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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] 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
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COMMISSION FILE NUMBER 1-7120
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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 78216
SAN ANTONIO, TEXAS (ZIP CODE)
(Address of principal executive officers)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE -- 210-829-9000
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
------------------- ----------------------------
Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
----------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ----
Indicate by check mark if disclosure of delinquent filings pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
----
Aggregate market value of the Company's voting stock held by
non-affiliates on March 17, 1997, based on the $28.75 per share closing price
for the Company's Common Stock on the New York Stock Exchange on such date:
approximately $605,000,000.
SHARES OUTSTANDING AT MARCH 17, 1997:
Common Stock -- 37,217,807 shares
DOCUMENTS INCORPORATED BY REFERENCE:
The Company's Annual Report to Stockholders for the year ended
December 31, 1996 (incorporated in Part II to the extent provided in Items 5,
6, 7 and 8 hereof).
Definitive Proxy Statement for the Company's May 6, 1997 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).
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Harte-Hanks Communications, Inc.
Table of Contents
Form 10-K Report
December 31, 1996
<TABLE>
<CAPTION>
Part I Page
----
<S> <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 Holders 17
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
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 and
Management 18
Item 13. Certain Relationships and Related Transactions 18
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. 19
Signatures 25
</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
marketing is undergoing a transition from traditional mass media to targeted
marketing, or to one-to-one customer relationships. The transition is being
driven by the increasing sophistication and efficiency of computer technology
and a growing need among marketers to customize the product and service choices
they offer to individuals. Direct marketing, which represents 50% of the
Company's revenues, is leading the movement toward highly targeted and
relationship marketing. The Company's shopper, newspaper and television
businesses apply many of the same targeting principles as direct marketing.
Harte-Hanks' strategy is based on five key elements: being a market leader in
each of its businesses; increasing revenues through growing its base
businesses, introducing new products, entering new markets and making
acquisitions; using technology to create competitive advantage; employing
people who can partner effectively with its clients; and creating shareholder
value. Company revenues totaled $665.9 million in 1996.
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 M 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, coordinated and integrated
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, pharmaceutical companies, healthcare organizations, insurance
companies and high technology firms, along with a growing number of
international clients. In 1996, Harte-Hanks Direct Marketing had revenues of
$330.3 million, which accounted for 50% of the Company's revenues.
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4
In 1996, Harte-Hanks made several acquisitions, all in the direct
marketing business segment. The largest of these was the merger of DiMark, Inc.
("DiMark") with a wholly owned subsidiary of Harte-Hanks. Each outstanding
share of DiMark common stock was converted into .656 of a share of common stock
of Harte-Hanks. As a result, Harte-Hanks issued approximately 6.1 million
shares of its common stock to the shareholders of DiMark, and DiMark's
outstanding stock options were converted into options to acquire approximately
1.5 million shares of Harte-Hanks common stock. The merger was accounted for on
a pooling-of-interests basis. The remainder of the acquisitions made in 1996
are discussed below.
Harte-Hanks Direct Marketing offers a complete range of specialized,
coordinated and integrated direct marketing services from a single source.
These services are organized into three broad sectors -- response
management/teleservices, database marketing and marketing services.
Response Management/Teleservices
Harte-Hanks Response Management manages the inquiries clients receive
from their marketing efforts, whether it be from 1-800 numbers, 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. Many of these leads are processed
and distributed over the Internet, accounting for more than 1.2 million
transactions in 1996. In addition to qualifying and distributing sales leads,
the Internet is being used to register attendees for seminars and training
events and to manage open-ended electronic mail responses traditionally handled
by phone.
Using proprietary software, the Company also builds contact 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.
Two newly acquired companies in Los Angeles and Framingham,
Massachusetts, enable Harte-Hanks to provide a consistent level of service to
its response management customers nationwide. Another company, PRO Direct,
acquired as part of the DiMark Inc. merger, has added significantly to the
Company's outbound telemarketing capabilities. Altogether, the seven
Harte-Hanks response management/teleservices operations maintain nearly 900
telemarketing workstations across the country. Approximately 60% of the
Company's response management/teleservices business is inbound, with 40%
outbound.
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, which Harte- Hanks has an option to acquire.
In addition to the newly acquired operations, the Company provides
response management services at its Austin and Boston facilities. The Austin
operation serves primarily high technology customers, while the Boston
operation primarily serves the mutual fund industry.
<PAGE> 5
5
Database Marketing
The Company builds customized marketing databases for specific clients
and provides them with easy-to-use tools to target 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' buying behavior. In addition to building a client's
database and installing the software, Harte-Hanks Direct Marketing performs
regular database updates and offers its stand-alone software module Trillium(R)
for clients who want to integrate this capability into their data warehouses.
Building on its longtime expertise in the banking industry, Harte-Hanks
formed a mergers and acquisitions group in 1996 to help banks handle customer
communications before, during and after mergers. It also introduced Market
Advantage, a new line of products for credit unions and community banks.
As a further extension of the client's marketing arm, Harte- Hanks
introduced a marketing planning and analysis service in 1996. Specific
capabilities include tracking and reporting, mailing analysis, modeling,
database profiling, marketing applications consulting and program development.
The Company also specializes in custom research for direct marketers,
providing yet another analytical tool to help clients define their marketing
objectives, develop effective programs, target the right prospect and measure
results. Information gathered through research can be used to enrich the
clients' marketing databases and assess customer satisfaction.
In addition, the Company operates as a service bureau for clients who
need it, preparing list selections, maximizing deliverability and reducing
clients' mailing costs through sophisticated postal coding, hygiene and address
updates through a non-exclusive National Change of Address license with the
U.S. Postal Service.
Database services are marketed to specific industries or markets with
software modifications tailored to each industry or market. Having established
the basic technological foundation, the Company is able to provide database
services to new industries and markets by modifying its existing 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 internationally, and database sales offices
were opened in 1996 in Brazil and Australia, in addition to existing offices in
London and Toronto. In early 1997, the Company expanded its overall production
capacity, especially for European clients, by acquiring Information for
Marketing, Limited, a London-based provider of database marketing services.
<PAGE> 6
6
In November, 1996 the Company expanded its marketing services, response
management/teleservices and database capabilities by acquiring Marketing
Communications, Inc. based in Kansas City, which provides marketing services to
the pharmaceutical industry and others.
Marketing Services
Harte-Hanks provides a variety of specialized services to help clients
develop and execute targeted marketing communication programs. These include
such upfront services as strategic development and creative services, along
with back-end services such as print and graphics, personalization of
communication pieces using laser and inkjet printers, targeted mail and
fulfillment, and transportation logistics.
The Company's mail tracking capability and longstanding relationships
with the U.S. Postal Service help ensure that customer mailings reach their
destinations on time. And, by controlling the final stage of the print
distribution process through its transportation logistics operations, the
Company facilitates the delivery of its clients' materials while holding costs
to a minimum.
These capabilities are provided in a specialized, coordinated and
integrated approach through eight primary facilities nationwide. The release of
a new product, MediaSelect, helps clients more effectively distribute their
spending among various print media in specific geographic markets. Another 1996
new product, TOPS4, helps catalogers, printers and retailers save money in
distributing fourth-class bound materials.
Sales and Marketing
Harte-Hanks' national direct marketing sales forces are headquartered in
Cincinnati, Ohio, with additional offices maintained throughout the United
States and in Toronto, London, Sao Paulo, Brazil and Melbourne, Australia. The
overall sales focus is to position Harte-Hanks as a single-source solution for
a client's targeted marketing needs. The sales forces emphasize cross-selling
the range of direct marketing services and are supported by employees in each
sector.
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.
<PAGE> 7
7
Facilities
Direct marketing services are provided at the following facilities:
RESPONSE MANAGEMENT/TELESERVICES MARKETING SERVICES (CONTINUED)
Austin, Texas Jacksonville, Florida
Brockton, Massachusetts New York, New York
Cherry Hill, New Jersey South Belmar, New Jersey
Clearwater, Florida Westville, New Jersey
Framingham, Massachusetts
Los Angeles, California NATIONAL SALES HEADQUARTERS
River Edge, New Jersey Cincinnati, Ohio
DATABASE MARKETING INTERNATIONAL OFFICES
Billerica, Massachusetts London, England
Langhorne, Pennsylvania Melbourne, Australia
Baltimore, Maryland Sao Paulo, Brazil
Kansas City, Kansas Toronto, Canada
River Edge, New Jersey
MARKETING SERVICES
Baltimore, Maryland
Bloomfield, Connecticut
Cincinnati, Ohio
Dallas/Fort Worth, Texas
Deerfield Beach, Florida
Forty Fort, Pennsylvania
Fullerton, California
Competition
Harte-Hanks' direct marketing business faces competition from other
direct marketing companies in each sector, 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/teleservices capabilities,
combined with its national production capability, industry focus and ability to
offer a full range of integrated services, enable the Company to compete
effectively.
<PAGE> 8
8
SHOPPERS
GENERAL
Harte-Hanks is the largest publisher of advertising shoppers in North
America based on weekly circulation and revenues, and the only national media
company that focuses on shoppers as a core business. Shoppers are weekly
advertising publications delivered free by third-class 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, 1996, shoppers reached
approximately 6.9 million households in four markets each week -- Southern
California, Northern California, South Florida and Dallas/Fort Worth. The
Company's Southern California shopper, PennySaver, accounted for 63% of these
households.
Harte-Hanks publishes 580 individual shopper editions each week
distributed to zones of approximately 12,000 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 is to increase its share of local advertising in its
existing circulation areas, and, over time, to increase circulation through
internal expansion into contiguous areas and make selective acquisitions. In
1996, Harte- Hanks shoppers had revenues of $185.2 million, accounting for
approximately 28% of the Company's revenues.
During the period 1992 through 1994, 1.1 million households were added to
the Company's shopper circulation through internal expansion, primarily in
Southern California, South Florida and Northern California. In September 1996,
Harte-Hanks added another 33,000 contiguous households to its Southern
California circulation. The Company believes that expansions provide increased
revenues and operating income as the publications in these new areas mature.
Publications
Harte-Hanks shoppers are published in Southern California,
Northern California, South Florida and Dallas/Fort Worth. The Southern
California operation accounted for 70% of all shopper revenues in 1996.
<PAGE> 9
9
The following table sets forth certain information with respect to
shopper publications:
<TABLE>
<CAPTION>
December 31, 1996
------------------------
Number of
Market Publication Name Circulation Zones
- ------------------- ------------------ ----------- ---------
<S> <C> <C> <C>
Southern California PennySaver 4,381,500 375
Northern California Potpourri 1,100,000 79
Miami/Ft. Lauderdale The Flyer 1,042,900 90
Dallas/Ft. Worth The Shopper's Guide 422,500 36
---------- ----
Total 6,946,900 580
</TABLE>
Shopper publications contain 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 multiple ads from
national and regional advertisers; "print and deliver" single-sheet inserts
designed and printed by the Company; coupon books; preprinted inserts from
major retail chains; and a four-color proprietary product, MARQUEE. Harte-Hanks
shopper publications also offer 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 South Florida in 1995. This software has made 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 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 another technological innovation, Harte-Hanks has expanded the ways
its advertisers can reach prospective customers by establishing World Wide Web
sites for its Southern California, Northern California and South Florida
shoppers. The websites 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
through its telemarketing departments and 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
<PAGE> 10
10
retailers. The Company is increasingly focusing its marketing efforts on larger
national accounts by emphasizing its ability to deliver saturation advertising
in defined zones in combination with advertising in the shopper publication.
