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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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM_________________ TO________________
COMMISSION FILE NUMBER 1-7120
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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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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(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.
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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
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Aggregate market value of the Company's voting stock held by
non-affiliates on March 16, 1998, based on the $22.06 per share closing price
for the Company's Common Stock on the New York Stock Exchange on such date:
approximately $1,077,000,000.
SHARES OUTSTANDING AT MARCH 16, 1998:
Common Stock -- 73,589,784 shares
DOCUMENTS INCORPORATED BY REFERENCE:
The Company's Annual Report to Stockholders for the year ended December
31, 1997 (incorporated in Part II to the extent provided in Items 5, 6, 7 and 8
hereof).
Definitive Proxy Statement for the Company's May 5, 1998 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, 1997
<TABLE>
<CAPTION>
Part I Page
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<S> <C> <C>
Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 10
Item 8. Financial Statements and Supplementary Data 10
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 10
Part III
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Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 11
Item 12. Security Ownership of Certain Beneficial Owners and
Management 11
Item 13. Certain Relationships and Related Transactions 11
Part IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. 11
Signatures 16
</TABLE>
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3
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES
INTRODUCTION
Harte-Hanks is a highly focused targeted media company with continuing
operations in two principal businesses - direct marketing and shoppers - as a
result of the sale of the Company's newspaper and television operations on
October 15, 1997. (See Note N of "Notes to Consolidated Financial Statements.")
Since the newspaper and television operations represented entire business
segments, their results are reported as "discontinued operations" for all
periods presented. Results of the remaining business segments are reported as
"continuing operations."
The Company's shopper business operates in local markets throughout the
United States, while its direct marketing business operates both nationally and
internationally. The Company believes that marketing is undergoing a transition
from traditional mass media marketing 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 66.7% of the Company's revenue,
is leading the movement toward highly targeted and relationship marketing. The
Company's shopper business applies 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 from continuing operations totaled $638.3 million in 1997.
Harte-Hanks is the successor to a newspaper business begun in Texas in
the early 1920's 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 P 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, reach, influence and nurture 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 customers in
such emerging markets as telecommunications, automotive, utilities and travel.
Its client base is both domestic and international. In 1997, Harte-Hanks Direct
Marketing had revenues of $425.5 million, which accounted for 66.7% of the
Company's revenues.
In 1997, Harte-Hanks' direct marketing business segment made three
acquisitions. In the database marketing sector, Harte-Hanks made two
acquisitions that strengthened its international services and expanded its
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technology base. Information for Marketing (IFM), a leading database marketer in
the United Kingdom, was acquired in January, expanding the company's overall
database production capacity, especially for European clients. Mercantile
Software Systems, Inc., a New Jersey-based provider of open architecture
software and systems integration solutions for direct marketing and other
applications, was acquired in November 1997. Mercantile's open architecture and
the speed of its IRE product will be integrated with the many powerful tools of
P/CIS(R).
Harte-Hanks continued to expand its international capabilities and
presence in the fast growing response management/teleservices business through
the acquisition of TeleSupport Services (TSS), and by entering into a strategic
alliance with the WP Group. TSS is a Pan-European provider of response
management services to the high technology industry in Europe and has worked
with Harte-Hanks Response Management since 1991.
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 - database marketing, marketing
services and response management/teleservices.
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. Relational databases are built
for clients from a range of facilities, each specializing in specific market
segments. These are moved to the client's site or maintained at Harte-Hanks with
on-line access to client locations. 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 warehouse.
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.
Harte-Hanks moved its service bureau operation in Baltimore, Maryland
into a new facility in nearby Glen Burnie to accommodate growth. The new offices
double the space available for the operation, which performs a wide range of
database and data processing services, primarily for the retail and financial
services industries. Recently introduced services include Phone-Bank-Plus,
featuring national telephone number append capabilities.
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 all of its primary markets in
addition to a range of emerging markets where a specialized group has been
formed to support the commitment to expand market coverage.
As a further extension of the client's marketing arm, Harte-Hanks
provides marketing research and analytics services. Specific capabilities
include tracking and reporting, media analysis, modeling, database profiling,
primary data collection, marketing applications, consulting and program
development.
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From the data and the analysis come the translation into marketing
programs. Increasingly our clients seek an execution approach as part of the
data-based offerings. These are accomplished from our database agencies which
create the plan to manage direct marketing communication efforts. These efforts,
which have a base in the health care/insurance and telecommunication businesses,
are being expanded to include new core and emerging markets.
The Company also provides database services internationally through
offices in Australia, Brazil, London and Toronto.
Marketing Services
Harte-Hanks provides a variety of services to help clients develop and
execute targeted marketing communication programs. These include such upfront
services as creative, along with back-end services such as printing and
graphics, personalization of communication pieces using laser and inkjet
printing, target mail and fulfillment, and transportation logistics.
The Company's mail tracking capability and long-standing 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 logistics operations, the Company facilitates
the delivery of its clients' materials while holding costs to a minimum.
The Dallas marketing services operation was relocated to a larger
55,000-square-foot facility to accommodate its growth. In other developments,
the Company implemented new routing software in its logistics business, beta
tested a new release of its internal Order Management System and converted to a
networked inkjet production system to enhance quality and reduce costs. It also
initiated a number of productivity improvement measures in its newly acquired
operations.
Depending upon the needs of our clients, these capabilities are
provided in a specialized, coordinated and integrated approach through eleven
primary facilities nationwide.
Response Management
Harte-Hanks Response Management manages the inquiries clients receive
from their marketing efforts, whether it is 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 3.3 million
transactions in 1997. 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.
The Company's response management business continued on its rapid
expansion path with the opening of a new call center in Langhorne, Pennsylvania
in May. Focused on serving the healthcare industry, the new facility has current
capacity for 105 seats and provides both inbound and outbound teleservices,
including inquiry
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management, lead generation and seminar management. Meanwhile, the Company's
Southern California response management operation completed its move to a new
135,000-square-foot fulfillment/distribution facility in Valencia in late July.
The new facility includes 100 call center stations initially, with significant
capacity for expansion.
The Company provides response management services at its Austin, Los
Angeles, Framingham, Massachusetts, Brockton, Massachusetts and Langhorne
facilities. These centers have some industry specialization and are linked
together to support certain clients which have volume spikes or high growth
needs.
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, Melbourne, Australia and
Hasselt, Belgium. 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. There are often start-up fees associated with response
management and planning fees for many of the data-based solutions.
Facilities
Direct marketing services are provided at the following facilities:
DATABASE MARKETING MARKETING SERVICES (CONTINUED)
Baltimore, Maryland Westville, New Jersey
Billerica, Massachusetts
Heathrow, Florida RESPONSE MANAGEMENT/TELESERVICES
Kansas City, Kansas Austin, Texas
Langhorne, Pennsylvania Brockton, Massachusetts
New York, New York Cherry Hill, New Jersey
Piscataway, New Jersey Clearwater, Florida
River Edge, New Jersey Framingham, Massachusetts
Langhorne, Pennsylvania
MARKETING SERVICES Los Angeles, California
Baltimore, Maryland
Cincinnati, Ohio NATIONAL SALES HEADQUARTERS
Dallas/Fort Worth, Texas Cincinnati, Ohio
Deerfield Beach, Florida
Forty Fort, Pennsylvania INTERNATIONAL OFFICES
Fullerton, California Hasselt, Belgium
Jacksonville, Florida London, England
Kansas City, Kansas Melbourne, Australia
New York, New York Sao Paulo, Brazil
South Belmar, New Jersey Toronto, Canada
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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.
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 primarily 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, 1997, shoppers reached over 9.3 million households
in five markets each week -- Southern California, Northern California, South
Florida, Dallas/Fort Worth, and Wichita, Kansas/Springfield, Missouri. The
Company's Southern California publications account for 62% of these households.
Harte-Hanks publishes 770 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 1997,
Harte-Hanks Shoppers had revenues of $213 million, accounting for approximately
33.3% of the Company's revenue from continuing operations.
During the period 1992 through 1996, 1.1 million households were added
to the Company's shopper circulation through internal expansion, primarily in
Southern California, South Florida and Northern California. Throughout 1997,
Harte-Hanks added another 138,000 contiguous households to its circulation
through internal expansion in its Southern and Northern California markets and
in its Miami, Florida market. The Company believes that expansions provide
increased revenues and operating income as the publications in these new areas
mature.
In addition to internal expansion, Harte-Hanks Shoppers added 2.4
million households to its circulation through the acquisition of the ABC
Shoppers Group from an indirect subsidiary of The Walt Disney Company. With the
addition of over 2.0 million weekly circulation from this acquisition, primarily
in the San Diego and Sacramento markets, the Company now reaches over 7.3
million households in California, or 65% of the state's total. The acquisition
also added 0.3 million weekly circulation in the Wichita, Kansas/Springfield,
Missouri markets.
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Publications
Harte-Hanks Shoppers are published in Southern California, Northern
California, South Florida, Dallas/Fort Worth and Wichita, Kansas/Springfield,
Missouri.
The following table sets forth certain information with respect to
shopper publications:
<TABLE>
<CAPTION>
December 31, 1997
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Number of
Market Publication Name Circulation Zones
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<S> <C> <C> <C>
Southern California PennySaver/South 5,793,000 496
Coast Shopper/Bargain
Bulletin
Northern California Potpourri/PennySaver 1,774,000 133
Miami/Ft. Lauderdale The Flyer 1,067,000 90
Dallas/Ft. Worth The Shopper's Guide 430,000 36
Wichita, Kansas/
Springfield, Missouri PennyPower 290,000 15
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Total: 9,354,000 770
</TABLE>
Shopper publications contain classified and display advertising and are
primarily 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.
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Sales and Marketing
The Company maintains local sales offices throughout its geographic
markets and employs more than 650 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 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 health care
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 seven production facilities -- three in
Southern California, two in Northern California and one in each of its Florida
and Texas markets -- and 32 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.
EMPLOYEES
As of December 31, 1997, Harte-Hanks employed 5,550 full-time employees and
1,346 part-time employees, as follows: direct marketing -- 3,591 full-time and
923 part-time employees; shoppers-- 1,935 full-time and 423 part-time employees;
and corporate office -- 24 full-time employees. None of the work force is
represented by labor unions. The Company considers its relations with its
employees to be good.
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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
2.7 million square feet. Approximately 2.6 million square feet are held under
leases, which expire at dates through 2010. The balance of the properties, which
are used primarily in the Company's 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. 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, 1997 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, 1997 at page 31.
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, 1997 at pages 14 through 18.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable to the Company for this report.
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, 1997, which is incorporated herein
by reference: All Consolidated Financial Statements (pages 19 through 22); all
Notes to Consolidated Financial Statements (pages 23 through 30); and the
Independent Auditors' Report (page 32). With the exception of the information
herein expressly incorporated by reference, the Company's Annual Report to
Stockholders for the year ended December 31, 1997 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.
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ITEM 10. MANAGEMENT
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 27, 1998 for the May 5, 1998 Annual
Meeting of Stockholders under the caption "Management -- Directors and Executive
Officers" on pages 9 and 10.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 27, 1998 for the May 5, 1998 Annual
Meeting of the Stockholders under the caption, "Executive Compensation and Other
Information" on pages 11 through 15.
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 27, 1998 for the May 5, 1998 Annual
Meeting of Stockholders under the caption "Security Ownership of Management and
Principal Stockholders" on pages 8 and 9.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a)(1) The following consolidated financial statements are
incorporated by reference from the Company's Annual Report to
Stockholders for the year ended December 31, 1997 attached
hereto:
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Operations, Years ended December
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows, Years ended December
31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity, Years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) The following accountants' report and financial schedule
for years ending December 31, 1997, 1996 and 1995 are
submitted herewith:
Independent Auditors' Report 10-K Schedule
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable.
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(a) (3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
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<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. 333-02047 and incorporated by reference herein).
