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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, 1998
[ ] 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, INC. (formerly 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:
<TABLE>
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NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
- ------------------- ----------------------------
<S> <C>
Common Stock New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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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 15, 1999, based on the $27.00 per share closing price
for the Company's Common Stock on the New York Stock Exchange on such date:
approximately $1,256,000,000.
SHARES OUTSTANDING AT MARCH 15, 1999:
Common Stock - 70,978,871 shares
DOCUMENTS INCORPORATED BY REFERENCE:
The Company's Annual Report to Stockholders for the year ended December
31, 1998 (incorporated in Part II to the extent provided in Items 5, 6, 7 and 8
hereof).
Definitive Proxy Statement for the Company's May 4, 1999 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, Inc.
Table of Contents
Form 10-K Report
December 31, 1998
<TABLE>
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Part I Page
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Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 12
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 12
Part III
Item 10. Directors and Executive Officers of the Registrant 12
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners and
Management 12
Item 13. Certain Relationships and Related Transactions 12
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. 13
Signatures 17
</TABLE>
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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 selected local and regional
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 products and
services they offer to individuals. Direct marketing, which represents 66.0% of
the Company's revenue, is leading the movement toward highly targeted and
relationship marketing. The Company's shopper business applies similar 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
$748.5 million in 1998.
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 clients to
identify, reach, influence and nurture their customers. 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 1998, Harte-Hanks Direct Marketing had revenues
of $493.9 million, which accounted for 66.0% of the Company's revenues.
Harte-Hanks Direct Marketing offers a complete range of specialized,
coordinated and integrated direct marketing services from a single source. These
services are organized into three broad sectors - response management, database
marketing and marketing services.
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In 1998, Harte-Hanks made three acquisitions in its direct marketing
business segment. In the response management sector, Harte-Hanks expanded its
services to the high-tech industry through the acquisition of Cornerstone
Integrated Services of Austin, Texas, a leading provider of technical and
marketing support services to major computer hardware and software
manufacturers. Harte-Hanks expanded its new media services capabilities through
the acquisition of Spectral Resources Inc. of Woodstock, New York. Spectral
specializes in the development and production of online, PC- and CD-ROM based
interactive programs primarily for pharmaceutical companies, and its expertise
will be integrated across all company offerings in 1999. Harte-Hanks also
acquired Printing Management Systems, Inc., a leading provider of direct
marketing services geared to addressing clients' needs in database marketing,
inventory control, information processing, fulfillment and direct mail.
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 7 million
transactions in 1998, an increase of more than 120% over 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. Additionally, for an
international client, the Company has developed and implemented a web-based lead
generation system designed to deliver sales leads to agencies around the world
and to provide "closed-loop" management tools.
The Company increased its Internet-driven opportunities by the July
acquisition of Cornerstone Integrated Services, a leading provider of technical
and marketing support to the technology industry. Another positive development
was the agreement signed with Acuity Corporation, an Austin-based supplier of
real-time, web-based solutions for customer support and e-commerce. These
additions allow comprehensive, coordinated programs, from pre-sale, sale and
post-sale services. With these fortifications, the Company now provides multiple
options for live interaction, e-commerce and e-fulfillment, e-mail response
services, online conferencing, real-time data access, online event registration,
knowledge base for customer support, and project management tools.
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 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 that have volume spikes or high growth
needs.
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. The Company recently announced
a new software application that extends marketing campaign management
capabilities by providing an open, scalable architecture that is designed to
work with relational databases while meeting common technology standards.
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. The
Company's
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new Relationship Builder(TM) product is a combination of software tools and
processes to construct and maintain customer centric databases. R2Segment(TM) is
a data analysis product that creates rapid access to client data. 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 data quality capabilities
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.
Database services are marketed to specific industries or markets with
software 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.
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
were expanded into retail and utilities and will further expand into other
markets. The capabilities of the database services group was increased by the
formation of an Internet marketing arm which includes the recently acquired
Spectral Resources. During 1999, Spectral Resources will be renamed Harte-Hanks
Interactive.
The Company also provides database services internationally through
offices in Melbourne, Australia; Sao Paulo, Brazil; London, England; and
Toronto, Canada.
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 and graphics, along with back-end services such as
printing, 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.
Depending upon the needs of our clients, these capabilities are
provided in a specialized, coordinated and integrated approach through eleven
primary facilities nationwide.