Additional focus is being placed on particular industries through the
development of sales specialists. These sales specialists are being used to
drive revenue growth in the automotive, real estate, employment and healthcare
industries.
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 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. 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. The Company believes that
its production systems and technology, which enable it to publish separate
editions in narrowly targeted zones, allow it to compete effectively,
particularly in large markets with high media fragmentation.
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
non-daily newspapers in higher income suburban areas of Dallas. In all of its
daily newspaper markets, the Company realizes additional revenue from niche
publications and specialized services (such as special interest publications
and direct mail programs) aimed at targeted consumer groups. Harte-Hanks'
strategy in its newspaper business is to build upon its strong local
franchises, to offer complementary products and services, and to expand its
market areas and customer base.
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The Company's five principal newspapers have achieved high levels of paid
household penetration. For 1996, circulation penetration in the city zones for
the five principal newspapers ranged from 46% to 66% on a daily basis and from
60% to 78% on Sunday, providing advertisers with broad coverage of these local
markets. According to Standard Rate & Data Service's Circulation '96, the daily
editions of the Company's newspapers in Abilene, San Angelo and Wichita Falls
ranked among the top 35 in the United States based on household penetration in
United States Census Bureau metropolitan statistical areas. In addition, these
same newspapers' Sunday editions rank in the top 15 in the United States based
on household penetration. Harte-Hanks community newspapers in suburban Dallas
concentrate on local news 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 1996,
Harte-Hanks newspapers had revenues of $124.3 million, accounting for
approximately 19% 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 their marketing 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 90% of Harte-Hanks newspaper revenues in 1996.
The following table sets forth certain information with respect to the
Company's five principal newspapers for 1996:
<TABLE>
<CAPTION>
Average
Average Paid Circulation
Circulation (1) Penetration (2)
------------------ -----------------
Publication Daily Sunday Daily Sunday
- ----------- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Corpus Christi Caller-Times 68,161 90,312 46% 60%
(Founded 1877)
Abilene Reporter-News 41,572 50,967 56% 69%
(Founded 1881)
Anderson Independent-Mail 41,442 47,834 66% 76%
(Founded 1899)
Wichita Falls Times Record News 38,150 45,211 58% 69%
(Founded 1907)
San Angelo Standard-Times 32,749 38,813 64% 78%
(Founded 1884)
</TABLE>
(1) In 1996, approximately 89% of daily circulation was home-delivered, with
the remaining 11% from single-copy sales.
(2) Penetration is average paid circulation in the city zone divided by the
number of households in the city zone.
<PAGE> 12
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The Corpus Christi Caller-Times is a morning newspaper serving Corpus
Christi and seven surrounding counties in South Texas. In 1996, the
Caller-Times was named Best Daily Newspaper under 100,000 circulation in five
Southwestern states, marking the seventh time in eight years it has been
awarded Best Daily Newspaper honors by the Press Club of Dallas. Average Sunday
circulation of the Sunday edition of the Caller-Times increased from 87,745 in
1988 to 90,312 in 1996. The Corpus Christi metropolitan statistical area had an
estimated population of 384,700 as of December 31, 1995. The local 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,
1995. The Reporter-News was a finalist in the Press Club of Dallas selections
as Best Daily Newspaper in Texas for its circulation size in 1994 and 1995. The
Sunday Reporter-News ranks second among Texas' Sunday newspapers in household
penetration. 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 during the 1990's. The newspaper has
won the National Headliner Award for outstanding reporting in its circulation
class in the United States two of the last five years. The newspaper has placed
among the Associated Press top 20 sports sections in the United States in its
circulation class in each of the last eight years. Anderson County had an
estimated population of 154,800 as of December 31, 1995 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, located in 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 and third for Sunday
circulation. The Wichita Falls metropolitan statistical area had an estimated
population of 132,100 as of December 31, 1995. Sheppard Air Force Base, one of
the nation's largest training installations and home of NATO fighter pilot
training, is a significant factor in the Wichita Falls economy. Wichita Falls
is home to the 2,800-bed James V. Allred Unit of the Texas Department of
Criminal Justice system. The city also has two major regional hospitals and ten
assisted-living facilities and is home to Midwestern State University.
<PAGE> 13
13
The San Angelo Standard-Times is a morning newspaper serving San Angelo,
Texas and its surrounding area. The Standard-Times was the finalist for Best
Daily newspaper honors in five Southwestern states in 1996 in competition
sponsored by the Press Club of Dallas. The San Angelo metropolitan statistical
area had an estimated population of 103,400 as of December 31, 1995. San Angelo
has a diversified economic base consisting of petroleum, military, regional
health services, agriculture, light industry and higher education. SITEL
Corporation, a fast-growing telemarketing services company which located in San
Angelo in 1995, has now exceeded the 1,000-employee mark and will be adding
another 200-400 employees by mid-year 1997. The $16 million Texas Department of
Information Resources Disaster Recovery Center at Angelo State University
opened in late 1996. Ranchers Lamb of Texas, a consortium of local producers,
banks and business interests, broke ground on a $3 million lamb processing
plant that will have 30 jobs initially. Goodfellow Air Force Base, a
significant factor in the San Angelo economy, has had many significant building
projects over the years, including a new civil engineering complex and
upgrading of all communications infrastructure to support further expansions of
missions at the base.
Harte-Hanks Community Newspapers
The Company publishes one daily and seven non-daily newspapers in the
higher income suburban communities of northern Dallas. Harte- Hanks Community
Newspapers concentrate on local news 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 non- daily
publications. The Company's non-daily 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 1996:
<TABLE>
<CAPTION>
Type of Average
Location Publication Name Publication Circulation
- -------- ---------------- ----------- -----------
<S> <C> <C> <C>
Dallas Area Plano Star Courier Daily 12,467
Sunday 13,885
Mesquite News Non-daily 29,981
Lewisville Leader Non-daily 25,816
The Leader Non-daily 11,795
McKinney Messenger Non-daily 8,000
Frisco Life Non-daily 4,300
Allen American Non-daily 4,146
Coppell Gazette Non-daily 4,091
</TABLE>
<PAGE> 14
14
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 have expanded 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.
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 and
services, markets 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 1996. These investments are expected to
increase productivity and shorten manufacturing time, allowing for later news
and advertising deadlines.
Competition
There are no other daily newspapers published 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.
<PAGE> 15
15
TELEVISION
GENERAL
The Company owns and operates KENS-TV, a CBS-affiliated VHF station in San
Antonio, Texas, the 38th 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 1996, Harte-Hanks Television
had revenues of $26.1 million, which accounted for approximately 4% 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. KENS programs 29 hours of live, local news each week. The station
introduced 7:00 a.m. and 4:30 p.m. newscasts to its daily lineup in 1996 and
added a half-hour live, local sports show on Saturdays.
KENS has been affiliated with CBS since the station's inception. For the
24th straight year, KENS' late night newscast finished 1996 as San Antonio's
top rated newscast, growing its audience share more than 70% over the CBS
weekday prime time averages. The station was one of only two CBS affiliates in
the 33 major metered markets to win its late local news race.
According to the November 1996 Nielsen Ratings Index, KENS broadcasts to a
market of approximately 655,700 households, defined as the designated market
area (the "DMA"). The San Antonio DMA is served by 10 television 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 services in its full-service
production facility. Video production services are provided for programming,
commercial and industrial applications, and live satellite uplinking worldwide.
<PAGE> 16
16
Sales and Marketing
Local advertising spots are sold by KENS sales personnel. National
advertising spots are sold by Katz Communications, an independent advertising
sales agent with offices throughout the United States. Generally, advertising
rates for national spot and local advertising are determined by the individual
station, which receives all of the revenues (less agency commissions). Rates
are influenced both by the demand for advertising time and the popularity of
the station's programming. Most advertising during network programs is sold by
the network, which pays its affiliated stations negotiated fees for
broadcasting such programs. Advertising rates charged by a television station
are based primarily on the size of the market and the station's ability to
attract audiences as reflected in surveys made by national 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 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 1996.
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 significant changes in the Communications
Act. 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
<PAGE> 17
17
characterized by stability. Harte-Hanks has operated television broadcast
stations since 1962, and to date its renewal applications have been granted
without hearing.
EMPLOYEES
As of December 31, 1996, Harte-Hanks employed 6,015 full-time employees and
1,495 part-time employees, as follows: direct marketing -- 3,229 full-time and
1,089 part-time employees; shoppers-- 1,388 full-time and 187 part-time
employees; newspapers -- 1,260 full-time and 197 part-time employees;
television -- 135 full-time and 22 part-time employees; and corporate office --
26 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 17,000 square feet in leased premises. The Company's business is
conducted in facilities nationwide containing aggregate space of approximately
3.2 million square feet. Approximately 2.3 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, 1996 at page 32.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from the Company's Annual Report to
Stockholders for the year ended December 31, 1996 at page 30.
<PAGE> 18
18
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, 1996 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, 1996, 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, 1996 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 28, 1997 for the May 6, 1997 Annual
Meeting of Stockholders under the caption "Management -- Directors and
Executive Officers on pages 4 and 5.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 28, 1997 for the May 6, 1997 Annual
Meeting of the Stockholders under the caption, "Executive Compensation and
Other Information" on pages 6 through 9.
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 28, 1997 for the May 6, 1997 Annual
Meeting of Stockholders under the caption "Security Ownership of Management and
Principal Stockholders" on pages 3 and 4.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE> 19
19
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, 1996 attached hereto:
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Statements of Operations, Years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Cash Flows, Years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity, Years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a) (2) The following accountants' report and financial schedule for years
ending December 31, 1996, 1995 and 1994 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> <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).
2(b) Agreement and Plan of Merger dated as of February 4,
1996 among Harte-Hanks Communications, Inc., HHD
Acquisition Corp. and DiMark, Inc. (filed as Appendix
A to the Company's Registration Statement No. 333-2047
and incorporated by reference herein).
3(a) Amended and Restated Certificate of Incorporation (filed as
Exhibit 3(a) to the Company's Form 10-K for the year ended
December 31, 1993 and incorporated by reference herein).
3(b) Amended and Restated Bylaws (filed as Exhibit 3(b) to the
Company's Registration Statement No. 33-69202 and
incorporated by reference herein).
3(c) Amendment dated April 30, 1996 to Amended and Restated
Certificate of Incorporation (filed as Exhibit 3(c) to the
Company's Form 10-Q for the six months ended June 30, 1996 and
incorporated by reference herein).
3(d) Amended and Restated Certificate of Incorporation as
amended through April 30, 1996 (filed as Exhibit 3(d) to the
Company's Form 10-Q for the six months ended June 30, 1996 and
incorporated by reference herein).
4(a) Long term debt instruments are not being filed pursuant to
Section (b)(4)(iii) of Item 601 of Regulation S-K. Copies of
such instruments will be furnished to the Commission upon
request.
10(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).