2(c) Agreement and Plan of Merger and Reorganization, dated as of May
16, 1997, by and between The E.W. Scripps Company and
Harte-Hanks Communications, Inc. (filed as Exhibit 2.1 to the
Company's Form 8-K dated May 22, 1997 and incorporated by
reference herein).
2(d) Acquisition Agreement, dated as of May 16, 1997, by and between
The E.W. Scripps Company and Harte-Hanks Communications, Inc.
(filed as Exhibit 2.2 to the Company's Form 8-K dated May 22,
1997 and incorporated by reference herein).
2(e) Stock Purchase Agreement dated as of July 26, 1997 between ABC,
Inc. and Harte-Hanks Communications, Inc. (filed as Exhibit 2(e)
to the Company's Form 10-Q for the nine months ended September
30, 1997 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).
</TABLE>
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(a) (3) EXHIBITS (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
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<S> <C> <C>
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).
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(i) 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(j) to the Company's Form 10-K for the
year ended December 31, 1992 and incorporated by reference
herein).
10(e) 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(f) Form of Severance Agreement between Harte-Hanks
Communications, Inc. and certain Executive Officers of the
Company, dated as of July 7 or December 28,1997. 19
</TABLE>
<PAGE> 14
14
(a) (3) EXHIBITS (continued)
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- -------------------------------------------------------------- --------
<S> <C> <C>
10(g) 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(h) 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(i) 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(j) 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).
*13 Annual Report to Securityholders (only those portions incorporated
by reference into the Form 10-K are filed herewith). 26
*21 Subsidiaries of the Company. 46
*23 Consent of KPMG Peat Marwick. 47
*27 Financial Data Schedule. 48
</TABLE>
- --------------------
*Filed herewith
<PAGE> 15
15
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(continued)
14(b) Reports on Form 8-K
A Form 8-K ( in response to items 5 and 7 thereof) was filed
dated October 30, 1997.
14(c) Exhibits -- The response to this portion of item 14 is
submitted as a separate section of this report on pages 19 to
48.
14(d) Financial Statement Schedule -- The response to this portion
of Item 14 is submitted as a separate section of this report
on page 18.
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> 16
16
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
By: /s/ Jacques D. Kerrest
-------------------------------------
Jacques D. Kerrest
Senior Vice President, Finance and
Chief Financial and Accounting Officer
Date: March 27, 1998
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/ Christopher M. Harte
- -------------------------------- ---------------------------------
Houston H. Harte, Chairman Christopher M. Harte, Director
/s/ Larry Franklin /s/ James L. Johnson
- -------------------------------- ---------------------------------
Larry Franklin, Director James L. Johnson, Director
/s/ Richard M. Hochhauser /s/ David L. Copeland
- -------------------------------- ---------------------------------
Richard M. Hochhauser, Director David L. Copeland, Director
/s/ Dr. Peter T. Flawn
- --------------------------------
Dr. Peter T. Flawn, Director
<PAGE> 17
17
INDEPENDENT AUDITORS' REPORT 10-K SCHEDULE
The Board of Directors and Stockholders
Harte-Hanks Communications, Inc.:
Under date of January 27, 1998, we reported on the consolidated balance sheets
of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1997 and
1996 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, 1997, as contained in the 1997 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 1997. 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, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
San Antonio, Texas
January 27, 1998
<PAGE> 18
18
Harte-Hanks Communications, Inc. and Subsidiaries
Financial Statement Schedule
Schedule II
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, 1997... $1,121 $4,050 $2,336 $2,835
====== ====== ====== ======
Year ended December 31, 1996... $1,761 $1,457 $2,097 $1,121
====== ====== ====== ======
Year ended December 31, 1995... $1,956 $2,183 $2,378 $1,761
====== ====== ====== ======
</TABLE>
<PAGE> 19
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- ------- ------------------------------------------------------------- --------
<S> <C> <C>
*10(f) Form of Severance Agreement between Harte-Hanks
Communications, Inc. and certain Executive Officers of the
Company, dated as of July 7 or December 28,1997. 19
*13 Annual Report to Securityholders (only those portions incorporated
by reference into the Form 10-K are filed herewith). 26
*21 Subsidiaries of the Company. 46
*23 Consent of KPMG Peat Marwick. 47
*27 Financial Data Schedule. 48
</TABLE>
- ------------
* Filed herewith
<PAGE> 1
19
Exhibit 10(f)
SEVERANCE AGREEMENT
AGREEMENT made as of the _____ of _________, 199_, between Harte-Hanks
Communications, Inc., a Delaware corporation (the "Company"), and
___________________ (the "Executive").
WHEREAS, the Executive is currently serving as __________________ Vice
President of the Company;
WHEREAS, the Executive possesses an intimate knowledge of the business
and affairs of the Company, its policies, methods, personnel and plans for the
future and has acquired contacts of considerable value to the Company; and
WHEREAS, the Board of Directors of the Company (the "Board") recognizes
that the Executive's contribution to the growth and success of the Company has
been substantial and wishes to offer an inducement to the Executive to remain in
the employ of the Company;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, this Agreement sets
forth benefits which the Company will pay to Executive in the event of
termination of Executive's employment under the circumstances described herein:
1. Term. Except as otherwise provided in Section 4, the term of
this Agreement shall be effective upon a Change in Control (as defined herein)
and continue until the earlier of (i) the expiration of the second anniversary
of the occurrence of a Change in Control, (ii) the Executive's death, or (iii)
the Executive's earlier voluntary retirement (except as provided in Section
3(a)(2)) (the "Term").
2. Definitions.
(a) Cause. For "Cause" means that the Executive shall have
committed:
(i) an intentional material act of fraud or embezzlement
in connection with his duties or in the course of his
employment with the Company;
(ii) intentional wrongful material damage to property of
the Company; or
(iii) intentional wrongful disclosure of material secret
processes or material confidential information of the Company.
<PAGE> 2
20
For the purposes of this Agreement, no act, or failure to act,
on the part of the Executive will be deemed "intentional"
unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that his action or
omission was in the best interest of the Company.
(b) Change in Control. A "Change in Control" of the Company
shall have occurred if any of the following events shall occur:
(i) The Company is merged, consolidated or reorganized
into or with another corporation or other legal person and as
a result of such merger, consolidation or reorganization less
than 60% of the combined voting power of the then outstanding
securities of the remaining corporation or legal person or its
ultimate parent immediately after such transaction is received
in respect of or in exchange for voting securities of the
Company pursuant to such transaction;
(ii) The Company sells all or substantially all of its
assets to any other corporation or other legal person and as a
result of such sale less than 60% of the combined voting power
of the then outstanding securities of such corporation or
legal person or its ultimate parent immediately after such
transaction is received in respect of or in exchange for
voting securities of the Company pursuant to such sale;
(iii) Any person (including any "person" as such term is
used in Section 13(d)(3) or Section 14(d)(2) of the Exchange
Act), has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange Act) of securities
which when added to any securities already owned by such
person would represent in the aggregate 30% or more of the
combined voting power of the then outstanding securities of
the Company; or
(iv) Such other events that cause a Change in Control of
the Company as determined by the Board in its sole discretion.
(c) Code. The "Code" shall mean the Internal Revenue Code of
1986, as amended.
(d) Disability. "Disability" shall have the meaning given to
disability in the Company's long term disability insurance plan.
<PAGE> 3
21
(e) Severance Compensation. The "Severance Compensation" shall
be a lump sum cash amount equal to 200% of the sum of (A) the annual
base salary of the Executive in effect immediately prior to the Change
in Control or the Termination Date, whichever is larger, plus (B) the
average of the bonus or incentive compensation of the Executive,
received from the Company for the two fiscal years preceding the year
in which the Change in Control occurred or for the two fiscal years
preceding the year in which the Termination Date occurs, whichever is
larger.
(f) Termination Date. The "Termination Date" shall be the date
upon which the Executive or the Company terminates the employment of
the Executive.
3. Rights of Executive Upon Change in Control and Termination.
(a) The Company shall provide the Executive, within ten days
following the Termination Date, Severance Compensation in lieu of
compensation to the Executive for periods subsequent to the Termination
Date, if, following the occurrence of a Change in Control, any of the
following events shall occur:
(1) the Company terminates the Executive's employment
during the Term of this Agreement other than for any of the
following reasons:
(i) the Executive dies;
(ii) the Executive suffers a Disability and is unable
to work for a period of 180 consecutive days; or
(iii) for Cause,
(2) the Executive terminates his employment after such
Change in Control and the occurrence of at least one of the
following events:
(i) A material adverse change in the nature or scope
of the authorities, functions or duties attached to the
position with the Company that the Executive had
immediately prior to the Change in Control; a reduction
in the Executive's salary, bonus or incentive
compensation or a significant reduction in scope or value
of other monetary or nonmonetary benefits (other than
benefits pursuant to a broad based employee benefit plan)
to which the Executive was entitled from the Company
immediately prior to the Change in Control, any of which
is not remedied within ten calendar days after receipt by
the Company of written notice from the Executive of such
change, reduction, alteration or termination, as the case
may be;
<PAGE> 4
22
(ii) A determination by the Executive made in good
faith that as a result of a Change in Control and a
change in circumstances thereafter, he has been rendered
substantially unable to carry out, or has been
substantially hindered in the performance of, the
authorities, functions or duties attached to his position
immediately prior to the Change in Control, which
situation is not remedied within ten calendar days after
receipt by the Company of written notice from the
Executive of such determination;
(iii) The Company shall require the Executive to
relocate his principal location of work from the location
thereof immediately prior to the Change in Control, or to
travel away from his office in the course of discharging
his responsibilities or duties significantly more than
required of him prior to the Change in Control without,
in either case, the Executive's prior written consent; or
(iv) the Company commits any material breach of this
Agreement.
(3) the Executive terminates his employment for any
reason during the 30-day period following the first
anniversary of the Change in Control.
(b) Severance Compensation pursuant to this Section 3 will not
be subject to setoff or mitigation.
(c) Upon a Change in Control, or in the event the Company
becomes obligated to make the payments specified in Section 4(a), all
stock options previously granted by the Company to the Executive and
not yet exercised will become vested and fully exercisable by the
Executive. Such options shall remain exercisable for their original
term; provided, however, that the Company has the right to require the
Executive to exercise such options within 90 days after receipt of
written notice to the Executive. If the Executive fails to exercise his
options within such 90-day period, the Company has the right to cancel
the options.
(d) In the event the Company becomes obligated hereunder to
pay the Executive the Severance Compensation or the payments specified
in Section 4(a), the Company shall also pay the Executive a lump sum
cash payment in the amount necessary to make continuation coverage
(COBRA) payments under the Company's group health insurance plan for a
period of 18 months.
<PAGE> 5
23
(e) Notwithstanding the above section or any other provision
of this Agreement, in no event shall the Company pay or be obligated to
pay the Executive an amount which would be an Excess Parachute Payment.
For purposes of this Agreement, the term "Excess Parachute Payment"
shall mean any payment or any portion thereof which would be an "excess
parachute payment" within the meaning of Section 280G of the Code, and
would result in the imposition of an excise tax under Section 4999 of
the Code, in the opinion of tax counsel selected by the Company and
acceptable to the Executive. To the extent that the payments hereunder
must be reduced to avoid any Excess Parachute Payment, such reduction
shall be applied in the following order:
(i) to cash amounts payable as Severance
Compensation;
(ii) to amounts payable for the maintenance of
continuation coverage (COBRA) payments under the
Company's group health insurance plan;
(iii) to the accelerated vesting of options as
provided in Section 3(c).
4. Additional Rights of Executive Prior to Change in Control.
(a) In the event the employment of the Executive with the
Company is terminated prior to a Change in Control, the Company shall
provide the Executive, within ten days following the Termination Date,
Severance Compensation in lien of compensation to the Executive for
periods subsequent to the Termination Date, if, and only if,
(i) the Company terminates the Executive's employment
without "Justification" (as defined herein); or
(ii) the Executive terminates his employment with
"Good Reason" (as defined herein).
