416,227
========= ======== ======== ======== ========
Operating income (loss)
Direct Marketing . . . . . . . . . . . . . $ 27,872 $ 19,361 $ 12,820 $ 10,912 $ 7,531
Shoppers . . . . . . . . . . . . . . . . . 20,020 17,743 12,685 15,517 16,234
Newspapers(8) . . . . . . . . . . . . . . . 27,281 26,363 (30,974) 20,973 16,664
Television . . . . . . . . . . . . . . . . 7,379 8,946 8,164 6,140 4,419
General corporate . . . . . . . . . . . . . (8,518) (8,399) (6,235) (6,294) (6,520)
--------- -------- -------- -------- --------
Total operating income (loss) . . . . . . . $ 74,034 $ 64,014 $ (3,540) $ 47,248 $ 38,328
========= ======== ======== ======== ========
Other Data
Operating Cash Flow(9) . . . . . . . . . . . . $ 97,000 $ 85,974 $ 73,605 $ 70,220 $ 62,082
Capital expenditures . . . . . . . . . . . . . 17,424 13,985 21,689 8,140 4,453
Balance Sheet Data (at end of period)
Property, plant and equipment, net . . . . . . $ 87,908 $ 91,278 $ 90,809 $ 78,210 $ 83,114
Goodwill, net . . . . . . . . . . . . . . . . 271,511 290,335 292,944 347,105 356,511
Total assets . . . . . . . . . . . . . . . . . 477,715 496,898 478,938 515,479 526,908
Total long term debt . . . . . . . . . . . . . 220,040 292,858 320,087 218,828 (10) 399,243
Total stockholders' equity . . . . . . . . . . 165,094 107,640 83,864 (11) 41,439 41,356
</TABLE>
(1) Includes goodwill write-down of $55.5 million. Newspaper and shopper
operating income was affected by $52.7 million and $2.8 million,
respectively. See Notes A 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 gains on divestitures of $3.1 million, or 10 cents per share,
net of $10.6 million income tax expense.
(4) Includes extraordinary loss from the early extinguishment of debt of
$7.4 million, net of $4.3 million income tax benefit.
(5) Includes the cumulative favorable effect of change in method
of accounting for income taxes of $3.1 million.
(6) Restated to reflect the three-for-two stock split effected as a stock
dividend effective December 15, 1995.
(7) Excluding the goodwill write-down and extraordinary items, earnings per
share on a fully diluted basis were 47 cents per share.
(8) In March 1995, the Company sold its suburban Boston newspapers. See
Note B of Notes to Consolidated Financial Statements.
(9) 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.
(10) 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.
(11) Includes the net proceeds from issuance of 9,375,000 shares of the
Company's common stock at $11.00 per share in an initial public
offering in November 1993.
45
<PAGE> 19
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, 1995 and 1994, 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, 1995.
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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
January 24, 1996
except as to Note M,
which is as of February 4, 1996
46
<PAGE> 20
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
Richard M. Hochhauser
Executive Vice President, Direct Marketing
Harry J. Buckel
Senior Vice President, Shoppers
Michael J. Conly
Senior Vice President, Television
Donald R. Crews
Senior Vice President, Legal and Secretary
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
CORPORATE INFORMATION
Common Stock
The Comany's common stock is listed on the New York Stock Exchange (symbol:
HHS). The quarterly stock price ranges for 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
1995 1994
HIGH LOW HIGH LOW
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 13 3/8 12 1/2 14 1/3 11 3/8
Second Quarter 16 7/8 13 1/4 13 1/4 12 1/4
Third Quarter 19 7/8 16 2/3 13 1/4 12
Fourth Quarter 22 1/4 18 1/4 13 1/4 11 1/2
</TABLE>
Quarterly dividends were paid at the rate of 1.67 cents per share in 1995. The
stock prices and dividends reflect retroactively the three-for-two stock split
in the form of a 50% stock dividend on December 15, 1995.
There are approximately 1,500 holders of record.
Transfer Agent and Registrar
Bank of Boston
c/o Boston EquiServe, L.P.
Mail Stop 45-02-64
P.O. Box 644
Boston, Massachusetts 02102-0644
Annual Meeting of Stockholders
The annual meeting of stockholders will be held at 1:00 p.m. April 30, 1996,
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: Harte-Hanks Direct Marketing
Production: Harte-Hanks Multimedia Graphics
Illustration: Gary Nichols
Photography: Mark Langford
Printing: Avon Behren Printing
Printed on Recycled Paper
47
<PAGE> 1
SUBSIDIARIES EXHIBIT 21
<TABLE>
<CAPTION>
JURISDICTION 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 Community Newspapers, Inc. Texas 100
Harte-Hanks Direct Mail/California Inc. California 100
Harte-Hanks Direct Marketing/Dallas, Inc. Delaware 100
Harte-Hanks do Brazil Consultoria e
Servicos Ltda.(1) Brazil 100
Harte-Hanks Limited(1) United Kingdom 100
Harte-Hanks Pty Limited (1) Australia 100
Harte-Hanks Shoppers, Inc. California 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.
48
<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 24, 1996, except as to Note M of the consolidated
financial statements, which is as of February 4, 1996, relating to the
consolidated balance sheets of Harte-Hanks Communications, Inc. and
subsidiaries as of December 31, 1995 and 1994, 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, 1995, which report appears in
the 1995 annual report to shareholders which is incorporated by reference in
the December 31, 1995 annual report on Form 10-K of Harte-Hanks Communications,
Inc. and our report dated January 24, 1996, relating to the related financial
statement schedule as of and for each of the years in the three-year period
ended December 31, 1995, which report appears in the December 31, 1995 annual
report on Form 10-K of the Company.
KPMG Peat Marwick
San Antonio, Texas
March 21, 1996
49
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
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0
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