</TABLE>
<PAGE> 21
21
(a) (3) EXHIBITS (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- ------------------------------------------------------------ ---------
<S> <C> <C>
10(b) Registration Rights Agreement dated as of September 11, 1984
among HHC Holding Inc. and its stockholders (filed as Exhibit
10 b) to the Company's Form 10-K for the year ended December
31, 1993 and incorporated by reference herein).
10(c) HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit
10(1) to the Company's Form 10-K for the year ended December
31, 1991 and incorporated by reference herein).
10(d) Amendment to HHC Holding Inc 1991 Stock Option Plan
(filed as Exhibit 10(1) to the Company's Form 10-K for the
year ended December 31, 1992 and incorporated by reference
herein).
10(e) Third Amended and Restated Loan Agreement dated
May 19, 1993 among the Company, The Toronto-Dominion
Bank, NationsBank of Texas, N.A., Fleet Bank (formerly
National Westminster Bank USA), Corestates Bank, N.A.,
The Bank of Nova Scotia, CIBC, Inc. and National Bank
of Canada; and Toronto-Dominion (Texas), Inc., as agent
(filed as Exhibit 10(1) to the Company's 10-Q for the quarter
ended June 30, 1993 and incorporated by reference herein).
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).
</TABLE>
<PAGE> 22
22
(a) (3) EXHIBITS (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- ------------------------------------------------------------- ---------
<S> <C> <C>
10(i) Amendment No. 2 to HHC Holding Inc. 1991 Stock Option Plan
(filed as Exhibit 10(1) to the Company's Registration
Statement No. 33-69202 and incorporated by reference herein).
10(j) Harte-Hanks Communications, Inc. Pension Restoration Plan
(filed as Exhibit 10(j) to the Company's Registration
Statement No. 33-69202 and incorporated by reference herein).
10(k) First Amendment, dated as of November 3, 1993 to Third
Amended and Restated Loan Agreement dated May 19, 1993 among
the Company, The Toronto-Dominion Bank, NationsBank of Texas,
N.A., Fleet Bank (formerly National Westminster Bank USA),
The First National Bank of Boston, Bank of Hawaii,
Corestates Bank, N.A., The Bank of Nova Scotia, CIBC, Inc.,
and National Bank of Canada; and Toronto-Dominion (Texas),
Inc., as agent (filed as Exhibit 10(1) to the Company's Form
10-Q for the quarter ended September 30, 1993 and
incorporated by reference herein).
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(1) to the Company's Form 10-Q for the quarter ended
September 30, 1993 and incorporated by reference herein).
10(m) Harte-Hanks Communications, Inc. Incentive Bonus Plan (filed
as Exhibit 10(m) to the Company's Form 10-K for the year
ended December 31, 1993 and incorporated by reference herein).
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., Fleet Bank (formerly National Westminster
Bank USA), The Bank of Nova Scotia, The First National Bank
of Boston, Bank of Hawaii, The Bank of Tokyo-Mitsubishi, 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).
</TABLE>
<PAGE> 23
23
(a) (3) EXHIBITS (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- ------------------------------------------------------------------ ---------
<S> <C> <C>
10(o) Amendment No. 3 to Harte-Hanks Communications (formerly HHC
Holding Inc.) 1991 Stock Option Plan (filed as Exhibit 10(o) to the
Company's Form 10-Q for the six months ended June 30, 1996 and
incorporated by reference herein).
10(p) Harte-Hanks Communications, Inc. 1996 Incentive Compensation
Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the six
months ended June 30, 1996 and incorporated by reference herein).
*11 Statement Regarding Computation of Net Income (Loss) Per Common
Share. 28
*13 Annual Report to Securityholders (only those portions incorporated
by reference into the Form 10-K are filed herewith). 29
*21 Subsidiaries of the Company. 49
*23 Consent of KPMG Peat Marwick. 50
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. 51
</TABLE>
- ------------------
*Filed herewith
<PAGE> 24
24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(continued)
14(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth quarter of
1996.
14(c) Exhibits -- The response to this portion of item 14 is submitted as a
separate section of this report on pages 28 to 51.
14(d) Financial Statement Schedule -- The response to this portion of Item
14 is submitted as a separate section of this report on page 27.
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> 25
25
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 Franklin
-----------------------------------
Larry Franklin
President & Chief Executive Officer
Date: March 24, 1997
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 Franklin /s/ Christopher M. Harte
- --------------------------------- ---------------------------------
Larry Franklin, Director Christopher M. Harte, Director
/s/ Edward H. Harte /s/ James L. Johnson
- --------------------------------- ---------------------------------
Edward H. Harte, Director James L. Johnson, Director
/s/ Richard M. Hochhauser /s/ David L. Copeland
- --------------------------------- ---------------------------------
Richard M. Hochhauser, Director David L. Copeland, Director
<PAGE> 26
26
INDEPENDENT AUDITORS' REPORT 10-K SCHEDULES
The Board of Directors and Stockholders
Harte-Hanks Communications, Inc.:
Under date of January 24, 1997, we reported on the consolidated balance sheets
of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1996
and 1995 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, 1996, as contained in the 1996 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 1996. 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.
/s/ KPMG Peat Marwick LLP
San Antonio, Texas
January 24, 1997
<PAGE> 27
27
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, 1996 ...... $ 2,584 $ 2,748 $ 3,337 $ 1,995
========= ========= ========= =========
Year ended December 31, 1995 ...... $ 3,155 $ 3,416 $ 3,987 $ 2,584
========= ========= ========= =========
Year ended December 31, 1994 ...... $ 2,283 $ 4,863 $ 3,991 $ 3,155
========= ========= ========= =========
</TABLE>
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- -------------------------------------------------------------- ---------
<S> <C> <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).
2(b) Agreement and Plan of Merger dated as of February 4,
1996 among Harte-Hanks Communications, Inc., HHD
Acquisition Corp. and DiMark, Inc. (filed as Appendix
A to the Company's Registration Statement No. 333-2047
and incorporated by reference herein).
3(a) Amended and Restated Certificate of Incorporation (filed as
Exhibit 3(a) to the Company's Form 10-K for the year ended
December 31, 1993 and incorporated by reference herein).
3(b) Amended and Restated Bylaws (filed as Exhibit 3(b) to the
Company's Registration Statement No. 33-69202 and
incorporated by reference herein).
3(c) Amendment dated April 30, 1996 to Amended and Restated
Certificate of Incorporation (filed as Exhibit 3(c) to the
Company's Form 10-Q for the six months ended June 30, 1996 and
incorporated by reference herein).
3(d) Amended and Restated Certificate of Incorporation as
amended through April 30, 1996 (filed as Exhibit 3(d) to the
Company's Form 10-Q for the six months ended June 30, 1996 and
incorporated by reference herein).
4(a) Long term debt instruments are not being filed pursuant to
Section (b)(4)(iii) of Item 601 of Regulation S-K. Copies of
such instruments will be furnished to the Commission upon
request.
10(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).
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- ------------------------------------------------------------- ---------
<S> <C> <C>
10(b) Registration Rights Agreement dated as of September 11, 1984
among HHC Holding Inc. and its stockholders (filed as Exhibit
10 b) to the Company's Form 10-K for the year ended December
31, 1993 and incorporated by reference herein).
10(c) HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit
10(1) to the Company's Form 10-K for the year ended December
31, 1991 and incorporated by reference herein).
10(d) Amendment to HHC Holding Inc 1991 Stock Option Plan
(filed as Exhibit 10(1) to the Company's Form 10-K for the
year ended December 31, 1992 and incorporated by reference
herein).
10(e) Third Amended and Restated Loan Agreement dated
May 19, 1993 among the Company, The Toronto-Dominion
Bank, NationsBank of Texas, N.A., Fleet Bank (formerly
National Westminster Bank USA), Corestates Bank, N.A.,
The Bank of Nova Scotia, CIBC, Inc. and National Bank
of Canada; and Toronto-Dominion (Texas), Inc., as agent
(filed as Exhibit 10(1) to the Company's 10-Q for the quarter
ended June 30, 1993 and incorporated by reference herein).
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).
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- ------------------------------------------------------------- ---------
<S> <C> <C>
10(i) Amendment No. 2 to HHC Holding Inc. 1991 Stock Option Plan
(filed as Exhibit 10(1) to the Company's Registration
Statement No. 33-69202 and incorporated by reference herein).
10(j) Harte-Hanks Communications, Inc. Pension Restoration Plan
(filed as Exhibit 10(j) to the Company's Registration
Statement No. 33-69202 and incorporated by reference herein).
10(k) First Amendment, dated as of November 3, 1993 to Third
Amended and Restated Loan Agreement dated May 19, 1993 among
the Company, The Toronto-Dominion Bank, NationsBank of Texas,
N.A., Fleet Bank (formerly National Westminster Bank USA),
The First National Bank of Boston, Bank of Hawaii,
Corestates Bank, N.A., The Bank of Nova Scotia, CIBC, Inc.,
and National Bank of Canada; and Toronto-Dominion (Texas),
Inc., as agent (filed as Exhibit 10(1) to the Company's Form
10-Q for the quarter ended September 30, 1993 and
incorporated by reference herein).
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(1) to the Company's Form 10-Q for the quarter ended
September 30, 1993 and incorporated by reference herein).
10(m) Harte-Hanks Communications, Inc. Incentive Bonus Plan (filed
as Exhibit 10(m) to the Company's Form 10-K for the year
ended December 31, 1993 and incorporated by reference herein).
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., Fleet Bank (formerly National Westminster
Bank USA), The Bank of Nova Scotia, The First National Bank
of Boston, Bank of Hawaii, The Bank of Tokyo-Mitsubishi, 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).
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- ------------------------------------------------------------------ ---------
<S> <C> <C>
10(o) Amendment No. 3 to Harte-Hanks Communications (formerly HHC
Holding Inc.) 1991 Stock Option Plan (filed as Exhibit 10(o) to the
Company's Form 10-Q for the six months ended June 30, 1996 and
incorporated by reference herein).
10(p) Harte-Hanks Communications, Inc. 1996 Incentive Compensation
Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the six
months ended June 30, 1996 and incorporated by reference herein).
*11 Statement Regarding Computation of Net Income (Loss) Per Common
Share. 28
*13 Annual Report to Securityholders (only those portions incorporated
by reference into the Form 10-K are filed herewith). 29
*21 Subsidiaries of the Company. 49
*23 Consent of KPMG Peat Marwick. 50
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. 51
</TABLE>
- ------------------
*Filed herewith
<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,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net income ........................ $40,621 $39,985 $28,885
======= ======= =======
Shares used in net earnings per
share computations...... ........ 38,577 36,805 $34,950
======= ======= =======
Earnings per share ................ $ 1.05 $ 1.09 $ .83
======= ======= =======
</TABLE>
COMPUTATION OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Average outstanding common shares .... 36,414 34,978 33,385
Average common equivalent shares --
dilutive effect of option shares ... 2,163 1,827 1,565
------- ------- -------
Shares used in net earnings
per share computations ............. 38,577 36,805 34,950
======= ======= =======
</TABLE>
FULLY DILUTED
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net income ........................... $ 40,621 $ 39,985 $ 28,885
======== ======== ========
Adjusted net income for interest
on convertible note ................ $ 40,621 $ 40,298 $ 29,635
======== ======== ========
Shares used in net earnings
per share computations ............. 38,654 37,747 $ 37,144
======== ======== ========
Earnings per share ................... $ 1.05 $ 1.07 $ .80
======== ======== ========
</TABLE>
COMPUTATION OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Average outstanding common shares .... 36,414 34,978 33,385
Average common equivalent shares --
dilutive effect of option shares ... 2,240 1,905 1,616
Dilutive effect of convertible note .. -- 864 2,143
------- ------- -------
Shares used in net earnings
per share computations ............. 38,654 37,747 37,144
======= ======= =======
</TABLE>
28
<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 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.