(b) "Justification" means that the Executive shall have (i)
committed an act of fraud, dishonesty, gross misconduct or other
unethical practices, or (ii) materially failed to perform his duties to
the satisfaction of the chief executive officer of the Company, which
failure has not been cured within 60 days after receipt of written
notice from the chief executive officer.
(c) With "Good Reason" means that the Executive shall have
terminated his employment following a reduction (which is instituted
without his consent and which is not rescinded within 30 days after the
Executive delivers written notice of objection to the chief executive
officer) in his functions, duties or responsibilities (i) to a level
that is not commensurate with those of an executive in the position of
the Executive prior to such reduction (it being understood that the
reassignment of any of the Executive's functions, duties or
responsibilities to one or more persons who report directly or
indirectly to the Executive is not such a reduction), or (ii) which
causes the Employee's position with the Company to become one of lesser
importance or scope.
<PAGE> 6
24
5. Successors; Binding Agreement. This Agreement will be binding upon
the Company, its successors and assigns, and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
6. Notice. The Company shall give written notice to Executive within
ten days after any Change in Control. Failure to give such notice shall
constitute a material breach of this Agreement. For purposes of this Agreement,
notices and all other communications provided for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or received
after being mailed by United States registered mail, return receipt requested,
postage prepaid, addressed as follows:
If to the Executive:
----------------------------
c/o Harte-Hanks Communications, Inc.
200 Concord Plaza Drive, Suite 800
San Antonio, Texas 78216
If to the Company:
Harte-Hanks Communications, Inc.
200 Concord Plaza Drive, Suite 800
San Antonio, Texas 78216
Attention: Donald R. Crews
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
7. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, unless specifically
referred to herein, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the substantive laws of the State of Delaware, without regard to principles
of conflicts of law. This Agreement replaces any prior severance agreement
between the Company and the Executive.
<PAGE> 7
25
8. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
9. Employment Rights. Nothing expressed or implied in this Agreement
shall create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company prior to any Change
in Control; provided, however, that any termination of employment of the
Executive or removal of the Executive as an elected officer of the Company
following the commencement of any discussion authorized by the Board of
Directors of the Company with a third person that ultimately results in a Change
in Control shall be deemed to be a termination or removal of the Executive after
a Change in Control for purposes of this Agreement and shall entitle the
Executive to all Severance Compensation. Notwithstanding any other provision
hereof to the contrary, the Executive may, at any time during his employment
with the Company upon the giving of 30 days prior written notice, terminate his
employment hereunder. If this Agreement or the employment of the Executive is
terminated under circumstances in which the Executive is not entitled to any
Severance Compensation, neither the Executive nor the Company shall have any
further obligation or liability hereunder.
10. Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling; provided,
however, that no withholding pursuant to Section 4999 of the Code shall be made
unless, in the opinion of tax counsel selected by the Company and acceptable to
the Executive, such withholding relates to payments which result in the
imposition of an excise tax pursuant to Section 4999 of the Code.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
on the date and year first above written.
HARTE-HANKS COMMUNICATIONS, INC.
By:
----------------------------------
Title:
----------------------------------
----------------------------------
NAME OF EXECUTIVE
<PAGE> 1
26
EXHIBIT 13
FINANCIAL CONTENTS
Management's Discussion & Analysis .............................. 14
Consolidated Balance Sheets ..................................... 19
Consolidated Statements of Operations ........................... 20
Consolidated Statements of Cash Flows ........................... 21
Consolidated Statements of Stockholders' Equity ................. 22
Notes to Consolidated Financial Statements ...................... 23
Five-Year Financial Summary ..................................... 31
Independent Auditors' Report .................................... 32
Corporate Information ........................................... 32
Directors, Officers and Harte-Hanks Operations .................. 33
13
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's overall performance reflects its commitment to its growth strategy
of being a market leader, introducing new products and entering new markets,
investing in technology and people, and increasing shareholder value. The
pursuit of this strategy was accelerated by the October 1997 sale of the
Company's newspaper and television operations. (See Note N of "Notes to
Consolidated Financial Statements.") This sale enables the Company to
increasingly focus on building one-to-one relationships with its customers, in
execution of its targeted marketing strategy. As a result of this strategy,
Harte-Hanks has grown revenues 41.8% since December 31, 1995, excluding the
results of operations sold by the Company during that time. On the same basis,
operating income increased 55.8%.
The Company extinguished all of its long-term debt ($306.3 million) on
October 15, 1997 using proceeds from the sale of its newspaper and television
operations.
Harte-Hanks has grown internally by adding new customers and products,
cross-selling existing products, entering new markets and expanding its
international presence. The Company also used proceeds from the sale of its
newspaper and television operations to fund several acquisitions in 1997. These
acquisitions, as well as several previous acquisitions, have enhanced the
Company's growth over the past three years. Harte-Hanks has funded $175.8
million in acquisitions during the period from 1995 through 1997. These
acquisitions have all been in the Company's direct marketing and shopper
segments, which now comprise 100% of the Company's revenues.
In addition to the purchase acquisitions mentioned above, DiMark, Inc.
merged with a wholly owned subsidiary of the Company on April 30, 1996 under the
basis discussed on page 16 under "Acquisitions." 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.
Harte-Hanks derives the majority of its revenues from the sale of
direct marketing and advertising services. The Company's shoppers 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, transportation and outsourced specialized printing. Postal rates, which
typically increase every three to four years, 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. Postal rate savings continued in the first half of
1997 in the shopper operations as a result of the 1996 postal reclassification.
================================================================================
RESULTS OF CONTINUING OPERATIONS
As described in Note N of the "Notes to Consolidated Financial Statements"
included herein, the Company sold its newspaper and television operations on
October 15, 1997. Therefore, the newspaper and television operations results are
excluded from management's discussion and analysis of financial condition and
results of operations below.
Operating results from continuing operations -- direct marketing and shoppers --
were as follows, exclusive of merger costs:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
In thousands 1997 % Change 1996 (a) % Change 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $638,349 23.8 $515,460 13.7 $453,302
Operating expenses 561,257 23.7 453,563 12.4 403,518
-------- -------- --------
Operating income $ 77,092 24.5 $ 61,897 24.3 $ 49,784
======== ======== ========
</TABLE>
(a) Excludes 1996 one-time merger costs (discussed under "Acquisitions").
Including these costs, operating expenses and operating income were $465.7
million and $49.8 million, respectively.
Consolidated revenues from continuing operations grew 23.8% in 1997 to $638.3
million, and 1997 operating income grew 24.5% to $77.1 million when compared to
1996. The Company's overall growth resulted from acquisitions and increased
business from both new and existing customers. Overall operating expenses
increased as a result of the overall revenue growth and the hiring of additional
personnel to support the growth.
Overall growth in the Company's 1996 revenues and operating income from
continuing operations resulted from acquisitions, increased business with both
new and existing customers, and new products and services. Overall operating
expenses increased as a result of the overall revenue growth and higher paper
prices experienced in 1996.
14
<PAGE> 3
================================================================================
DIRECT MARKETING
Direct marketing operating results were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
In thousands 1997 % Change 1996 % Change 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $425,489 28.8 $330,255 23.1 $268,257
Operating expenses 371,129 30.0 285,461 23.9 230,483
-------- -------- --------
Operating income $ 54,360 21.4 $ 44,794 18.6 $ 37,774
======== ======== ========
</TABLE>
Direct marketing revenues increased $95.2 million, or 28.8%, in 1997 when
compared to 1996. The response management, database marketing, and marketing
services sectors all experienced significant revenue growth. Response management
growth is attributable to increased business with existing customers as well as
new customer gains. The high technology and mutual fund industry sectors
contributed significantly to overall response management revenues. Database
marketing revenue increased primarily from database processing and acquisitions.
The acquisitions included: Information for Marketing, a London-based database
marketer, in January 1997; and Mercantile Software Systems, a New Jersey-based
open architecture software provider, in November 1997. The retail industry
sector provided the largest revenue increase for database marketing. Marketing
services growth was largely due to an increase in logistics services and a full
year of revenue from the acquisition of Marketing Communications, Inc., in
November of 1996. Overall, revenue growth for direct marketing increased as a
result of providing service to both new and existing customers across several
industry sectors including retail, high technology, financial services,
pharmaceutical and insurance industries.
Operating expenses increased $85.7 million, or 30%, in 1997 when
compared to 1996. Payroll costs increased $40.1 million due to the addition of
personnel to support the revenue growth. Also contributing to increased
operating expenses were additional production costs of $32.2 million due to
increased volumes. Depreciation expense increased $3.5 million due to higher
levels of capital investment to support growth. Operating expenses were also
impacted by the acquisitions noted above.
Direct marketing's 1996 revenue growth of $62.0 million,
or 23.1%, occurred primarily in the database marketing and response management
sectors. Database marketing revenues increased mainly from database construction
and updates, and higher sales volume of software products. Response management
revenues increased as a result of the addition of new customers, increased sales
to existing customers, and acquisitions in January, May, and August 1996. These
included DiMark's January 1996 acquisition of PRO Direct Response Corp., a
telemarketing company with a strong customer base in the financial services
industry; the May 1996 acquisition of Inquiry Handling Service, a Los
Angeles-based response management company that serves the high technology and
electronics industries; and the August 1996 acquisition of Lead Management
Group, a Boston-based response management, telemarketing and fulfillment company
that serves the high technology industry. In addition, the Company purchased
Marketing Communications, Inc., a 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%, during 1996 due
primarily to revenue growth. 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.
15
<PAGE> 4
================================================================================
SHOPPERS
Shopper operating results were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
In thousands 1997 % Change 1996 % Change 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $212,860 14.9 $185,205 0.1 $185,045
Operating expenses 181,771 12.8 161,188 (2.3) 165,025
-------- -------- --------
Operating income $ 31,089 29.4 $ 24,017 20.0 $ 20,020
======== ======== ========
</TABLE>
Shopper revenues increased $27.7 million, or 14.9%, in 1997 when compared to
1996. The increase was primarily due to an acquisition in 1997. The ABC Shoppers
Group, comprised of 6 publications located primarily in California, was acquired
in September 1997 and accounted for $17.3 million of the increase. Excluding the
revenue contributed by these newly-acquired units, revenue increased $10.4
million, or 5.6%, in 1997 over 1996. This remaining revenue increase was
attributed to higher in-book advertising revenue and continued growth of core
business accounts as well as an additional publication week in 1997.
Shopper operating expenses increased $20.6 million, or 12.8%, in 1997
due primarily to revenue growth contributed by the shopper acquisition which
accounted for $15.4 million of the increase. Other factors included increased
costs directly associated with increased product volumes and higher promotion
costs.
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.
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 reclassification and less overweight postage associated
with the lower insert volumes. Insurance costs and outsourced printing costs
were also lower when compared to 1995. In addition, reduced circulation in the
Dallas market 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.
================================================================================
ACQUISITIONS
As described in Note B of the "Notes to Consolidated Financial Statements"
included herein, the Company made several acquisitions in the current year.
The Company acquired the ABC Shoppers Group for $104 million from an
indirect subsidiary of The Walt Disney Company in September 1997. The group
consisted of 6 publications with a strong presence primarily in California,
which added more than 2.4 million in circulation to the Company's existing
shopper businesses.
The Company also acquired Information for Marketing Limited, a leading
London-based database marketer which services the United Kingdom, and Mercantile
Software Systems, Inc., a New Jersey-based provider of open architecture
software and systems integration solutions for direct marketing, in January 1997
and November 1997, respectively. These acquisitions help strengthen the
international services, and support and expand the technology base of the
database marketing sector. The Company also expanded its international
capabilities in the response management sector through the acquisition of Tele
Support Services, a leading provider of response management services to the high
technology industry in Europe, in October 1997.