As a result of this strategy, Harte-Hanks has grown revenues 40.6% since
December 31, 1993, excluding the results of the operations sold during that
time. On the same basis, operating income increased 70.6%.
Harte-Hanks has grown internally by adding new customers and products,
cross-selling existing products, entering new markets and expanding its
international presence. Several acquisitions have enhanced the Company's growth
during the last three years. Harte-Hanks, together with DiMark, Inc. (discussed
below), has funded $69.0 million in acquisitions during the period 1994 through
1996. All of these acquisitions were made in the Company's direct marketing
segment, which now comprises 50% of the Company's revenues.
In addition to the purchase acquisitions mentioned above, DiMark, Inc.
("DiMark") merged with a wholly-owned subsidiary of the Company on April 30,
1996 as discussed under "Acquisitions" on page 17. The merger was accounted for
on a pooling-of-interests basis, and all historical information has been
restated as if the pooling occurred at the beginning of the periods presented.
DiMark provides a full range of outsource marketing, database services and
teleservices to clients in the insurance, healthcare, pharmaceutical, financial
services and telecommunications industries, as well as direct response printing
services.
The Company has significantly reduced its total borrowings by $105 million
from $323 million at December 31, 1993 to $218 million at December 31, 1996
with cash flow generated from operations, net proceeds from the March 1995 sale
of the Boston community newspapers and the May 1995 conversion of its $20
million 61/4% Convertible Notes due 2002. This debt reduction occurred while
the Company funded $137.6 million in capital expenditures and acquisitions
during the same period.
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. The
Company's principal expense items are payroll, postage and paper. Paper prices
increased in 1994 and 1995, and the Company experienced the effects of those
increases in 1996. Paper prices began decreasing in 1996, and the Company began
to benefit from the lower prices at the end of 1996 and will continue to
benefit into 1997. Postal rates, which typically increase every three to four
years,
29
<PAGE> 2
increased 14% in January 1995. In 1996, the Company experienced postal savings
in its shopper operations and increased costs in its direct marketing
operations due to a mid-year postal reclassification rate case. Savings are
expected in the first half of 1997 in its shopper operations as a result of the
1996 postal reclassification.
===============================================================================
RESULTS OF OPERATIONS
Operating results were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
In thousands, except per share amounts 1996 (a) % Change 1995 (b) % Change 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $665,873 10.3 $603,511 4.1 $579,602
Operating expenses 565,742 8.9 519,575 2.5 507,039
-------- -------- --------
Operating income $100,131 19.3 $ 83,936 15.7 $ 72,563
======== ======== ========
Net income $ 49,382 34.0 $ 36,862 27.6 $ 28,885
======== ======== ========
Earnings per share-- fully diluted $ 1.28 30.6 $ .98 22.5 $ .80
======== ======== ========
</TABLE>
(a) Excludes 1996 one-time merger costs (discussed under "Acquisitions").
Including these costs, net income was $40.6 million, or $1.05 per share.
(b) Excludes 1995 gains on divestitures (discussed under "Gains on
Divestitures"). Including these gains, net income was $40.0 million, or
$1.07 per share.
Consolidated revenues grew 10.3% in 1996 to $665.9 million, and 1996
operating income grew 19.3% to $100.1 million when compared to 1995, excluding
the one-time merger costs. The Company's overall growth resulted from
acquisitions, increased business with both new and existing customers, new
products and services, as well as advertising and circulation rate increases.
Overall operating expenses increased as a result of the overall revenue growth
and higher paper prices experienced in 1996.
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.
Excluding the results of the Boston community newspapers sold on March 31, 1995
(See "Gains on Divestitures"), 1995 consolidated revenues grew 8.4% and
operating income grew 17.9%. Operating expenses, excluding the results of the
Boston newspapers, rose correspondingly with the growth in overall business as
well as from higher paper prices and postal rates experienced throughout the
year.
===============================================================================
DIRECT MARKETING
Direct marketing operating results were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
In thousands 1996 % Change 1995 % Change 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $330,255 23.1 $268,257 14.8 $233,751
Operating expenses 285,461 23.9 230,483 12.0 205,841
-------- -------- --------
Operating income $ 44,794 18.6 $ 37,774 35.3 $ 27,910
======== ======== ========
</TABLE>
Direct marketing revenues increased $62.0 million, or 23.1%, in 1996 when
compared to 1995. The database marketing and response management/teleservices
sectors experienced significant revenue growth. Database marketing revenues
increased due to database construction and updates as well as higher sales of
software products. Response management/teleservices revenues increased because
of increased business with existing customers, the addition of new customers,
particularly in the high technology industry, and acquisitions in January, May
and August 1996. These included DiMark's January acquisition of PRO Direct
Response Corp., a telemarketing company with a strong customer base in the
financial services industry; the May acquisition of Inquiry Handling Service, a
Los Angeles based
30
<PAGE> 3
response management company that serves the high technology and electronics
industries and the August acquisition of Lead Management Group, a Boston based
response management, telemarketing and fulfillment company that serves the high
technology industry.
In addition to the response management/teleservices acquisitions, DiMark
acquired H & R Communications, Inc. in September 1995, which provides marketing
services primarily to the pharmaceutical industry. In November 1996, the
Company also acquired Marketing Communications, Inc., a database marketing
company that serves the pharmaceutical industry. Overall, revenue growth
resulted from acquisitions and increased business with both new and existing
customers, particularly in services provided to the retail, high technology,
financial services, healthcare, pharmaceutical and insurance industries.
Operating expenses increased $55.0 million, or 23.9%, in 1996 when
compared to 1995. Payroll costs increased $31.1 million due to expanded hiring
to support revenue growth. Also contributing to the increased operating
expenses were additional production costs of $16.2 million due to increased
volumes. Depreciation expense increased $2.4 million due to higher levels of
capital investment to support growth. Operating expenses were also impacted by
the acquisitions noted above.
Direct marketing's 1995 revenue growth of $34.5 million, or 14.8%,
occurred primarily in the database marketing and response
management/teleservices sectors along with growth in marketing services to
customers in the financial services, high technology, retail, healthcare and
insurance industries. The addition of new customers, increased business with
existing customers through new products and services, and cross-selling of
services contributed to 1995's growth. Although the majority of direct
marketing's revenue growth came from existing operations, a portion of the
increase was attributable to the October 1994 acquisition of Select Marketing,
Inc., an Austin, Texas response management company that serves the high
technology industry, and the January 1995 acquisition of Steinert & Associates,
a New York City advertising and marketing communications firm. The revenue
increase was partially offset by the absence of a local hand distribution
advertising business sold in July 1995.
Operating expenses rose $24.6 million, or 12.0%, during 1995 due primarily
to revenue growth. Payroll costs were up $12.2 million, or 14.9%, as a result
of increased hiring. In addition, production and distribution costs increased
$7.1 million, or 7.3%, due to increased production levels. Also contributing to
higher operating expenses were $3.4 million of additional general and
administrative costs and increased depreciation expense of $1.6 million,
supporting direct marketing's growth. Facility expansion 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.
===============================================================================
SHOPPERS
Shopper operating results were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
In thousands 1996 % Change 1995 % Change 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $185,205 0.1 $185,045 4.9 $176,461
Operating expenses 161,188 (2.3) 165,025 4.0 158,718
-------- -------- --------
Operating income $ 24,017 20.0 $ 20,020 12.8 $ 17,743
======== ======== ========
</TABLE>
Shopper revenues increased $0.2 million, or 0.1%, in 1996 when compared to
1995. The increase was due primarily to higher in-book advertising revenues
resulting from higher display advertising volumes. Display advertising growth
came from the Company's core business accounts as well as increased in-column
display advertisements made possible by pagination technology implemented in
1995. These increases were offset by lower insert revenues as a result of
reduced volumes and revenue declines from reductions of marginal circulation in
Dallas. At December 31, 1996, total weekly shopper circulation was 6.9 million.
Shopper operating expenses decreased $3.8 million, or 2.3%, in 1996 when
compared to 1995. Postage expense decreased $4.8 million due to lower rates as
a result of postal
31
<PAGE> 4
reclassification and less overweight postage associated with the lower insert
volumes. Insurance costs and outsourced printing costs were also lower when
compared to 1995. Reduced circulation in the Dallas market also contributed to
the decreased expense. These decreases were offset by paper cost increases of
$2.1 million attributable to higher paper prices experienced through the first
three quarters of 1996.
Shopper revenues 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%. Revenue growth was
primarily attributable to increased advertising rates in existing circulation
zones, and, to a lesser degree, increased newsstand product volumes produced in
portions of the Company's markets.
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 from new pagination technology used by the Company's
Southern California and South Florida 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 from
investments in technology and changes in commission plans.
===============================================================================
NEWSPAPERS
Newspaper operating results were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
In thousands 1996 % Change 1995 % Change 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $124,313 (0.6) $125,077 (11.1) $140,761
Operating expenses 94,754 (3.1) 97,796 (14.5) 114,398
-------- -------- --------
Operating income $ 29,559 8.4 $ 27,281 3.5 $ 26,363
======== ======== ========
</TABLE>
Newspaper revenues decreased $0.8 million, or 0.6%, in 1996 when compared
to 1995. Excluding the results of the Boston newspapers sold in March 1995,
revenues in 1996 increased $6.6 million, or 5.6%, from 1995. Newspaper
advertising revenues were up $3.1 million overall, or 3.9%. That increase
included increases in classified and retail advertising revenues. Classified
advertising revenues were up $1.7 million, or 5.8%, due to higher rates and
volumes. In addition, retail advertising revenues increased $1.3 million, or
3.8%, also as a result of rate increases. Circulation revenues increased $1.3
million, or 4.5%, due to home delivery rate increases in all markets and a
Sunday single-copy rate increase at the Corpus Christi paper in late 1995.
Niche product revenues grew $1.9 million due principally to the continued
growth of existing direct mail programs as well as the launch of new programs
in 1996. Initiatives in community publications, total market coverage products,
Internet and audiotext services also added to revenue growth.
Newspaper operating expenses decreased $3.0 million, or 3.1%, in 1996 when
compared to 1995. This decrease was caused by the sale of the Company's Boston
newspapers. Excluding the results of these papers, 1996 operating expenses
increased $4.6 million, or 5.0%, in 1996 when compared to 1995. Newsprint
expense increased $2.5 million, or 14.9%, as a result of higher average
newsprint prices experienced through the first three quarters of 1996. Postage
costs were up $0.4 million due to increased direct mail activity. General and
administrative costs increased $0.6 million, or 4.6%.
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. Help wanted and
automotive categories fueled the classified revenue growth. Retail advertising
revenues were flat.
Insert revenues increased 5.5% as a result of higher volumes. In addition,
niche product revenues grew primarily due to a South Texas direct mail
initiative into the Rio
32
<PAGE> 5
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.
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%, 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.
===============================================================================
TELEVISION
Television operating results were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
In thousands 1996 % Change 1995 % Change 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 26,100 3.9 $ 25,132 (12.2) $ 28,629
Operating expenses 17,003 (4.2) 17,753 (9.8) 19,683
-------- -------- --------
Operating income $ 9,097 23.3 $ 7,379 (17.5) $ 8,946
======== ======== ========
</TABLE>
Revenues for the television segment increased $1.0 million, or 3.9%, in
1996 when compared to 1995. This increase was primarily due to higher network
compensation revenue from a renegotiated network affiliation agreement. Also
contributing to the revenue increase were higher political and radio
advertising revenues. These increases were partially offset by decreased
revenues from graphics services, which were discontinued in 1996.
Operating expenses decreased $0.8 million, or 4.2%, in 1996 when compared
to 1995. The decrease was due primarily to film cost savings as well as reduced
costs related to the elimination of graphics services.
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 benefited from CBS coverage of the National Football
League playoffs and winter Olympics, while the full year 1994 benefited 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 renegotiated network affiliation
agreement.
Operating expenses decreased $1.9 million, or 9.8%, when compared to 1994.
The decrease was attributable to lower payroll and direct mail publication
production costs. Also contributing to the decrease were lower film costs.
===============================================================================
ACQUISITIONS
As described in Note B to the Notes to Consolidated Financial Statements
included herein, on April 30, 1996, DiMark was merged with a wholly-owned
subsidiary of the Company, and each outstanding share of DiMark common stock
was converted into .656 of a share of common stock of Harte-Hanks. As a result,
Harte-Hanks issued approximately 6.1 million shares of its common stock to the
shareholders of DiMark, and DiMark's outstanding stock options were converted
into options to acquire approximately 1.5 million shares of Harte-Hanks common
stock. The merger was accounted for on a pooling-of-interests basis, and all
historical information has been restated as if the pooling occurred at the
beginning of the periods presented. One-time merger expenses of $12.1 million
($8.7 million after tax) were recognized in the second quarter of 1996.
INTEREST EXPENSE/INTEREST INCOME
Interest expense decreased $3.4 million in 1996 when compared to 1995 due
to lower effective interest rates and debt levels. Interest expense decreased
$0.7 million in 1995
33
<PAGE> 6
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 61/4%
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 income increased $0.7 million in 1996 when compared to 1995 due
to interest income related to an income tax refund from a favorable tax
settlement.
GAINS ON DIVESTITURES
In March 1995 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 8 cents per share, net of $10.6 million of
income taxes. See Note K of Notes to Consolidated Financial Statements.
INCOME TAXES
Excluding the income taxes related to the 1996 merger costs and the 1995
gains on divestitures, income tax expense increased $8.1 million in 1996 and
$4.7 million in 1995 due to higher income levels. The effective income tax rate
(excluding the unusual items) was 43.6%, 44.8% and 46.7% in 1996, 1995 and
1994, respectively.
CAPITAL INVESTMENTS
Net cash used in investing activities for 1996 included $32.7 million for
acquisitions and $27.4 million for capital expenditures. In addition to the
cash outlay for acquisitions, the Company incurred $18.8 million in notes
payable in connection with its November 1996 acquisition, which was repaid in
early January 1997 with borrowings under the Company's revolving credit
commitment. The acquisition investments were made in the direct marketing
segment discussed under "Direct Marketing." The capital expenditures consisted
primarily of additional computer capacity for the direct marketing business to
support the growth in its database marketing sector. The Company also invested
in facility expansions in its database and response management businesses as
well as the opening of sales offices in Brazil and Australia. Other investments
included pagination technology in the newspaper business and upgraded prepress
technology in the shopper business.
The investment activities in 1995 included $31.7 million for capital
expenditures and acquisitions. In the direct marketing business, the capital
expenditures consisted of new computer systems to increase capacity to support
its growing customer base. The Company also invested in laser printing
equipment as well as the expansion of several facilities. Other expenditures
included investments in pagination technology and order entry systems at the
South Florida shopper and classified advertising systems and distribution
center expansions in the newspaper business.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $72.5 million in 1996. Net cash
outflows for investing activities were $61.1 million. Investing activities
consisted primarily of acquisitions and capital expenditures. Cash provided by
operating activities for 1995 and 1994 was $48.4 million and $54.4 million,
respectively. Net cash inflows from investing activities were $9.8 million in
1995. Included in 1995 investing activities was $43.4 million in proceeds from
the sale of property, plant and equipment and divested assets. Proceeds from
divestitures were used to reduce borrowings under the Company's credit
facility. Net cash outflows for investing activities in 1994 were $28.6
million, consisting principally of equipment purchases and acquisitions.
Capital resources are also available for and provided through the
Company's unsecured credit facility. On February 2, 1995, the Company replaced
its existing credit agreement with 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. 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, 1996, the
Company had $125.0 million of unused borrowing capacity under its credit
facility, of which $3.0 million was reserved to serve as backup for other
short-term borrowings.
34
<PAGE> 7
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
December 31,
In thousands, except per share and share amounts 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash ................................................... $ 12,017 $ 18,102
Accounts receivable (less allowance for doubtful
accounts of $1,995 in 1996 and $2,584 in 1995) .... 107,559 80,056
Inventory .............................................. 13,720 24,307
Prepaid expense ........................................ 9,445 5,330
Current deferred income tax benefit .................... 6,204 7,181
Other current assets ................................... 4,202 3,477
--------- ---------
Total current assets ............................... 153,147 138,453
--------- ---------
Property, plant and equipment
Land ................................................... 8,392 8,392
Buildings and improvements ............................. 44,990 42,470
Equipment and furniture ................................ 179,908 159,192
--------- ---------
233,290 210,054
Less accumulated depreciation .......................... 121,827 109,064
--------- ---------
111,463 100,990
Construction and equipment installations in progress ... 1,445 1,174
--------- ---------
Net property, plant and equipment .................. 112,908 102,164
--------- ---------
Intangible and other assets
Goodwill (less accumulated amortization
of $109,009 in 1996 and $99,982 in 1995) ........... 319,289 283,149
Other assets ........................................... 6,939 5,513
--------- ---------
Total intangible and other assets .................. 326,228 288,662
--------- ---------
Total assets ....................................... $ 592,283 $ 529,279
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ....................................... $ 40,573 $ 35,768
Accrued payroll and related expenses ................... 23,116 20,677
Customer deposits and unearned revenue ................. 19,809 16,174
Income taxes payable ................................... 2,748 1,593
Other current liabilities .............................. 11,481 9,015
--------- ---------
Total current liabilities .......................... 97,727 83,227
Long term debt .............................................. 218,005 220,468
Other long term liabilities (including deferred
income taxes of $10,749 in 1996 and $11,133 in 1995) ... 23,859 23,728
--------- ---------
Total liabilities .................................. 339,591 327,423
--------- ---------
Stockholders' equity
Common stock, $1 par value, authorized
125,000,000 shares. Issued and outstanding 1996:
36,801,701 shares; 1995: 36,044,265 shares ......... 36,802 36,044
Additional paid-in capital ............................. 186,677 174,870
Retained earnings (accumulated deficit) ................ 29,213 (9,058)
--------- ---------
Total stockholders' equity ......................... 252,692 201,856
--------- ---------
Total liabilities and stockholders' equity ......... $ 592,283 $ 529,279
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
35
<PAGE> 8
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year Ended December 31,
In thousands, except per share amounts 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues ................................................... $ 665,873 $ 603,511 $ 579,602
--------- --------- ---------
Operating expenses
Payroll ............................................... 237,260 209,464 210,734
Production and distribution ........................... 240,033 225,909 213,740
Advertising, selling, general and administrative ...... 59,655 58,223 58,096
Depreciation .......................................... 18,750 16,211 14,623
Goodwill amortization ................................. 10,044 9,768 9,846
Merger costs .......................................... 12,136 -- --
--------- --------- ---------
577,878 519,575 507,039
--------- --------- ---------
Operating income ........................................... 87,995 83,936 72,563
--------- --------- ---------
Other expenses (income)
Interest expense ...................................... 13,484 16,868 17,605
Interest income ....................................... (1,359) (641) (412)
Gains on divestitures ................................. -- (13,747) --
Other, net ............................................ 513 873 1,142
--------- --------- ---------
12,638 3,353 18,335
--------- --------- ---------
Income before income taxes ................................. 75,357 80,583 54,228
Income tax expense ......................................... 34,736 40,598 25,343
--------- --------- ---------
Net income ................................................. $ 40,621 $ 39,985 $ 28,885
========= ========= =========
Earnings per common share -- primary
Net income ............................................ $ 1.05 $ 1.09 $ .83
--------- --------- ---------
Weighted average common and
common equivalent shares outstanding .................. 38,577 36,805 34,950
========= ========= =========
Earnings per common share -- fully diluted
Net income ............................................ $ 1.05 $ 1.07 $ .80
========= ========= =========
Weighted average common and common
equivalent shares outstanding ......................... 38,654 37,747 37,144
========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
<PAGE> 9
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31,
In thousands 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income ......................................................... $ 40,621 $ 39,985 $ 28,885
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................ 18,750 16,211 14,623
Goodwill amortization ....................................... 10,044 9,768 9,846
Amortization of option related compensation ................. 971 1,786 1,605
Film amortization ........................................... 1,347 2,188 2,746
Deferred income taxes ....................................... 592 (276) (2,153)
Other, net .................................................. 1,103 309 801
Gains on divestitures ....................................... -- (13,747) --
Changes in operating assets and liabilities,
net of effects from acquisitions and divestitures:
Increase in accounts receivable, net ........................ (18,657) (2,600) (10,686)
Decrease (increase) in inventory ............................ 11,920 (9,300) (6,658)
Increase in prepaid expenses and other current assets ....... (3,425) (931) (731)
Increase in accounts payable ................................ 1,426 2,961 5,976
Increase (decrease) in other accrued expenses
and other liabilities .................................... 8,366 (498) 9,612
Other, net .................................................. (573) 2,593 544
--------- --------- ---------
Net cash provided by operating activities .......................... 72,485 48,449 54,410
--------- --------- ---------
Cash Flows from Investing Activities
Acquisitions ....................................................... (32,749) (9,661) (7,800)
Purchases of property, plant and equipment ......................... (27,414) (22,110) (19,051)
Proceeds from the sale of property, plant and equipment
and divested assets ............................................ 678 43,408 412
Payments on film contracts ......................................... (1,572) (1,817) (2,122)
--------- --------- ---------
Net cash provided by (used in) investing activities ................ (61,057) 9,820 (28,561)
--------- --------- ---------
Cash Flows from Financing Activities
Long term borrowings ............................................... 244,573 895,463 657,695
Payments on debt, including current
maturities and financing costs ................................. (267,224) (949,289) (686,074)
Issuance of common stock ........................................... 7,488 5,598 2,221
Dividends paid ..................................................... (2,350) (1,968) --
--------- --------- ---------
Net cash used in financing activities .............................. (17,513) (50,196) (26,158)
--------- --------- ---------
Net increase (decrease) in cash ........................................ (6,085) 8,073 (309)
Cash at beginning of period ............................................ 18,102 11,533 11,842
Pooling adjustment to beginning of year
balance to conform fiscal years .................................... -- (1,504) --
--------- --------- ---------
Cash at end of period .................................................. $ 12,017 $ 18,102 $ 11,533
========= ========= =========
Supplemental cash flow information:
Non-cash investing activities:
Acquisitions .................................................. $ 18,765 $ -- $ --
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
37
<PAGE> 10
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Retained
Additional Earnings Minimum Total
Paid-In (Accumulated Pension Liability Stockholders'
In thousands Common Stock Capital Deficit) Adjustment Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 .................. $ 24,181 $ 157,664 $ (73,820) $ -- $ 108,025
Common stock issued-- employee
benefit plans ............................. 33 502 -- -- 535
Exercise of stock options ................... 180 1,504 -- -- 1,684
Tax benefit on options exercised ............ -- 561 -- -- 561
Adjustment for minimum pension liability,
net of income taxes of $1.3 million ....... -- -- -- (1,945) (1,945)
Issuance of warrants ........................ -- 100 -- -- 100
Net income .................................. -- -- 28,885 -- 28,885
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 ................ 24,394 160,331 (44,935) (1,945) 137,845
Common stock issued-- employee
benefit plans ............................. 94 1,836 -- -- 1,930
Exercise of stock options ................... 133 2,227 -- -- 2,360
Tax benefit on options exercised ............ -- 743 -- -- 743
Conversion of 61/4% convertible notes ....... 1,429 18,525 -- -- 19,954
Dividends paid ($.067 per share) ............ -- -- (1,968) -- (1,968)
Stock issued in connection with acquisition . -- 1,310 -- -- 1,310
Net income .................................. -- -- 39,985 -- 39,985
Pooling adjustment to beginning of year
balance to conform fiscal year ............ -- (108) (2,140) -- (2,248)
Reduction of minimum pension liability ...... -- -- -- 1,945 1,945
Three-for-two stock split ................... 9,994 (9,994) -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 ................ 36,044 174,870 (9,058) -- 201,856
Common stock issued-- employee
benefit plans ............................. 104 2,545 -- -- 2,649
Exercise of stock options ................... 596 5,295 -- -- 5,891
Dividends paid ($.071 per share) ............ -- -- (2,350) -- (2,350)
Tax benefits on options exercised ........... -- 2,766 -- -- 2,766
Net income .................................. -- -- 40,621 -- 40,621
Stock issued in connection with
acquisition earnout ....................... 58 1,201 -- -- 1,259
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 ................ $ 36,802 $ 186,677 $ 29,213 $ -- $ 252,692
============ ============ ============ ============ ============
</TABLE>
38
<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").