Also described in Note B of 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 1.312 shares of the Company's common stock. As a
result, the Company issued approximately 12.2 million shares of its common stock
to the shareholders of DiMark, and DiMark's outstanding stock options were
converted into options to acquire approximately 3.0 million shares of Company
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.
16
<PAGE> 5
INTEREST EXPENSE/INTEREST INCOME
Total interest income and expense through October 15, 1997 was allocated to
continuing operations and discontinued operations based upon percentage of net
assets. The percentages allocated to continuing operations were approximately
58%, 55% and 44% for 1997, 1996 and 1995, respectively.
Interest expense for continuing operations decreased $1.2 million in
1997 over 1996 due primarily to the October extinguishment of $306.3 million of
long-term debt, using proceeds from the sale of the newspaper and television
operations, as described in Note N of the "Notes to Consolidated Financial
Statements" included herein. Total interest expense decreased in 1996 when
compared to 1995 due to lower effective interest rates and debt levels. However,
interest expense for continuing operations was flat due to the increased
allocation percentage from 1995 to 1996.
Interest income from continuing operations increased $3.7 million in
1997 as compared to 1996. This increase was due to the short-term investment of
the proceeds from the sale of the newspaper and television operations after debt
extinguishment and operational fundings. These short-term investments are
comprised of both taxable and non-taxable components with an aggregate balance
of $388.1 million at December 31, 1997. (See Note C of the "Notes to
Consolidated Financial Statements.") Interest income increased $0.4 million in
1996 when compared to 1995, due to interest income related to an income tax
refund from a favorable tax settlement.
EXTRAORDINARY ITEM
The Company extinguished its debt on October 15, 1997 using the proceeds from
the sale of its newspaper and television operations. The early extinguishment of
debt resulted in an extraordinary loss in the amount of $0.9 million, or one
cent per share.
INCOME TAXES
Excluding income taxes related to the 1996 merger costs and the 1995 gain on
divestiture, income tax expenses for continuing operations increased $7.7
million in 1997 and $4.8 million in 1996 due to higher income levels. The
effective income tax rate (excluding the unusual items) was 41.1%, 42.1%, and
43.8% in 1997, 1996 and 1995, respectively.
CAPITAL INVESTMENTS
Net cash used in investing activities for 1997 included $114.6 million for
acquisitions and $28.4 million for capital expenditures. In addition to the cash
outlay for acquisitions, the Company issued stock with a value of $6.3 million
in connection with its November 1997 acquisition. The acquisition investments
were made in both the direct marketing and shopper segments, discussed under
"Direct Marketing" and "Shoppers," respectively. The capital expenditures
consisted primarily of additional computer capacity, technology, systems and
equipment upgrades for the direct marketing business to support its growth in
all sectors. The shopper segment's capital expenditures were primarily related
to two new inserting machines. Additionally, the Company has invested
significantly in the reengineering of its financial systems and processes
through the purchase of new accounting systems software with implementation
beginning December 1997. The Company also invested in facility expansions in its
database marketing, response management and marketing services businesses.
Net cash used in investing activities for 1996 included $32.7 million
for acquisitions and $23.9 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
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
upgraded prepress technology in the shopper business.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of continuing operations was $68.5 million
for 1997. Net cash inflows from investing activities were $231.7 million in
1997. Included in 1997 investing activities was $789.9 million in proceeds, less
$24.5 million of sales related costs, from the sale of the Company's newspaper
and television operations. Proceeds from the sale were used to extinguish
outstanding debt under the Company's credit facility, purchase short-term
securities, and fund several acquisitions. Total cash outflows in 1997 related
to acquisitions was $114.6 million (see Note B of the "Notes to Consolidated
Financial Statements" included herein for further information). Cash provided by
operating activities of continuing operations for 1996 and 1995 was $39.8
million and $34.5 million, respectively. Net cash outflows for investing
activities of continuing operations were $56.2 million in 1996 and $23.6 million
in 1995. These investing outflows are the result of the Company's expansion
through acquisitions and investments in infrastructure to support growth.
Capital resources were available from, and provided through, the
Company's unsecured credit facility, through October 15,
17
<PAGE> 6
1997. This credit facility, a $320 million variable rate, revolving loan
commitment put in place on February 2, 1995, was to have been repaid by December
31, 2001. However, the outstanding borrowings under this facility ($306.3
million) were extinguished on October 15, 1997, funded primarily through the
proceeds of the sale of the Company's newspaper and television operations as
described in Note N of the "Notes to Consolidated Financial Statements" included
herein.
Management believes that the proceeds from the sale of the Company's
newspaper and television operations, after extinguishment of debt and payment of
income taxes related to the sale, together with cash provided from operating
activities, will be sufficient to fund operations and anticipated capital
service needs for the foreseeable future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income" which establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. The FASB also issued in June
1997 SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information" which establishes new standards for the way public companies
disclose information about operating segments, products and services, geographic
areas and major customers. SFAS No. 131 is effective for financial statements
for fiscal years beginning after December 15, 1997. The Company does not expect
the adoption of SFAS No. 131 to affect the groupings of its businesses for
purposes of segment reporting.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
From time to time, in both written reports and oral statements by senior
management, the Company may express its expectations regarding its future
performance. These "forward-looking statements" are inherently uncertain, and
investors should realize that events could turn out to be other than what senior
management expected. Set forth below are some key factors which could affect the
Company's future performance.
Acquisitions -- In recent years the Company has made a number of
acquisitions in its direct marketing and shopper businesses, and it expects to
pursue additional acquisition opportunities. Acquisition activities, even if not
consummated, require substantial amounts of management time and can distract
from normal operations. In addition, there can be no assurance that the
synergies and other objectives sought in acquisitions will be achieved.
Competition -- Direct marketing is a rapidly evolving business, subject
to periodic technological advancements, high turnover of customer personnel who
make buying decisions, and changing customer needs and preferences.
Consequently, the Company's direct marketing business faces competition in each
of its three sectors - database marketing, marketing services, and response
management. The Company's shopper business competes for advertising, as well as
for readers, with other print and electronic media. Competition comes from local
and regional newspapers, magazines, radio, broadcast and cable television,
shoppers and other communications media that operate in the Company's markets.
The extent and nature of such competition is, in large part, determined by the
location and demographics of the markets targeted by a particular advertiser,
and the number of media alternatives in those markets.
Postal Rates -- The Company's shoppers are delivered by standard mail,
and postage is the second largest expense, behind payroll, in the Company's
shopper business. The present standard postage rates went into effect in January
1995, and the next increase is expected in 1998. Postal rates also influence the
demand for the Company's direct marketing services even though the cost of
mailings is borne by the Company's customers and is not directly reflected in
the Company's revenues or expenses.
Newsprint Prices -- Newsprint represents a substantial expense in the
Company's shopper operations. In recent years newsprint prices have fluctuated
widely, and such fluctuations can materially affect the results of the Company's
operations.
Economic Conditions -- Changes in national economic conditions can
affect levels of advertising expenditures generally, and such changes can affect
each of the Company's businesses. In addition, revenues from the Company's
shopper business are dependent to a large extent on local advertising
expenditures in the markets in which they operate. Such expenditures are
substantially affected by the strength of the local economies in those markets.
Direct marketing revenues are dependent on national and international economics.
Year 2000 Issue -- The Year 2000 issue is a result of computer programs
being written using two digits rather than four to define the applicable year.
The Company has conducted a comprehensive review of its computer systems to
identify those that could be affected by the Year 2000 issue and has developed
an implementation plan to resolve the issue. The Company is utilizing both
internal and external resources to correct or reprogram, and test the systems
for the Year 2000 compliance. It is anticipated that all reprogramming efforts
will be completed by December 31, 1998, allowing adequate time for testing. The
Company is also in the process of obtaining confirmations, from primary
processing vendors and customers, that plans are being developed to address
processing of transactions in the year 2000. The Company does not expect the
amounts required to be expensed over the next two years to have a material
effect on its financial position or results of operations.
18
<PAGE> 7
================================================================================
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
In thousands, except per share and share amounts 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................................... $ 83,675 $ 12,017
Short-term investments ....................................... 388,145 --
Accounts receivable (less allowance for doubtful
accounts of $2,835 in 1997 and $1,121 in 1996) ........... 109,340 87,510
Inventory .................................................... 7,703 9,012
Prepaid expenses ............................................. 8,473 8,502
Current deferred income tax asset ............................ 12,518 5,201
Other current assets ......................................... 3,285 2,074
--------- ---------
Total current assets ..................................... 613,139 124,316
--------- ---------
Net assets of discontinued operations ............................. -- 223,477
Property, plant, and equipment
Land ......................................................... 3,069 3,657
Buildings and improvements ................................... 20,913 20,161
Software ..................................................... 13,175 10,300
Equipment and furniture ...................................... 141,161 106,411
--------- ---------
178,318 140,529
Less accumulated depreciation ................................ (91,072) (69,542)
--------- ---------
87,246 70,987
Construction and equipment installations in progress ......... 2,105 1,208
--------- ---------
Net property, plant and equipment ............................ 89,351 72,195
--------- ---------
Intangible and other assets
Goodwill (less accumulated amortization
of $34,307 in 1997 and $28,782 in 1996) .................. 250,363 142,053
Other assets ................................................. 2,070 4,441
--------- ---------
Total intangible and other assets ........................ 252,433 146,494
--------- ---------
Total assets ............................................. $ 954,923 $ 566,482
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................. $ 49,918 $ 37,356
Accrued payroll and related expenses ......................... 23,097 18,799
Customer deposits and unearned revenue ....................... 17,944 16,242
Income taxes payable ......................................... 270,440 2,748
Other current liabilities .................................... 9,950 7,989
--------- ---------
Total current liabilities ................................ 371,349 83,134
--------- ---------
Long-term debt .................................................... -- 218,005
Other long-term liabilities (including deferred
income taxes of $9,723 in 1997 and $2,601 in 1996) ........... 17,337 12,651
--------- ---------
Total liabilities ........................................ 388,686 313,790
========= =========
Stockholders' equity
Common stock, $1 par value, authorized 125,000,000 shares.