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> <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 non-current other assets, respectively. The
payments under these contracts due within one year and after one year are
classified as current and non-current 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 PER SHARE
Primary earnings per common share are 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 per common share are 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 61/4% Convertible Notes
due 2002 until May 1995, at which time the Company issued shares of its common
stock upon conversion of the notes.
STOCK SPLIT
In December 1995, the Company effected a three-for-two stock split in the form
of a stock 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.
NOTE B -- ACQUISITIONS
POOLING-OF-INTERESTS
Effective April 30, 1996, DiMark, Inc. ("DiMark") was merged with a
wholly-owned subsidiary of the Company, and each outstanding share of DiMark
common stock was converted into the right to acquire .656 of a share of
Harte-Hanks common stock. As a result, Harte-Hanks issued approximately 6.1
million shares of Harte-Hanks common stock to the shareholders of DiMark, and
DiMark's outstanding stock options were converted into options to acquire
approximately 1.5 million shares of Harte-Hanks common stock. The merger was
accounted for on a pooling-of-interests basis. Accordingly, the Company's
financial statements have been restated to include the results of DiMark for
all periods presented. The combined financial results include reclassifications
to conform
39
<PAGE> 12
financial statement preparation. Merger expenses related to the transaction
were $12.1 million ($8.7 million, net of income taxes).
Prior to the combination, Harte-Hanks' fiscal year ended on December 31 and
DiMark's fiscal year ended February 28. In recording the business combination,
DiMark's financial statements for the 12 months ended December 31, 1996 and
1995 were combined with the Company's consolidated financial statements for the
same periods. DiMark's financial statements for the fiscal year ended February
28, 1995 were combined with the Company's consolidated financial statements for
the year ended December 31, 1994. Net income, the issuance of common stock, and
the net increase in cash and cash equivalents were adjusted to eliminate the
effect of including DiMark's results of operations, financial position, and
cash flows for the two months ended January and February, 1995 in the years
ended December 31, 1995 and December 31, 1994.
Combined and separate results of the Company and DiMark during the reporting
periods preceding the merger were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three Months Ended Year Ended
In thousands March 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Harte-Hanks .......... $ 124,899 $ 532,852
DiMark ............... 27,377 77,583
Adjustments .......... (1,665) (6,924)
----------- -----------
Combined ............. $ 150,611 $ 603,511
=========== ===========
Net income
Harte-Hanks .......... $ 6,385 $ 33,985
DiMark ............... 1,932 6,000
----------- -----------
Combined ............. $ 8,317 $ 39,985
=========== ===========
</TABLE>
Adjustments consist of elimination of DiMark's postage costs from revenues and
cost of sales to conform to Harte-Hanks' accounting classification.
PURCHASES
In January 1996, PRO Direct Response Corp., a telemarketing company that serves
the financial services industry, was acquired by DiMark.
In May 1996, the Company acquired Inquiry Handling Service, a Los Angeles-based
response management company that serves the high technology and electronics
industries. In August 1996, the Company acquired Lead Management Group, a
Boston-based response management, telemarketing and fulfillment company that
serves the high technology industry.
In November 1996, the Company acquired Marketing Communications, Inc., a Kansas
City-based integrated database marketing company that serves the pharmaceutical
industry.
The total cash outlay in 1996 for these acquisitions was $32.7 million. In
addition, the Company incurred $18.8 million in notes payable for its November
1996 acquisition, which was repaid in January 1997 with borrowings under its
revolving credit commitment.
The operating results of the acquired companies have been included in the
accompanying Consolidated Financial Statements from the date of acquisition.
NOTE C -- LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31,
In thousands 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Revolving loan commitment, various
interest rates (effective rate of 6.0%
at December 31, 1996), due in
mandatory reductions beginning
June 30, 1998 through
December 31, 2001 ......................... $ 195,000 $ 214,000
Bank lines, various interest rates
(effective rate of 7.8% at
December 31, 1996) ........................ 3,000 4,700
Acquisition notes payable (interest
rate of 5.5%) ............................. 18,765 --
Miscellaneous notes payable, interest
rates ranging from 7.3% to 8%, due
on various dates through 1998 ............. 1,340 2,664
--------- ---------
218,105 221,364
Less current maturities ...................... 100 896
--------- ---------
$ 218,005 $ 220,468
========= =========
</TABLE>
CREDIT FACILITY
The Company's 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, 1996, the Company had
$125 million of unused borrowing capacity under its credit facility, of which
$3 million was reserved to serve as backup for short term 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 the Company
intends to maintain unused and available credit under its credit facility in an
amount equal to its outstanding short term borrowings.
40
<PAGE> 13
ACQUISITION NOTES PAYABLE
In November 1996, the Company issued notes payable of $18.8 million in
connection with an acquisition. These notes were repaid in January 1997 with
borrowings under the Company's revolving credit commitment.
OTHER DEBT INFORMATION
As of December 31, 1996, the minimum annual maturities of long term debt
(excluding the borrowings under the Company's credit facility) for each of the
following years ending December 31 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
In thousands
- -------------------------------------------------------------------------------
<S> <C> <C>
1997........................................... $ 100
1998........................................... 1,240
</TABLE>
Cash payments for interest were $13.5 million, $16.8 million and $17.8 million
for the years ended December 31, 1996, 1995 and 1994, 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.
NOTE D -- INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
In thousands 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal ................. $ 29,090 $ 35,197 $ 23,474
State and local ......... 5,054 5,677 4,022
-------- -------- --------
Total current ......... $ 34,144 $ 40,874 $ 27,496
======== ======== ========
Deferred
Federal ................. $ 196 $ (1,895) $ (2,262)
State and local ......... 396 1,619 109
-------- -------- --------
Total deferred ........ $ 592 $ (276) $ (2,153)
======== ======== ========
</TABLE>
Included in income tax expense for 1996 is a tax benefit of $3.4 million
related to merger costs. Included in income tax expense for 1995 is $10.6
million related to the gains on divestitures.
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 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed expected
income tax
expense ............................... $ 26,376 35% $ 28,236 35% $ 18,894 35%
Effect of goodwill
amortization .......................... 3,204 4% 3,319 4% 3,348 6%
Net effect of state
income taxes .......................... 3,637 5% 4,671 6% 2,740 5%
Effect of goodwill related
to divestiture ........................ -- -- 4,307 5% -- --
Change in the beginning
of the year balance
of the valuation
allowance ............................. (95) -- 119 -- (30) --
Merger costs ............................. 1,498 2% -- -- -- --
Other, net ............................... 116 -- (54) -- 391 1%
-------- -------- -------- -------- -------- --------
Income tax expense
for the period ........................ $ 34,736 46% $ 40,598 50% $ 25,343 47%
======== ======== ======== ======== ======== ========
</TABLE>
Excluding the effects of the merger costs, the effective income tax rate for
1996 was 43.6%. Excluding the effects of the gains on divestitures, the
effective income tax rate for 1995 was 44.8%.
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 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
State net operating losses ....................... $ 67 $ 85
Accrued benefit costs, primarily
pension and vacation pay ....................... 5,297 4,872
Accrued casualty and health
insurance expense .............................. 2,658 2,830
Merger costs ..................................... 1,671 --
Accounts receivable, net ......................... 782 896
State income tax ................................. 331 727
Other, net ....................................... 427 689
-------- --------
Total gross deferred tax assets................. 11,233 10,099
Less valuation allowance ....................... (67) (60)
-------- --------
Net deferred tax assets ........................ 11,166 10,039
-------- --------
Deferred tax liabilities:
Property, plant and equipment .................... (14,799) (13,742)
Goodwill ......................................... (912) (235)
Other, net ....................................... -- (14)
-------- --------
Total gross deferred tax liabilities.............. (15,711) (13,991)
-------- --------
Net deferred tax liability ....................... $ (4,545) $ (3,952)
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1995 was $1.6
million. The valuation allowance at December 31, 1996 and 1995 relate to state
net operating losses, which are not expected to be realized.
41
<PAGE> 14
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 $30.0 million, $40.4 million and $24.5
million in 1996, 1995 and 1994, respectively.
NOTE E -- EMPLOYEE BENEFIT PLANS
The Company maintains a defined benefit pension plan for which most of its
employees are eligible. 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 plan if it were not for limitations imposed by
income tax regulation.
Net pension cost for all plans included the following components:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
In thousands 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period ................... $ 3,937 $ 3,282 $ 3,572
Interest cost on projected
benefit obligation .................. 5,134 4,801 4,608
Actual return on plan assets ........... (8,089) (10,786) 1,493
Net deferrals and amortization ......... 2,532 6,171 (5,872)
-------- -------- --------
Net periodic pension cost .............. $ 3,514 $ 3,468 $ 3,801
======== ======== ========
</TABLE>
In determining the 1996, 1995 and 1994 actuarial present value of benefit
obligations, discount rates of 73/4%, 71/4% and 8% were used, respectively. The
assumed annual rate 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>
- --------------------------------------------------------------------------------------------------------
Year Ended December 31,
In thousands 1996 1995
- --------------------------------------------------------------------------------------------------------
Qualified Non-Qualified Qualified Non-Qualified
Plan Plan Plan Plan
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested .............................................. $ 49,581 $ -- $ 49,673 $ --
Non-vested .......................................... 4,790 1,033 4,945 871
-------- -------- -------- --------
Total accumulated
benefit obligations ............................... 54,371 1,033 54,618 871
Additional obligation
related to projected
salary increases .................................... 16,123 1,295 16,260 977
-------- -------- -------- --------
Projected benefit
obligations for service
rendered to date .................................... 70,494 2,328 70,878 1,848
Fair value of plan assets,
primarily listed stocks and
government securities ............................... (65,316) -- (56,763) --
-------- -------- -------- --------
Projected benefit obligation
in excess of plan assets ............................ 5,178 2,328 14,115 1,848
Unrecognized net loss from
past experience different
from that assumed ................................... (2,173) (209) (10,211) (238)
Unrecognized prior
service costs ....................................... (47) (1,126) (52) (1,000)
Unrecognized net assets at
January 1, 1987
being recognized over
average expected
remaining service period
of employees ........................................ 828 -- 950 --
Adjustment to recognize
minimum liability ................................... -- 40 -- 261
-------- -------- -------- --------
Recorded pension liability ............................ $ 3,786 $ 1,033 $ 4,802 $ 871
======== ======== ======== ========
</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.
The 1994 Employee Stock Purchase Plan 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 130,717 at
December 31, 1996.
42
<PAGE> 15
NOTE F -- STOCKHOLDERS' EQUITY
In January 1997, the Company announced a stock repurchase program of up to 1.8
million shares of its common stock. As of February 28, 1997, the Company had
repurchased 500,000 shares for $13.5 million.
In April 1996, the Company amended its Certificate of Incorporation to increase
its total authorized capitalization to 125,000,000 shares of common stock.
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
61/4% Convertible Notes. Accordingly, the Company transferred $20 million, less
$0.1 million of unamortized issue costs, to stockholders' equity.
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, 1996, 1995
and 1994, options to purchase 469,800 shares, 657,900 shares and 810,300
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 4,000,000
shares of common stock. Options have been granted at prices equal to the market
price on the grant date ("market price options") and at prices below market
price ("performance options"). As of December 31, 1996, 1995 and 1994, market
price options to purchase 2,162,000 shares, 1,678,275 shares and 1,394,400
shares, respectively, were outstanding with exercise prices ranging from $6.67
to $26.375 per share. Market price options become exercisable after the fifth
anniversary of their date of grant. The weighted-average exercise price for
outstanding options and exercisable options at December 31, 1996 was $13.04 and
$8.10, respectively. The weighted-average remaining life for outstanding
options was 8.02 years.
At December 31, 1996, 1995 and 1994, performance options to purchase 497,125
shares, 557,775 shares and 544,050 shares, respectively, were outstanding with
exercise prices ranging from $0.67 to $2.00 per share. The performance options
become exercisable in whole or in part after three years, and the extent to
which they become exercisable at that time depends upon the extent to which the
Company achieves certain goals established at the time the options are granted.
That portion of the performance options which does not become exercisable at an
earlier date becomes exercisable after the ninth anniversary of the date of
grant. Compensation expense of $1.0 million, $1.8 million and $1.6 million was
recognized for the performance options for the years ended December 31, 1996,
1995 and 1994, respectively. The weighted-average exercise price for
outstanding options and exercisable options at December 31, 1996 was $0.76 and
$0.67, respectively. The weighted-average remaining life for outstanding
options was 7.09 years.
DIMARK MERGER
In connection with the DiMark merger, DiMark's outstanding stock options were
converted into options to acquire approximately 1.5 million shares of
Harte-Hanks common stock. As of December 31, 1996, 1995 and 1994, DiMark
options to purchase 1,267,342 shares, 1,566,014 shares and 1,272,075 shares,
respectively, were outstanding with exercise prices ranging from $2.61 to
$22.49 per share. As of December 31, 1996 all outstanding DiMark options were
exercisable. The weighted-average exercise price at December 31, 1996 was
$11.02, and the weighted-average remaining life was 2.47 years.
The following summarizes stock option plans activity:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Number Weighted Average
of Shares Option Price
- -------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding
at January 1, 1994 .......... 4,065,925 $ 5.97
Granted ........................ 359,544 10.96
Exercised ...................... (325,486) 3.66
Cancelled ...................... (79,158) 6.66
---------
Options outstanding
at December 31, 1994 ...... 4,020,825 6.41
Granted ........................ 883,482 14.09
Exercised ...................... (341,112) 5.24
Cancelled ...................... (122,058) 8.27
Pooling adjustment to
conform fiscal year ......... 18,827 8.83
---------
Options outstanding
at December 31, 1995 ........ 4,459,964 8.17
Granted ........................ 735,750 21.75
Exercised ...................... (597,054) 7.93
Cancelled ...................... (202,393) 11.22
---------
OPTIONS OUTSTANDING AT
DECEMBER 31, 1996 ........... 4,396,267 10.32
=========
EXERCISABLE AT
DECEMBER 31, 1996 ........... 2,252,667 8.24
=========
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting For Stock-Based
Compensation." Accordingly, no compensation expense has been recognized for
options granted where the exercise price is equal to the market price of the
underlying stock at the date of grant. The Company does recognize compensation
expense for options whose market price of the underlying stock exceeds the
exercise price on the date of grant under the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," as permitted under SFAS No. 123.
43
<PAGE> 16
Had compensation expense for the Company's options been determined based on the
fair value at the grant date for awards in 1996 and 1995, the Company's net
income and earnings per share would have been reduced to the proforma amounts
indicated below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
In thousands, except per share amounts 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Net income-- as reported ............... $ 40,621 $ 39,985
Net income-- proforma .................. 39,021 39,370
Earnings per share-- as reported ....... 1.05 1.07
Earnings per share-- proforma .......... 1.01 1.05
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Expected dividend yield................ 0.3% 0.3%
Expected stock price volatility........ 22.1% 21.3%
Risk-free interest rate................ 6.3% 6.1%
Expected life of options............... 3-10 YEARS 3-10 years
</TABLE>
The weighted-average fair value of market price options granted during 1996 and
1995 was $8.14 and $5.18, respectively. The weighted-average fair value and
exercise price of performance options was $14.63 and $1.14 in 1996, and $12.14
and $0.67 in 1995, respectively.
NOTE H -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Because of maturities and/or interest rates, the Company's financial
instruments have a fair value approximating their carrying value. These
instruments primarily include accounts receivable, revolving credit borrowings
and trade payables.
NOTE I -- COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company had outstanding letters of credit in the
amount of $23.1 million, which included $18.8 million to support an acquisition
note payable which was repaid in January 1997 with borrowings under the
Company's revolving credit commitment.
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 $14.4 million, $12.1
million and $11.9 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The future minimum rental commitments for all non-cancellable
operating leases with terms in excess of one year as of December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
In thousands
- -------------------------------------------------------------------------------
<S> <C>
1997................................ $ 11,560
1998................................ 9,855
1999................................ 8,107
2000................................ 6,225
2001................................ 5,130
After 2001.......................... 10,306
--------
$ 51,183
========
</TABLE>
NOTE K -- 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 8 cents per
share, net of $10.6 million of income taxes.
In March 1997, the Company announced plans to explore the divestiture of its
newspaper and television operations.
NOTE L -- 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>
1996
Revenues ......................................... $189,098 $166,248 $159,916 $150,611
Operating income ................................. 31,217 25,204 13,736 17,838
Net income ....................................... 16,106 12,292 3,906(c) 8,317
Earnings per common share-- primary .............. .42 .32 .10(c) .22
Earnings per common share-- fully diluted ........ .42 .32 .10(c) .22
1995
Revenues ......................................... $158,344 $146,459 $149,686 $149,022
Operating income ................................. 24,599 20,504 22,310 16,523
Net income ....................................... 11,885 9,976(a) 9,701 8,423(b)
Earnings per common share-- primary .............. .31 .26(a) .27 .24(b)
Earnings per common share-- fully diluted. ....... .31 .26(a) .26 .23(b)
</TABLE>
(a) Includes a net gain on divestiture of $0.8 million, or 1 cent per share.
(b) Includes a net gain on divestiture of $2.3 million, or 7 cents per share.
(c) Includes merger costs of $ 8.7 million, or 23 cents per share.
44
<PAGE> 17
NOTE M -- 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 and international business that serves customers primarily in the
retail, financial services, insurance, high technology, pharmaceutical and
healthcare industries. The Company's other businesses operate in local markets
and serve the retail, automotive, real estate and other service industries.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
In thousands 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues
Direct Marketing .................... $ 330,255 $ 268,257 $ 233,751
Shoppers ............................ 185,205 185,045 176,461
Newspapers(a)........................ 124,313 125,077 140,761
Television .......................... 26,100 25,132 28,629
--------- --------- ---------
Total operating revenues .......... $ 665,873 $ 603,511 $ 579,602
========= ========= =========
Operating income
Direct Marketing .................... $ 44,794 $ 37,774 $ 27,910
Shoppers ............................ 24,017 20,020 17,743
Newspapers(a)........................ 29,559 27,281 26,363
Television .......................... 9,097 7,379 8,946
General corporate expense, net ...... (19,472)(b) (8,518) (8,399)
--------- --------- ---------
Total operating income ............ $ 87,995 $ 83,936 $ 72,563
========= ========= =========
Identifiable assets
Direct Marketing .................... $ 231,365 $ 149,855 $ 128,197
Shoppers ............................ 99,061 108,743 104,528
Newspapers(a)........................ 184,846 192,607 223,632
Television .......................... 65,735 66,754 70,333
General corporate ................... 11,276 11,320 13,440
--------- --------- ---------
Total identifiable assets ......... $ 592,283 $ 529,279 $ 540,130
========= ========= =========
Depreciation
Direct Marketing .................... $ 9,139 $ 6,693 $ 5,063
Shoppers ............................ 4,600 4,410 3,905
Newspapers(a)........................ 3,927 4,010 4,510
Television .......................... 1,044 1,066 1,041
General corporate ................... 40 32 104
--------- --------- ---------
Total depreciation ................ $ 18,750 $ 16,211 $ 14,623
========= ========= =========
Goodwill amortization
Direct Marketing .................... $ 1,791 $ 1,377 $ 1,042
Shoppers ............................ 1,867 1,867 1,867
Newspapers(a)........................ 4,638 4,776 5,189
Television .......................... 1,748 1,748 1,748
--------- --------- ---------
Total goodwill amortization ....... $ 10,044 $ 9,768 $ 9,846
========= ========= =========
Capital expenditures
Direct Marketing .................... $ 20,706 $ 14,595 $ 10,400
Shoppers ............................ 2,929 2,724 3,316
Newspapers(a)........................ 2,740 3,609 4,409
Television .......................... 789 1,060 883
General corporate ................... 250 122 43
--------- --------- ---------
Total capital expenditures ........ $ 27,414 $ 22,110 $ 19,051
========= ========= =========
</TABLE>
(a) In March 1995, the Company sold its suburban Boston newspapers. See Note K
of Notes to Consolidated Financial Statements.