Issued 1997: 74,842,982; 1996: 73,603,402 shares ............. 74,843 73,604
Additional paid-in capital ................................... 177,238 149,875
Unrealized losses on short-term investments .................. (577) --
Retained earnings ............................................ 362,000 29,213
--------- ---------
613,504 252,692
Less treasury stock, 1,648,608 shares at cost ................ (47,267) --
--------- ---------
Total stockholders' equity ............................... 566,237 252,692
--------- ---------
Total liabilities and stockholders' equity ............... $ 954,923 $ 566,482
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
19
<PAGE> 8
================================================================================
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands, except per share amounts 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues ........................................................... $ 638,349 $ 515,460 $ 453,302
--------- --------- ---------
Operating expenses
Payroll ....................................................... 236,319 187,765 156,901
Production and distribution ................................... 243,423 204,729 190,619
Advertising, selling, general and administrative .............. 59,054 43,632 41,619
Depreciation .................................................. 17,327 13,779 11,135
Goodwill amortization ......................................... 5,134 3,658 3,244
Merger costs .................................................. -- 12,136 --
--------- --------- ---------
561,257 465,699 403,518
--------- --------- ---------
Operating income ................................................... 77,092 49,761 49,784
--------- --------- ---------
Other expenses (income)
Interest expense .............................................. 6,189 7,346 7,506
Interest income ............................................... (4,412) (717) (285)
Gains on divestitures ......................................... -- -- (1,454)
Other, net .................................................... 196 395 842
--------- --------- ---------
1,973 7,024 6,609
--------- --------- ---------
Income from continuing operations
before income taxes ........................................... 75,119 42,737 43,175
Income tax expense ................................................. 30,848 19,653 18,874
--------- --------- ---------
Income from continuing operations .................................. 44,271 23,084 24,301
--------- --------- ---------
Income from discontinued operations, net of income taxes ........... 15,483 17,537 15,684
Gain on sale, net of income taxes .................................. 276,869 -- --
--------- --------- ---------
Total discontinued operations ...................................... 292,352 17,537 15,684
--------- --------- ---------
Income before extraordinary item ................................... 336,623 40,621 39,985
Extraordinary item -- loss due to early extinguishment of debt,
net of income tax benefit of $586 ............................. (875) -- --
--------- --------- ---------
Net income ......................................................... $ 335,748 $ 40,621 $ 39,985
========= ========= =========
Basic earnings per common share
Continuing operations ......................................... $ 0.60 $ 0.32 $ 0.35
Discontinued operations ....................................... 3.95 0.24 0.22
Extraordinary item, net of income taxes ....................... (0.01) -- --
--------- --------- ---------
Basic earnings per common share ........................... $ 4.54 $ 0.56 $ 0.57
========= ========= =========
Weighted-average common shares outstanding .................... 73,998 72,830 69,956
========= ========= =========
Diluted earnings per common share
Continuing operations ......................................... $ 0.57 $ 0.30 $ 0.32
Discontinued operations ....................................... 3.80 0.23 0.21
Extraordinary item, net of income taxes ....................... (0.01) -- --
--------- --------- ---------
Diluted earnings per common share ......................... $ 4.36 $ 0.53 $ 0.53
========= ========= =========
Weighted-average common and
common equivalent shares outstanding .......................... 77,000 77,154 75,338
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE> 9
================================================================================
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income .......................................................................... $ 335,748 $ 40,621 $ 39,985
Adjustments to reconcile net income to net cash provided by continuing operations:
Income from discontinued operations ........................................ (15,483) (17,537) (15,684)
Gain on sale of discontinued operations .................................... (539,647) -- --
Depreciation ............................................................... 17,327 13,779 11,135
Goodwill amortization ...................................................... 5,134 3,658 3,244
Amortization of option-related compensation ................................ 769 661 1,349
Deferred income taxes ...................................................... 2,716 333 662
Gains on divestitures ...................................................... -- -- (1,454)
Extraordinary item ......................................................... 1,461 -- --
Other, net ................................................................. (1,192) 1,158 278
Changes in operating assets and liabilities, net of effects from
acquisitions and divestitures:
Increase in accounts receivable, net ....................................... (12,737) (17,495) (2,265)
Decrease (increase) in inventory ........................................... 2,435 7,900 (7,208)
Decrease (increase) in prepaid expenses and other current assets ........... 2,454 (3,313) (761)
Increase in accounts payable ............................................... 7,818 1,703 3,748
Increase (decrease) in other accrued expenses and other liabilities ........ 263,242 8,550 (1,547)
Other, net ................................................................. (1,546) (250) 3,048
--------- --------- ---------
Net cash provided by continuing operations ................................. 68,499 39,768 34,530
Net cash provided by discontinued operating activities .......................... 24,250 32,717 13,919
--------- --------- ---------
Net cash provided by operating activities .................................. 92,749 72,485 48,449
--------- --------- ---------
Cash Flows from Investing Activities
Acquisitions ........................................................................ (114,589) (32,749) (9,661)
Purchases of property, plant and equipment .......................................... (28,396) (23,885) (17,441)
Proceeds from the sale of property, plant and equipment ............................. 1,997 408 1,067
Proceeds from divestiture ........................................................... -- -- 2,388
Net purchases of available-for-sale short-term investments .......................... (386,687) -- --
Discontinued operations:
Purchases of property, plant and equipment ...................................... (4,548) (3,529) (4,669)
Proceeds from the sale of property, plant and equipment ......................... 34 270 310
Payments on film contracts ...................................................... (1,481) (1,572) (1,817)
Proceeds from divestiture ....................................................... -- -- 39,643
Proceeds from sale of discontinued operations ................................... 789,882 -- _
Costs related to sale of discontinued operations ................................ (24,544) -- --
--------- --------- ---------
Net cash provided by (used in) investing activities .......................... 231,668 (61,057) 9,820
--------- --------- ---------
Cash Flows from Financing Activities
Long-term borrowings ................................................................ 497,600 244,573 895,463
Payments on debt, including current maturities and financing costs .................. (714,465) (267,224) (949,289)
Issuance of common stock ............................................................ 14,334 7,488 5,598
Purchase of treasury stock .......................................................... (47,267) -- --
Dividends paid ...................................................................... (2,961) (2,350) (1,968)
--------- --------- ---------
Net cash (used in) financing activities ....................................... (252,759) (17,513) (50,196)
--------- --------- ---------
Net increase (decrease) in cash ..................................................... 71,658 (6,085) 8,073
Cash and cash equivalents at beginning of period .................................... 12,017 18,102 11,533
Pooling adjustment to beginning of year balance to conform fiscal years ............. -- -- (1,504)
--------- --------- ---------
Cash and cash equivalents at end of period .......................................... $ 83,675 $ 12,017 $ 18,102
========= ========= =========
Supplemental cash flow information:
Non-cash investing and financing activities:
Acquisitions; stock issued (1997) and debt issued (1996) ....................... $ 6,255 $ 18,765 $ --
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE> 10
================================================================================
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Accumulated
Additional Deficit)
Common Paid-In Retained Treasury
In thousands Stock Capital Earnings Stock
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 ..................... $ 67,120 $ 117,605 $ (44,935) $ --
Common stock issued-- employee
benefit plans ............................. 282 1,648 -- --
Exercise of stock options ...................... 399 1,961 -- --
Tax benefit of options exercised ............... -- 743 -- --
Dividends paid ($0.0335 per share) ............. -- -- (1,968) --
Net income ..................................... -- -- 39,985 --
Stock issued in conjunction with acquisition ... -- 1,310 -- --
Conversion of 61/4% Convertible Notes .......... 4,287 15,667 -- --
Pooling adjustment to beginning of year
balance to conform fiscal year ............ -- (108) (2,140) --
Reduction of minimum pension liability ......... -- -- -- --
-------- --------- --------- --------
Balance at December 31, 1995 ................... 72,088 138,826 (9,058) --
Common stock issued -- employee
benefit plans ............................. 208 2,441 -- --
Exercise of stock options ...................... 1,192 4,699 -- --
Tax benefit of options exercised ............... -- 2,766 -- --
Dividends paid ($0.0335 per share) ............. -- -- (2,350) --
Net income ..................................... -- -- 40,621 --
Stock issued in conjunction with
acquisition earnout ....................... 116 1,143 -- --
-------- --------- --------- --------
Balance at December 31, 1996 ................... 73,604 149,875 29,213 --
Common stock issued -- employee
benefit plans ............................. 278 3,370 -- --
Exercise of stock options ...................... 2,250 8,566 -- --
Tax benefit of options exercised ............... -- 7,841 -- --
Dividends paid ($0.04 per share) ............... -- -- (2,961) --
Net income ..................................... -- -- 335,748 --
Stock issued in conjunction with
acquisition ............................... 360 5,937 -- --
Treasury stock repurchase ...................... (1,649) 1,649 -- (47,267)
Unrealized loss on short-term investments
(net of tax) .............................. -- -- -- --
-------- --------- --------- --------
Balance at December 31, 1997 ................... $ 74,843 $ 177,238 $ 362,000 $(47,267)
======== ========= ========= ========
<CAPTION>
Minimum Unrealized
Pension (Loss) on Total
Liability Short-Term Stockholders'
In thousands Adjustment Investments Equity
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1995 ..................... $(1,945) $ -- $ 137,845
Common stock issued-- employee
benefit plans ............................. -- -- 1,930
Exercise of stock options ...................... -- -- 2,360
Tax benefit of options exercised ............... -- -- 743
Dividends paid ($0.0335 per share) ............. -- -- (1,968)
Net income ..................................... -- -- 39,985
Stock issued in conjunction with acquisition ... -- -- 1,310
Conversion of 61/4% Convertible Notes .......... -- -- 19,954
Pooling adjustment to beginning of year
balance to conform fiscal year ............ -- -- (2,248)
Reduction of minimum pension liability ......... 1,945 -- 1,945
------- ----- ---------
Balance at December 31, 1995 ................... -- -- 201,856
Common stock issued -- employee
benefit plans ............................. -- -- 2,649
Exercise of stock options ...................... -- -- 5,891
Tax benefit of options exercised ............... -- -- 2,766
Dividends paid ($0.0335 per share) ............. -- -- (2,350)
Net income ..................................... -- -- 40,621
Stock issued in conjunction with
acquisition earnout ....................... -- -- 1,259
------- ----- ---------
Balance at December 31, 1996 ................... -- -- 252,692
Common stock issued -- employee
benefit plans ............................. -- -- 3,648
Exercise of stock options ...................... -- -- 10,816
Tax benefit of options exercised ............... -- -- 7,841
Dividends paid ($0.04 per share) ............... -- -- (2,961)
Net income ..................................... -- -- 335,748
Stock issued in conjunction with
acquisition ............................... -- -- 6,297
Treasury stock repurchase ...................... -- -- (47,267)
Unrealized loss on short-term investments
(net of tax) .............................. -- (577) (577)
------- ----- ---------
Balance at December 31, 1997 ................... $ -- $(577) $ 566,237
======= ===== =========
</TABLE>
See Notes to Consolidated Financial Statements
22
<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. Actual results could differ from the estimates.
All intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified for comparative
purposes.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments with a remaining maturity of 90 days or less at
the time of purchase are considered to be cash equivalents. Cash equivalents are
carried at cost, which approximates fair value. The short-term investments
comprise readily marketable debt and equity securities with remaining maturities
of more than 90 days at the time of purchase. Even where the remaining maturity
is more than one year, the securities are classified as short-term investments,
as the Company's intention is to convert them into cash within one year. The
Company considers all of its short-term investments to be available-for-sale and
are recorded at fair value, with the unrealized gain (loss) recognized as a
separate component of stockholders' equity.
INVENTORY
Inventory, consisting primarily of newsprint and operating supplies, is stated
at the lower of cost (first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Depreciation of
buildings and equipment is computed generally on the straight-line method at
rates calculated to amortize the cost of the assets over their useful lives. The
general ranges of estimated useful lives are:
Buildings and improvements 10 to 40 years
Equipment and furniture 4 to 20 years
GOODWILL
Goodwill is stated on the basis of cost, adjusted as discussed below, and is
amortized on a straight-line basis over 15 to 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 will not be recovered, an
impairment loss is recognized based on 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.
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
Basic earnings per common share are based upon the weighted-average number of
common shares outstanding. 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 using the treasury stock
method 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. See Note M.
STOCK SPLIT
In January 1998, the Company announced a two-for-one split of its common stock
in the form of a 100% stock dividend payable March 16 to holders of record on
March 2, 1998. All share, per share and common stock information in the
Consolidated Financial Statements and the Notes thereto have been restated to
reflect the stock split.
NOTE B -- ACQUISITIONS
PURCHASES
In January 1997, the Company acquired Information for Marketing Limited, a
London-based database marketer servicing the United Kingdom.
In September 1997, the Company acquired the ABC Shoppers Group from an
indirect subsidiary of The Walt Disney Company for $104 million. The group
consisted of 6 publications located primarily in California, and added over 2.4
million circulation to the shopper segment, for a total circulation of more than
9 million per week.
In October 1997, the Company exercised the option to acquire Tele Support
Services, a provider of response management services to the high technology
industry in Europe, and in November 1997, the Company acquired Mercantile
Software Systems, Inc., a New Jersey-based provider of open architecture
software and systems integration solutions for direct marketing.
In January 1996, DiMark acquired PRO Direct Response Corp., a telemarketing
company that serves the financial services industry.
In May 1996, the Company acquired Inquiry Handling Service, a Los
Angeles-based response management company that serves the high technology and
electronics industries, and in August 1996, the Company acquired Lead Management
Group, a Boston-based response management, telemarketing and fulfillment company
that serves the high technology industry.
23
<PAGE> 12
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 1997 for acquisitions was $114.6 million. In
addition, the Company issued stock with a value of $6.3 million for its November
1997 acquisition. The total cash outlay in 1996 for 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.
The following table summarizes, on an unaudited pro forma basis, the estimated
combined results of operations of the Company and the 1997 acquisitions (ABC
Shoppers Group, Information for Marketing Limited, Tele Support Services and
Mercantile Software Systems) assuming the acquisitions had taken place on
January 1, 1996. The pro forma information includes adjustments for interest
expense that would have been incurred to finance the acquisitions and
amortization of the intangible assets acquired. The unaudited pro forma results
of operations are not necessarily indicative of the results that actually would
have occurred had the acquisitions been completed on January 1, 1996.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
In thousands, except For the years ended December 31,
per share amounts 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Revenues ............................ $698,809 $592,681
Income from continuing operations ... 45,257 23,273
Net income .......................... 336,734 40,810
Diluted earnings per
common share:
Continuing operations ............... 0.59 0.30
Net income .......................... 4.37 0.53
</TABLE>
POOLING-OF-INTERESTS
Effective April 30, 1996, DiMark, Inc. 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 1.312 shares of Company common stock. As a result, the
Company issued approximately 12.2 million shares of common stock to the
shareholders of DiMark, and DiMark's outstanding stock options were converted
into options to acquire approximately 3.0 million shares of Company 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 to financial statement preparation. Merger
expenses related to the transaction were $12.1 million ($8.7 million, net of
income taxes).
Prior to the combination, the Company's 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 from continuing
operations
Harte-Hanks ....................... $ 89,794 $ 382,643
DiMark ............................ 27,377 77,583
Adjustments ....................... (1,665) (6,924)
--------- ---------
Combined .......................... $ 115,506 $ 453,302
========= =========
Income from continuing
operations
Harte-Hanks ....................... $ 3,056 $ 18,301
DiMark ............................ 1,932 6,000
--------- ---------
Combined .......................... $ 4,988 $ 24,301
========= =========
</TABLE>
Adjustments consist of elimination of DiMark's postage costs from revenues and
cost of sales to conform to the Company's accounting classification.
NOTE C -- SHORT-TERM INVESTMENTS
The Company's intention is to maintain a liquid portfolio to take advantage of
investment opportunities; therefore all securities are considered to be
available-for-sale and are classified as current assets. Short-term investments
consist of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
December 31, 1997
Gross
Amortized Unrealized Fair
In thousands Cost Loss Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax exempt variable rate
demand notes ................. $241,018 $ -- $241,018
Tax exempt auction rate
securities ................... 3,100 -- 3,100
Tax exempt commercial paper ....... 37,233 -- 37,233
Taxable commercial paper .......... 71,102 -- 71,102
Taxable certificates of deposit ... 33,244 -- 33,244
Taxable federal securities ........ 990 -- 990
Equity securities ................. 2,346 (888) 1,458
-------- ----- --------
Total ............................. $389,033 $(888) $388,145
======== ===== ========
</TABLE>
The fair value of the Company's investment in securities by contractual maturity
is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
In thousands December 31, 1997
- -----------------------------------------------------------------
<S> <C>
Due in less than 1 year .......................... $141,579
Due in 1 to 5 years .............................. 990
Due in more than 5 years ......................... 244,118
No stated maturity-equity securities ............. 1,458
--------
Total ............................................ $388,145
========
</TABLE>
The gross realized gains and losses on the sale of available-for-sale securities
were immaterial for the year ended December 31, 1997. The net change in the
unrealized loss on marketable securities classified as available-for-sale
included as a component of equity was $577,000 at December 31, 1997.
24
<PAGE> 13
NOTE D -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
December 31,
In thousands 1997 1996
- -----------------------------------------------------------------------------
<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
Bank lines, various interest rates
(effective rates of 7.8% at
December 31, 1996) ....................... -- 3,000
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 ............ 1,240 1,340
-------- --------
1,240 218,105
Less current maturities ....................... 1,240 100
-------- --------
$ -- $218,005
======== ========
</TABLE>
CREDIT FACILITY
The Company extinguished its $320 million revolving credit facility on October
15, 1997. As of December 31, 1997, the Company had no long-term debt. Cash
payments for interest were $10.5 million, $13.5 million and $16.8 million for
the years ended December 31, 1997, 1996 and 1995, respectively.
BANK LINES
The Company has two separate uncommitted short-term borrowing arrangements.
Under these arrangements, the Company can borrow up to a maximum of $50 million.
These short-term borrowings were previously classified as long-term debt since
the Company's intent was to maintain unused and available credit under its
credit facility in an amount equal to its outstanding short-term borrowings. As
of December 31, 1997, the Company had no borrowings related to these bank lines.
ACQUISITION NOTES PAYABLE
In November 1996, the Company issued notes payable of $18.8 million in
connection with an acquisition. These notes payable were repaid in January 1997
with borrowings under the Company's revolving credit commitment.
NOTE E -- INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Year Ended December 31,
In thousands 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal ............... $23,216 $ 16,475 $ 16,149
State and local ....... 4,916 2,845 2,063
------- -------- --------
Total current ...... $28,132 $ 19,320 $ 18,212
======= ======== ========
Deferred
Federal ............... $ 2,201 $ (23) $ (1,212)
State and local ....... 515 356 1,874
------- -------- --------
Total deferred ..... $ 2,716 $ 333 $ 662
======= ======== ========
</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 $0.6 million related
to the gain on divestiture.
The differences between total income tax expense and the amount computed by
applying the statutory federal income tax rate to income from continuing
operations before income taxes were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Year Ended December 31,
In thousands 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed expected
income tax
expense ................ $26,292 35% $ 14,958 35% $15,111 35%
Net effect of state
income taxes ........... 3,531 5% 2,081 5% 2,559 6%
Effect of goodwill
amortization ........... 1,017 1% 977 2% 889 2%
Effect of non-taxable
investment
income ................. (912) -1% -- -- -- --
Merger costs ................ -- -- 1,498 4% -- --
Change in the beginning
of the year balance
of the valuation
allowance .............. -- -- (95) 0% 119 0%
Other, net .................. 920 1% 234 0% 196 1%
------- -- -------- -- ------- --
Income tax expense
for the period ......... $30,848 41% $ 19,653 46% $18,874 44%
======= == ======== == ======= ==
</TABLE>
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Year Ended December 31,
In thousands 1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Continuing operations ...... $ 30,848 $ 19,653 $ 18,874
Discontinued operations .... 275,548 15,064 21,724
Extraordinary items ........ (586) -- --
Stockholders' equity ....... (8,152) (2,766) (743)
--------- -------- --------
Total ................. $ 297,658 $ 31,951 $ 39,855
========= ======== ========
</TABLE>
25
<PAGE> 14
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 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
State net income tax ........................... $ 4,967 $ 1,046
Deferred compensation and retirement plans ..... 4,651 6,098
Accrued expenses not deductible until paid ..... 3,743 2,870
Accounts receivable, net ....................... 439 476
Other, net ..................................... 253 237
State net operating loss carryforwards ......... 191 67
-------- --------
Total gross deferred tax assets ............. 14,244 10,794
Less valuation allowance .................... (191) (67)
-------- --------
Net deferred tax assets ..................... 14,053 10,727
-------- --------
Deferred tax liabilities:
Property, plant and equipment .................. (8,643) (7,522)
Goodwill ....................................... (2,324) (605)
Other, net ..................................... (291) --
-------- --------
Total gross deferred tax liabilities ........ (11,258) (8,127)
-------- --------
Net deferred tax assets ..................... $ 2,795 $ 2,600
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 was
$60,000. The valuation allowance at December 31, 1997 and 1996 relate to state
net operating losses, which are not expected to be realized.
The net deferred tax asset is recorded both as a current deferred income
tax asset and as other long-term liabilities based upon the classification of
the related temporary difference.
Cash payments for income taxes were $25.7 million, $19.8 million and $19.7
million in 1997, 1996 and 1995, respectively.
NOTE F -- 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 applicable to continuing operations for all plans included the
following components:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
December 31,
In thousands 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period .............. $ 2,644 $ 2,803 $ 2,251
Interest cost on projected
benefit obligation ............. 4,118 3,656 3,292
Actual return on plan assets ....... (11,184) (5,759) (7,377)
Net deferrals and amortization ..... 6,184 1,803 4,227
-------- ------- -------
Net periodic pension cost .......... $ 1,762 $ 2,503 $ 2,393
======== ======= =======
</TABLE>
In determining the 1997, 1996 and 1995 actuarial present value of benefit
obligations, discount rates of 71/4%, 73/4% and 71/4% 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 1997 1996
- ----------------------------------------------------------------------------------------------------------
Qualified Non-Qualified Qualified Non-Qualified
Plan Plan Plan Plan
---------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested .............................. $(60,054) $(2,129) $(49,581) $ --
Non-vested .......................... (3,975) (315) (4,790) (1,033)
-------- ------- -------- -------
Total accumulated
benefit obligations ................. (64,029) (2,444) (54,371) (1,033)
Additional obligation related to
projected salary increases ............ (12,551) (1,011) (16,123) (1,295)
-------- ------- -------- -------
Projected benefit obligations
for service rendered to date .......... (76,580) (3,455) (70,494) (2,328)
Fair value of plan assets,
primarily listed stocks
and government securities ............. 79,392 -- 65,316 --
-------- ------- -------- -------
Projected benefit obligation less than
(in excess of) plan assets ............ 2,812 (3,455) (5,178) (2,328)
Unrecognized net loss
(gain) from past
experience different
from that assumed ..................... (425) 726 2,173 209
Unrecognized prior
service costs ......................... 30 1,070 47 1,126
Unrecognized net assets
at January 1, 1987 being
recognized over average
expected remaining service
period of employees ................... (706) -- (828) --
Adjustment to recognize
minimum liability ..................... -- (585) -- (40)
-------- ------- -------- -------
Recorded pension asset (liability) ....... $ 1,711 $(2,244) $ (3,786) $(1,033)
======== ======= ======== =======
</TABLE>
During 1997, the Company recognized a pension curtailment gain of $4.1 million
related to the divestiture of its newspaper and television operations. This
curtailment gain is included in the calculation of the gain on the sale of
discontinued operations.
The Company also sponsors 401(k) plans to provide employees with additional
income upon retirement. The Company generally 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 2,000,000
shares to be sold to participating employees at 85% of the fair market value at
specified quarterly investment dates. Shares available for sale totaled
1,082,486 at December 31, 1997.
26
<PAGE> 15
NOTE G -- STOCKHOLDERS' EQUITY
In January 1998, the Company announced a two-for-one split of its common stock
in the form of a 100% stock dividend payable March 16 to holders of record on
March 2, 1998. All share, per share and common stock amounts have been restated
to retroactively reflect the stock split.
Also in January 1998, the Company announced an increase in the regular
quarterly dividend from 1 cent to 1.5 cents per share payable March 16 to
holders of record on March 2, 1998.
Under the 1.8 million share repurchase program authorized in January 1997,
the Company repurchased 1,606,300 shares of its common stock for $47.3 million.
In December, a new repurchase program was authorized for an additional 2 million
shares.
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 May 26, 1995, the Company issued 4,285,714 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 H -- 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, 1997, 1996 and 1995, options to
purchase 629,000 shares, 939,600 shares and 1,315,800 shares, respectively, were
outstanding under the 1984 Plan, with exercise prices ranging from $1.67 to
$3.34 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 8,000,000
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, 1997, 1996 and 1995, market
price options to purchase 4,194,650 shares, 4,324,000 shares and 3,356,550
shares, respectively, were outstanding with exercise prices ranging from $3.34
to $17.38 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, 1997 was $8.83 and
$5.21, respectively. The weighted-average remaining life for outstanding options
was 7.88 years.