(b) Included is $12.1 million in merger expenses. See Note B of Notes to
Consolidated Financial Statements.
45
<PAGE> 18
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
In thousands, except per share amounts 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Revenues ........................................ $ 665,873 $ 603,511 $ 579,602 $ 515,905 $ 469,317
--------- --------- --------- --------- ---------
Operating expenses
Payroll, production and distribution ....... 477,293 435,373 424,474 381,002 321,070
Selling, general and administrative ......... 59,655 58,223 58,096 53,116 72,337
Depreciation ................................ 18,750 16,211 14,623 13,317 13,274
Goodwill amortization ....................... 10,044 9,768 9,846 10,446 11,181
Merger costs(a) ............................. 12,136 -- -- -- --
Goodwill write-down(b) ...................... -- -- -- 55,463 --
--------- --------- --------- --------- ---------
Total operating expenses ............... 577,878 519,575 507,039 513,344 417,862
--------- --------- --------- --------- ---------
Operating income ..................................... 87,995 83,936 72,563 2,561 51,455
Interest expense, net ................................ 12,125 16,227 17,193 30,811 36,670
Income (loss) from continuing operations ............. 40,621 39,985 28,885 (41,941)(c) 5,593
Net income (loss) .................................... 40,621(d) 39,985(e) 28,885 (49,334)(f) 5,593
Earnings (loss) from continuing operations
per common share-- fully diluted(g) ............. 1.05(d) 1.07(e) .80 (1.64)(c) .24
Earnings (loss) per common share--
fully diluted(g) ................................ 1.05(d) 1.07(e) .80 (1.92)(h) .24
Cash dividends per common share(g) ................... .07 .07 -- -- --
Weighted average common and common
equivalent shares outstanding --
fully diluted ................................... 38,654 37,747 37,144 25,638 22,853
Segment Data
Revenues
Direct Marketing ............................ $ 330,255 $ 268,257 $ 233,751 $ 182,021 $ 153,372
Shoppers .................................... 185,205 185,045 176,461 174,521 164,021
Newspapers(i) ............................... 124,313 125,077 140,761 131,545 126,222
Television .................................. 26,100 25,132 28,629 27,818 25,702
--------- --------- --------- --------- ---------
Total revenues .............................. $ 665,873 $ 603,511 $ 579,602 $ 515,905 $ 469,317
========= ========= ========= ========= =========
Operating income
Direct Marketing ............................ $ 44,794 $ 37,774 $ 27,910 $ 18,921 $ 15,119
Shoppers .................................... 24,017 20,020 17,743 12,685 15,517
Newspapers(i) ............................... 29,559 27,281 26,363 (30,974) 20,973
Television .................................. 9,097 7,379 8,946 8,164 6,140
General corporate ........................... (19,472) (8,518) (8,399) (6,235) (6,294)
--------- --------- --------- --------- ---------
Total operating income ...................... $ 87,995 $ 83,936 $ 72,563 $ 2,561 $ 51,455
========= ========= ========= ========= =========
Other Data
Operating cash flow(j) .......................... $ 116,789(k) $ 109,915 $ 97,032 $ 81,787 $ 75,910
Capital expenditures ............................ 27,414 22,110 19,051 25,276 11,295
Balance Sheet Data (at end of period)
Property, plant and equipment, net .............. $ 112,908 $ 102,164 $ 103,768 $ 101,516 $ 85,764
Goodwill, net ................................... 319,289 283,149 298,407 301,363 355,911
Total assets .................................... 592,283 529,279 540,130 515,924 547,350
Total long term debt ............................ 218,005 220,468 294,499 323,056 220,469(1)
Total stockholders' equity ...................... 252,692 201,856 137,845 108,025(m) 60,156
</TABLE>
(a) Merger cost of $12.1 million related to DiMark merger. See Note B of Notes
to Consolidated Financial Statements.
(b) Goodwill write-down of $55.5 million related to newspaper and shopper
segments. Newspaper and shopper operating income was affected by $52.7
million and $2.8 million, respectively. See Note A of Notes to Consolidated
Financial Statements.
(c) Represents income loss and earnings loss per common share before
extraordinary item.
(d) Includes merger costs of $8.7 million, or 23 cents per share, net of $3.4
million income tax benefit. Excluding these costs, earnings were $1.28 per
share.
(e) Includes gains on divestitures of $3.1 million, or 8 cents per share, net
of $10.6 million income tax expense. Excluding these gains, earnings were 98
cents per share.
(f) Includes extraordinary loss from the early extinguishment of debt of $7.4
million, net of $4.3 million income tax benefit.
(g) Restated to reflect the three-for-two stock split effected as a stock
dividend effective December 15, 1995.
(h) Excluding the goodwill write-down and extraordinary items, earnings on a
fully diluted basis were 53 cents per share.
(i) In March 1995, the Company sold its suburban Boston newspapers. See Note K
of Notes to Consolidated Financial Statements.
(j) 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.
(k) Excluding 1996 one-time merger costs, operating cash flow was $128.9
million.
(l) 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.
(m) Includes the net proceeds from issuance of 9,375,000 shares of the
Company's common stock at $11.00 per share in the initial public offering in
November 1993.
46
<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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
San Antonio, Texas
January 24, 1997
47
<PAGE> 20
DIRECTORS
DAVID L. COPELAND
President, SIPCO, Inc.
DR. PETER T. FLAWN
President Emeritus
The University of Texas at Austin
Chairman, Audit Committee
LARRY FRANKLIN
President and Chief Executive Officer
RICHARD M. HOCHHAUSER
Executive Vice President
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
OFFICERS
LARRY FRANKLIN
President and Chief Executive Officer
RICHARD M. HOCHHAUSER
Executive Vice President
MICHAEL J. CONLY
Senior Vice President, Television
DONALD R. CREWS
Senior Vice President, Legal and Secretary
PETER E. GORMAN
Senior Vice President, Shoppers
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
FRANK PUCKETT, JR.
Vice President, Newspapers
CORPORATE INFORMATION
COMMON STOCK
The Company's common stock is listed on the New York Stock Exchange (symbol:
HHS). The quarterly stock price ranges for 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter 23 19 3/4 13 3/8 12 1/2
Second Quarter 27 3/4 20 5/8 16 7/8 13 1/4
Third Quarter 27 7/8 25 1/8 19 7/8 16 5/8
Fourth Quarter 28 1/2 24 7/8 22 1/4 18 3/4
</TABLE>
Quarterly dividends were paid at the rate of 1.67 cents per share for the first
three quarters of 1996 and 2 cents per share in the fourth quarter of 1996. In
1995, quarterly dividends were paid at a rate of 1.67 cents per share. The
stock prices and dividends reflect retroactively the three-for-two stock split
in the form of a stock dividend on December 15, 1995.
There are approximately 2,300 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 10:00 a.m. May 6, 1997, at
200 Concord Plaza Drive, First Floor, 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
Photography: Mark Langford
Production: Seale Studios
Printing: Avon Behren Printing Co.
Printed on Recycled Paper
48
<PAGE> 1
Exhibit 21
RESTRICTED SUBSIDIARIES
OF
HARTE-HANKS COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
State of % of Stock
Name of Corporation Incorporation Owned
- ------------------- ------------- ----------
<S> <C> <C>
DiMark, Inc. New Jersey 100%
DiMark Marketing, Inc. Pennsylvania 100%(1)
Direct Market Concepts, Inc. Florida 100%
DMK, Inc. Delaware 100%(2)
The Flyer Publishing Corporation Florida 100%
Harte-Hanks Community Newspapers, Inc. Texas 100%
Harte-Hanks Data Technologies, Inc. Massachusetts 100%
Harte-Hanks Direct, Inc. Delaware 100%
Harte-Hanks Direct Marketing/Baltimore, Inc. Maryland 100%
Harte-Hanks Direct Marketing/Cincinnati, Inc. Ohio 100%
Harte-Hanks Direct Marketing/Dallas, Inc. Delaware 100%
Harte-Hanks Direct Marketing/Fullerton, Inc. California 100%
Harte-Hanks do Brazil Consultoria e Servicos Ltda. Brazil 100%(3)
Harte-Hanks Limited England 100%(3)
Harte-Hanks Market Research, Inc. New Jersey 100%
Harte-Hanks Pty. Limited Australia 100%(3)
Harte-Hanks Response Management/Boston, Inc. Massachusetts 100%
Harte-Hanks Shoppers, Inc. California 100%
Harte-Hanks Stock Plan, Inc. Delaware 100%
Harte-Hanks Television, Inc. Delaware 100%
H&R Communications, Inc. New Jersey 100%(2)
HTS, Inc. Connecticut 100%
Independent Publishing Company South Carolina 100%
Information for Marketing Limited England 100%(5)
Marketing Communications, Inc. Missouri 100%
Mars Graphic Services, Inc. New Jersey 100%(4)
Northern Comprint Co. California 100%
NSO, Inc. Ohio 100%
Pennysaver Publications, Inc. Texas 100%
Potpourri Shopper, Inc. California 100%
PRO Direct Response Corp. New Jersey 100%(2)
Select Marketing, Inc. Texas 100%
Southern Comprint Co. California 100%
</TABLE>
(1) Owned by Mars Graphic Services, Inc.
(2) Owned by DiMark Marketing, Inc.
(3) Owned by Harte-Hanks Data Technologies, Inc.
(4) Owned by DiMark, Inc.
(5) Owned by Harte-Hanks Limited
Dated: February 19, 1997
49
<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, 1997 relating to the consolidated balance sheets
of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1996
and 1995, 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, 1996, which report appears in the 1996 annual report to
shareholders which is incorporated by reference in the December 31, 1996 annual
report on Form 10-K of Harte-Hanks Communications, Inc. and our report dated
January 24, 1997, relating to the related financial statement schedule as of
and for each of the years in the three-year period ended December 31, 1996,
which report appears in the December 31, 1996 annual report on Form 10-K of the
Company.
/s/ KPMG Peat Marwick LLP
San Antonio, Texas
March 25, 1997
50
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,017
<SECURITIES> 0
<RECEIVABLES> 109,554
<ALLOWANCES> 1,995
<INVENTORY> 13,720
<CURRENT-ASSETS> 153,147
<PP&E> 234,735
<DEPRECIATION> 121,827
<TOTAL-ASSETS> 592,283
<CURRENT-LIABILITIES> 97,727
<BONDS> 218,005
0
0
<COMMON> 36,802
<OTHER-SE> 215,890
<TOTAL-LIABILITY-AND-EQUITY> 592,283
<SALES> 665,873
<TOTAL-REVENUES> 665,873
<CGS> 477,293
<TOTAL-COSTS> 577,878
<OTHER-EXPENSES> 513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,484
<INCOME-PRETAX> 75,357
<INCOME-TAX> 34,736
<INCOME-CONTINUING> 40,621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,621
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
</TABLE>