At December 31, 1997, 1996 and 1995, performance options to purchase
737,800 shares, 994,250 shares and 1,115,550 shares, respectively, were
outstanding with exercise prices ranging from $0.34 to $1.00 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 $0.8 million, $1.0
million and $1.8 million was recognized for the performance options for the
years ended December 31, 1997, 1996 and 1995, respectively. The weighted-average
exercise price for outstanding options and exercisable options at December 31,
1997 was $0.44 and $0.34, respectively. The weighted-average remaining life for
outstanding options was 6.91 years.
DIMARK MERGER
In connection with the DiMark merger, DiMark's outstanding stock options were
converted into options to acquire approximately 3.0 million shares of
Harte-Hanks common stock. As of December 31, 1997, 1996 and 1995, DiMark options
to purchase 435,466 shares, 2,534,684 shares and 3,132,028 shares, respectively,
were outstanding with exercise prices ranging from $3.28 to $10.48 per share. As
of December 31, 1997, all outstanding DiMark options were exercisable. The
weighted-average exercise price at December 31, 1997 was $7.94 and the
weighted-average remaining life was 2.18 years.
The following summarizes all stock option plans activity during 1997, 1996 and
1995:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Weighted-
Number Average
of Shares Option Price
- ---------------------------------------------------------------------
<S> <C> <C>
Options outstanding
at January 1, 1995 ........... 8,041,650 $ 3.21
Granted ........................... 1,766,964 7.05
Exercised ......................... (682,224) 2.62
Cancelled ......................... (244,116) 4.14
Pooling adjustment to
conform fiscal year .......... 37,654 4.42
==========
Options outstanding
at December 31, 1995 ......... 8,919,928 4.09
Granted ........................... 1,471,500 10.88
Exercised ......................... (1,194,108) 3.97
Cancelled ......................... (404,786) 5.61
----------
Options outstanding
at December 31, 1996 ......... 8,792,534 5.16
Granted ........................... 1,302,350 13.12
Exercised ......................... (2,249,240) 4.80
Cancelled ......................... (1,848,728) 4.83
----------
Options outstanding at
December 31, 1997 ............ 5,996,916 $ 7.13
==========
Exercisable at
December 31, 1997 ............ 2,246,766 $ 3.99
==========
</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.
27
<PAGE> 16
Had compensation expense for the Company's options been determined based on the
fair value at the grant date for awards in 1997, 1996 and 1995, consistent with
the provisions of SFAS No. 123, the Company's income from continuing operations,
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
In thousands, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing
operations-- as reported .......... $ 44,271 $ 23,084 $ 24,301
Income from continuing
operations-- pro forma ............ 42,512 21,630 23,734
Net income-- as reported ............ 335,748 40,621 39,985
Net income-- pro forma .............. 333,989 39,021 39,370
Diluted earnings per share
from continuing operations
-- as reported .................... 0.57 0.30 0.32
Diluted earnings per share
from continuing operations
-- pro forma ...................... 0.55 0.28 0.31
Diluted earnings per share
-- as reported .................... 4.36 0.53 0.53
Diluted earnings per share
-- pro forma ...................... 4.34 0.51 0.52
</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 1997, 1996 and 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield.............. 0.3% 0.3% 0.3%
Expected stock price volatility...... 20.3% 22.1% 21.3%
Risk free interest rate.............. 6.4% 6.3% 6.1%
Expected life of options............. 3-10 years 3-10 years 3-10 years
</TABLE>
The weighted-average fair value of market price options granted during 1997,
1996 and 1995 was $5.12, $4.07 and $2.59 respectively. The weighted-average fair
value and exercise price of performance options was $8.96 and $0.71 in 1997,
$7.32 and $0.57 in 1996, and $6.07 and $0.34 in 1995, respectively.
NOTE I -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Because of their maturities and/or interest rates, the Company's financial
instruments have a fair value approximating their carrying value. These
instruments include short-term investments, accounts receivable, revolving
credit borrowings, trade payables, and miscellaneous notes receivable and
payable.
NOTE J -- COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company had outstanding letters of credit in the
amount of $3.1 million. These letters of credit exist to support the Company's
insurance programs relating to worker's compensation, automobile and general
liability.
NOTE K -- 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 applicable to continuing operations under all operating
leases was $16.0 million, $13.0 million and $10.8 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
The future minimum rental commitments for all non-cancellable operating leases
with terms in excess of one year as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
In thousands
- -------------------------------------------------------------------------------
<S> <C>
1998............................................................. $ 13,673
1999............................................................. 10,827
2000............................................................. 8,537
2001............................................................. 7,218
2002............................................................. 4,007
After 2002....................................................... 8,113
--------
$ 52,375
========
</TABLE>
NOTE L -- EXTRAORDINARY ITEM
The Company extinguished its debt on October 15, 1997 using the proceeds from
the sale of its newspaper and television operations. The early extinguishment of
debt resulted in an extraordinary loss in the amount of $0.9 million, or one
cent per share, net of $0.6 million tax benefit.
NOTE M -- EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." This statement requires the
presentation of basic earnings per share (EPS) and diluted earnings per share
for reporting periods of all public companies ending after December 15, 1997,
instead of the primary and fully diluted EPS previously required. The new
standard requires the restatement of EPS for all periods presented.
EPS restated as required by SFAS No. 128 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
In thousands, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income from continuing operations ....... $ 44,271 $ 23,084 $ 24,301
Income from discontinued operations ..... 292,352 17,537 15,684
Extraordinary item ...................... (875) -- --
--------- --------- ---------
Net income .............................. $ 335,748 $ 40,621 $ 39,985
========= ========= =========
Weighted-average common shares
outstanding used in net earnings
per share computations ............. 73,998 72,830 69,956
========= ========= =========
Earnings per share:
Continuing operations .............. $ 0.60 $ 0.32 $ 0.35
Discontinued operations ............ 3.95 0.24 0.22
Extraordinary item ................. (0.01) -- --
--------- --------- ---------
Net income ......................... $ 4.54 $ 0.56 $ 0.57
========= ========= =========
</TABLE>
28
<PAGE> 17
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
In thousands, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
DILUTED EPS
Income from continuing operations ...... $ 44,271 $ 23,084 $ 24,301
Income from discontinued operations .... 292,352 17,537 15,684
Extraordinary item ..................... (875) -- --
-------- -------- --------
Net income ............................. $335,748 $ 40,621 $ 39,985
======== ======== ========
Adjusted income from continuing
operations ........................... $ 44,271 $ 23,084 $ 24,476
Adjusted income from discontinued
operations ........................... 292,352 17,537 15,822
Extraordinary item ..................... (875) -- --
-------- -------- --------
Adjusted net income for interest on
convertible note ..................... $335,748 $ 40,621 $ 40,298
======== ======== ========
Shares used in net earnings per
share computations ................... 77,000 77,154 75,338
======== ======== ========
Earnings per share:
Continuing operations ................ $ 0.57 $ 0.30 $ 0.32
Discontinued operations .............. 3.80 0.23 0.21
Extraordinary item ................... (0.01) -- --
-------- -------- --------
Net income ........................... $ 4.36 $ 0.53 $ 0.53
======== ======== ========
Computation of Shares Used In Net Earnings Per Share Computations
Average outstanding common shares....... 73,998 72,830 69,956
Average common equivalent shares--
dilutive effect of option shares...... 3,002 4,324 3,654
Dilutive effect of convertible note..... -- -- 1,728
-------- -------- --------
Shares used in net earnings
per share computations................ 77,000 77,154 75,338
======== ======== ========
</TABLE>
NOTE N -- DISCONTINUED OPERATIONS
The Company sold its newspaper operations, KENS-TV, the CBS affiliate in San
Antonio and KENS-AM radio to The E.W. Scripps Company on October 15, 1997 for a
cash price of $775 million plus approximately $15 million for estimated working
capital. This transaction resulted in gain on sale of $276.9 million, or $3.60
per share diluted, net of $262.8 million of income taxes.
Because the newspaper and television operations represent entire business
segments that were divested on October 15, 1997, their results are reported as
"discontinued operations" for all periods presented. Results of the remaining
business segments are reported as "continuing operations."
Summarized operating results for the combined newspaper and television
discontinued operations are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
In thousands 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues ....................... $121,169 $150,413 $150,209
Income from discontinued
operations before gain
on divestiture and
income tax expense ........... $ 28,231 $ 32,601 $ 25,115
Gain on divestiture ............ -- -- 12,293
Income tax expense ............. 12,748 15,064 21,724
-------- -------- --------
Income from discontinued
operations ................... $ 15,483 $ 17,537 $ 15,684
======== ======== ========
</TABLE>
Summarized balance sheet data for the combined newspaper and television
discontinued operations is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
In thousands 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Current assets .................................... $ -- $ 28,831
Property, plant and equipment ..................... -- 40,713
Goodwill and other intangibles .................... -- 177,236
Other assets ...................................... -- 2,498
Current liabilities ............................... -- (14,593)
Deferred income tax liabilities ................... -- (8,148)
Other liabilities ................................. -- (3,060)
--------- ---------
Net assets of discontinued operations ............. $ -- $ 223,477
========= =========
</TABLE>
The major components of cash flows for the combined newspaper and television
discontinued operations are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
In thousands 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from discontinued
operations .................... $ 15,483 $ 17,537 $ 15,684
Depreciation and goodwill
amortization .................. 9,062 11,357 11,600
Film amortization ............... 1,369 1,347 2,188
Gain on divestiture ............. -- -- (12,293)
Other, net ...................... (1,664) 2,476 (3,260)
-------- -------- --------
Net cash provided by
discontinued operations ....... $ 24,250 $ 32,717 $ 13,919
======== ======== ========
</TABLE>
29
<PAGE> 18
NOTE O -- SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1997 Quarter Ended
-----------------------------------------------------
In thousands, except per share amounts(a) December 31 September 30 June 30 March 31
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from continuing operations ........... $ 193,900 $ 155,061 $ 150,964 $ 138,424
Operating income from continuing operations ... 24,610 20,224 19,765 12,493
Income from continuing operations ............. 17,193 10,470 10,640 (b) 5,968
Income before extraordinary items ............. 294,712 15,549 16,345 (b) 10,017
Net income .................................... 293,837 15,549 16,345 (b) 10,017
Basic earnings per share:
Continuing operations ......................... 0.24 0.14 0.14 (b) 0.08
Discontinued operations ....................... 3.80 0.07 0.08 0.05
Net income .................................... 4.02 0.21 0.22 (b) 0.13
Diluted earnings per share:
Continuing operations ......................... 0.23 0.13 0.13 (b) 0.08
Discontinued operations ....................... 3.67 0.07 0.07 0.05
Net income .................................... 3.88 0.20 0.21 (b) 0.13
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1996 Quarter Ended
-----------------------------------------------------
In thousands, except per share amounts(a) December 31 September 30 June 30 March 31
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from continuing operations ........... $ 148,459 $ 129,210 $ 122,285 $ 115,506
Operating income from continuing operations ... 19,268 15,863 3,981 (c) 10,649
Income from continuing operations ............. 10,654 8,031 (589)(c) 4,988
Income before extraordinary items ............. 16,106 12,292 3,906 (c) 8,317
Net income .................................... 16,106 12,292 3,906 (c) 8,317
Basic earnings per share:
Continuing operations ......................... 0.15 0.11 (0.01)(c) 0.07
Discontinued operations ....................... 0.07 0.06 0.06 0.05
Net income .................................... 0.22 0.17 0.05 (c) 0.12
Diluted earnings per share:
Continuing operations ......................... 0.14 0.10 (0.01)(c) 0.07
Discontinued operations ....................... 0.07 0.06 0.06 0.04
Net income .................................... 0.21 0.16 0.05 (c) 0.11
</TABLE>
(a) See Note N for discussion of discontinued operations, including the gain on
sale from discontinued operations recognized in the fourth quarter of 1997.
The amounts disclosed in the above table do not agree with the amounts
previously reported on Form 10-Q for all quarters of 1996 and the first
quarter of 1997 because of the reclassification for discontinued
operations.
(b) Includes one-time non-operating net gain of $0.4 million, or one-half cent
per share.
(c) Includes merger costs of $8.7 million, or 11 cents per share.
NOTE P -- BUSINESS SEGMENTS
Harte-Hanks Communications, Inc. is a diversified communications company with
operations throughout the United States in two principal businesses -- direct
marketing and shoppers. 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.
Harte-Hanks Shoppers operate in local markets and serve the retail, automotive,
real estate and other service industries through weekly advertising
publications.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
In thousands 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues
Direct Marketing ................... $ 425,489 $ 330,255 $ 268,257
Shoppers ........................... 212,860 185,205 185,045
--------- --------- ---------
Total operating revenues ........ $ 638,349 $ 515,460 $ 453,302
========= ========= =========
Operating income
Direct Marketing ................... $ 54,360 $ 44,794 $ 37,774
Shoppers ........................... 31,089 24,017 20,020
General corporate .................. (8,357) (19,050)(a) (8,010)
--------- --------- ---------
Total operating income .......... $ 77,092 $ 49,761 $ 49,784
========= ========= =========
Identifiable assets
Direct Marketing ................... $ 272,847 $ 231,365 $ 149,855
Shoppers ........................... 207,541 99,061 108,743
General corporate .................. 474,535 12,579 10,396
--------- --------- ---------
Total identifiable assets ....... $ 954,923 $ 343,005 $ 268,994
========= ========= =========
Depreciation
Direct Marketing ................... $ 12,673 $ 9,139 $ 6,693
Shoppers ........................... 4,572 4,600 4,410
General corporate .................. 82 40 32
--------- --------- ---------
Total depreciation .............. $ 17,327 $ 13,779 $ 11,135
========= ========= =========
Goodwill amortization
Direct Marketing ................... $ 2,659 $ 1,791 $ 1,377
Shoppers ........................... 2,475 1,867 1,867
--------- --------- ---------
Total goodwill amortization ..... $ 5,134 $ 3,658 $ 3,244
========= ========= =========
Capital expenditures
Direct Marketing ................... $ 22,434 $ 20,706 $ 14,595
Shoppers ........................... 5,912 2,929 2,724
General corporate .................. 50 250 122
--------- --------- ---------
Total capital expenditures ...... $ 28,396 $ 23,885 $ 17,441
========= ========= =========
</TABLE>
(a) Included is $12.1 million in merger expenses. See Note B of Notes to
Consolidated Financial Statements.
30
<PAGE> 19
===============================================================================
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
In thousands, except per share amounts 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Revenues .......................................... $ 638,349 $ 515,460 $ 453,302 $ 410,212 $ 356,542
Operating expenses
Payroll, production and distribution ........... 479,742 392,494 347,520 321,995 281,234
Selling, general and administrative ............ 59,054 43,632 41,619 38,483 36,272
Depreciation ................................... 17,327 13,779 11,135 9,072 7,777
Goodwill amortization .......................... 5,134 3,658 3,244 2,909 2,727
Merger costs ................................... -- 12,136 (a) -- -- --
Goodwill write-down ............................ -- -- -- -- 2,756 (b)
--------- --------- --------- --------- ---------
Total operating expenses .................... 561,257 465,699 403,518 372,459 330,766
--------- --------- --------- --------- ---------
Operating income .................................... 77,092 49,761 49,784 37,753 25,776
Interest expense, net ............................... 1,777 6,629 7,221 6,851 10,938
Income from continuing operations(c) ................ 44,271 (d) 23,084 (e) 24,301 (f) 16,262 7,637
Income from continuing operations after
extraordinary items, net of taxes ................. 43,396 (g) 23,084 24,301 16,262 244 (h)
Earnings from continuing operations per
common share-- diluted(i) ......................... 0.57 (d) 0.30 (e) 0.32 (f) 0.23 0.15 (j)
Earnings from continuing operations after
extraordinary items per common share-- diluted(i).. 0.56 (g) 0.30 (e) 0.32 (f) 0.23 0.01 (h)
Cash dividends per common share(k) .................. 0.04 0.03 0.03 -- --
Weighted-average common and common
equivalent shares outstanding-- diluted(i) ........ 77,000 77,154 75,338 74,186 55,562
Segment Data
Revenues
Direct Marketing ............................... $ 425,489 $ 330,255 $ 268,257 $ 233,751 $ 182,021
Shoppers ....................................... 212,860 185,205 185,045 176,461 174,521
--------- --------- --------- --------- ---------
Total revenues ................................. $ 638,349 $ 515,460 $ 453,302 $ 410,212 $ 356,542
========= ========= ========= ========= =========
Operating income
Direct Marketing ............................... $ 54,360 $ 44,794 $ 37,774 $ 27,910 $ 18,921
Shoppers ....................................... 31,089 24,017 20,020 17,743 12,685
General corporate .............................. (8,357) (19,050) (8,010) (7,900) (5,830)
--------- --------- --------- --------- ---------
Total operating income ......................... $ 77,092 $ 49,761 $ 49,784 $ 37,753 $ 25,776
========= ========= ========= ========= =========
Other Data
Operating cash flow(l) ............................ $ 99,553 $ 67,198 (m) $ 64,163 $ 49,734 $ 39,036
Capital expenditures .............................. 28,396 23,885 17,441 13,759 14,959
Balance Sheet Data (at end of period)
Property, plant and equipment ..................... $ 89,351 $ 72,195 $ 59,878 $ 53,081 $ 49,962
Goodwill, net ..................................... 250,363 142,053 99,528 92,391 88,547
Total assets ...................................... 954,923 343,005 268,994 246,166 219,916
Total long-term debt .............................. -- 218,005 220,468 294,499 323,056
Total stockholders' equity ........................ 566,237 252,692 201,856 137,845 108,025
</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 $2.8 million related to shopper segment. See Note A
of Notes to Consolidated Financial Statements.
(c) Represents income and earnings from continuing operations per common share
before extraordinary items.
(d) Includes non-recurring income of $0.4 million, or one-half cent per share,
net of $0.4 million income tax expense related to the sale of stock in
another company partially offset by other non-recurring items. Excluding
this income, earnings were $0.57 per share.
(e) Includes merger costs of $8.7 million, or 11 cents per share, net of $3.4
million income tax benefit. Excluding these costs, earnings were 41 cents
per share.
(f) Includes gain on divestiture of $0.9 million, or one cent per share, net of
$0.6 million income tax expense. Excluding this gain, earnings were 31
cents per share.
(g) Includes extraordinary loss from the early extinguishment of debt of $0.9
million, net of $0.6 million income tax benefit.
(h) Includes extraordinary loss from the early extinguishment of debt of $7.4
million, net of $4.3 million income tax benefit.
(i) Earnings per share and weighted-average common and common equivalent shares
have been calculated and restated in accordance with Statement of Financial
Accounting Standards No. 128 for all periods presented. See Note M of Notes
to Consolidated Financial Statements.
(j) Excluding the goodwill write-down and extraordinary item, earnings on a
diluted basis were 19 cents per share.
(k) Restated to reflect the two-for-one stock split effected as a stock
dividend effective March 16, 1998.
(l) 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.
(m) Excluding 1996 merger costs, operating cash flow was $79,334.
<PAGE> 20
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
San Antonio, Texas
January 27, 1998
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 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
HIGH LOW HIGH LOW
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 14 7/8 12 7/8 11 1/2 9 7/8
Second Quarter 15 9/16 13 3/8 13 7/8 10 5/16
Third Quarter 16 15/32 14 21/32 13 15/16 12 9/16
Fourth Quarter 19 3/16 16 3/8 14 1/4 12 7/16
</TABLE>
In 1997, quarterly dividends were paid at the rate of 1 cent per share. In 1996,
quarterly dividends were paid at the rate of 0.835 cents per share for the first
three quarters and 1 cent per share in the fourth quarter. The stock prices and
dividends reflect retroactively the two-for-one stock split in the form of a
stock dividend on March 16, 1998.
There are approximately 2,500 holders of record.
TRANSFER AGENT AND REGISTRAR
BankBoston
c/o Boston EquiServe, L.P.
P.O. Box 8040
Boston, Massachusetts 02266-8040
ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders will be held at 10:00 a.m. on May 5, 1998, 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
32
<PAGE> 1
46
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 Data Technologies, Inc. Massachusetts 100%
Harte-Hanks Delaware, Inc. Delaware 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 Partnership, Ltd. Texas 100%(7)
Harte-Hanks Pty. Limited Australia 100%(3)
Harte-Hanks Response Management/Boston, Inc. Massachusetts 100%
Harte-Hanks Response Management Call Centers, Inc. Delaware 100%
Harte-Hanks Response Management Europe Belgium 100%
Harte-Hanks Shoppers, Inc. California 100%
Harte-Hanks Stock Plan, Inc. Delaware 100%
H&R Communications, Inc. New Jersey 100%(2)
HTS, Inc. Connecticut 100%
Information for Marketing Limited England 100%(5)
Marketing Communications, Inc. Missouri 100%
Mars Graphic Services, Inc. New Jersey 100%(4)
Mercantile Software Systems, Inc. New Jersey 100%
Northern Comprint Co. California 100%
NSO, Inc. Ohio 100%
Pennypower Shopping News, Inc. Kansas 100%
Pennysaver Publications, Inc. Texas 100%
Potpourri Shopper, Inc. California 100%
PRO Direct Response Corp. New Jersey 100%(2)
PSP&D, Inc. Delaware 100%(6)
Select Marketing, Inc. Texas 100%
Southern Comprint Co. California 100%
Sutton Industries, Inc. Delaware 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
(6) Owned by Sutton Industries, Inc.
(7) 99.5% Owned by Harte-Hanks Delaware, Inc.
.5% Owned by Harte-Hanks Communications, Inc.
<PAGE> 1
47
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, No. 33-54303, No. 333-03045 and No. 333-30995) on Form S-8 of
Harte-Hanks Communications, Inc. of (i) our report dated January 27, 1998
relating to the consolidated balance sheets of Harte-Hanks Communications, Inc.
and subsidiaries as of December 31, 1997 and 1996, 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, 1997, which report appears in
the 1997 annual report to shareholders which is incorporated by reference in the
December 31, 1997 annual report on Form 10-K of Harte-Hanks Communications, Inc.
and (ii) our report dated January 27, 1998, relating to the related financial
statement schedule as of and for each of the years in the three-year period
ended December 31, 1997, which report appears in the December 31, 1997 annual
report on Form 10-K of the Company.
/s/ KPMG Peat Marwick LLP
San Antonio, Texas
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 83,675
<SECURITIES> 388,145
<RECEIVABLES> 112,175
<ALLOWANCES> 2,835
<INVENTORY> 7,703
<CURRENT-ASSETS> 613,139
<PP&E> 180,423
<DEPRECIATION> 91,072
<TOTAL-ASSETS> 954,923
<CURRENT-LIABILITIES> 371,349
<BONDS> 0
0
0
<COMMON> 74,843
<OTHER-SE> 491,394
<TOTAL-LIABILITY-AND-EQUITY> 954,923
<SALES> 638,349
<TOTAL-REVENUES> 638,349
<CGS> 479,742
<TOTAL-COSTS> 561,257
<OTHER-EXPENSES> 196
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,189
<INCOME-PRETAX> 75,119
<INCOME-TAX> 30,848
<INCOME-CONTINUING> 44,271
<DISCONTINUED> 292,352
<EXTRAORDINARY> (875)
<CHANGES> 0
<NET-INCOME> 335,748
<EPS-PRIMARY> 4.54
<EPS-DILUTED> 4.36
</TABLE>