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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, Canada; London, England; Sao Paulo, Brazil; Melbourne,
Australia and Hasselt, Belgium. Additionally, the Company has affiliates in
Singapore. The sales forces, with industry specific knowledge and experience,
emphasize cross-selling the range of direct marketing services and are supported
by employees in each sector. The overall sales focus is to position Harte-Hanks
as a marketing partner and a single-source solution for a client's targeted
marketing needs.
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 consulting and account management 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:
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RESPONSE MANAGEMENT MARKETING SERVICES (CONTINUED)
Austin, Texas Bellmawr, New Jersey
Brockton, Massachusetts Cincinnati, Ohio
Cherry Hill, New Jersey Dallas/Fort Worth, Texas
Clearwater, Florida Deerfield Beach, Florida
Framingham, Massachusetts Forty Fort, Pennsylvania
Langhorne, Pennsylvania Fullerton, California
Los Angeles, California Jacksonville, Florida
Kansas City, Kansas
DATABASE MARKETING New York, New York
Baltimore, Maryland Westville, New Jersey
Billerica, Massachusetts
Heathrow, Florida NATIONAL SALES HEADQUARTERS
Kansas City, Kansas Cincinnati, Ohio
Langhorne, Pennsylvania Kansas City, Kansas
New York, New York
Piscataway, New Jersey INTERNATIONAL OFFICES
River Edge, New Jersey Hasselt, Belgium
South Belmar, New Jersey London, England
Woodstock, New York Melbourne, Australia
Sao Paulo, Brazil
MARKETING SERVICES Toronto, Canada
Baltimore, Maryland
</TABLE>
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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 targeted
media company that focuses on shoppers as a core business. Shoppers are weekly
advertising publications delivered free by third-class mail to all households in
a particular geographic area. Shoppers offer advertisers a targeted,
cost-effective local advertising system, with virtually 100% penetration in
their area of distribution. Shoppers are particularly effective in large markets
with high media fragmentation in which major metropolitan newspapers generally
have low penetration.
As of December 31, 1998, Shoppers delivered 9.2 million shopper
packages to 8.9 million households in four major markets each week covering the
greater Los Angeles market (Los Angeles County, Orange County, Riverside County,
San Bernardino County, Ventura County, and Kern County), the greater San Diego
market, Northern California (San Jose and Sacramento) and South Florida.
(Shopper publications overlap in approximately 300,000 households in South
Orange County and South Riverside County in California.) The Company's
California publications account for 88% of Shopper's weekly circulation.
Harte-Hanks publishes 775 individual shopper editions each week
distributed to zones of approximately 11,800 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 areas in a
number of ways including, geographic, demographic, lifestyles, behavioral and
language. This allows 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 1998,
Harte-Hanks Shoppers had revenues of $254.6 million, accounting for
approximately 34.0% of the Company's revenues.
During the period 1995 through 1998, 700,000 households were added to
the Company's shopper circulation through internal expansion. 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 2.0 million households to its California circulation
with the acquisition of the ABC Shoppers Group from an indirect subsidiary of
The Walt Disney Company in October 1997. The Company now reaches 7.8 million
households in California, or nearly 70% of the state's total.
PUBLICATIONS
Harte-Hanks Shoppers are published in the Greater Los Angeles, San
Diego/South Orange and South Riverside counties, Northern California and South
Florida markets.
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The following table sets forth certain information with respect to shopper
publications:
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December 31, 1998
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Number of
Market Publication Name Circulation Zones
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Greater Los Angeles PennySaver/South 4,840,000 429
Coast Shopper
San Diego/South Orange PennySaver/Bargain 1,412,000 119
& South Riverside counties Bulletin
Northern California PennySaver/Potpourri 1,843,000 137
South Florida The Flyer 1,077,000 90
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Total: 9,172,000 775
</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 42 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.
In addition, shoppers also over advertising over its internet sites -
thepennysaver.com for its California publications and theflyer.com for its South
Florida publication.
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.
SALES AND MARKETING
The Company maintains local sales offices throughout its geographic
markets and employs more than 625 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 placed on particular industries/categories through
the use of sales specialists. These sales specialists are primarily used to
target automotive, real estate, and employment advertisers.
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The Company utilizes a proprietary sales and marketing system (SAMS) to
enter customer orders directly from the field, instantly checking space
availability, ad costs and other pertinent information. A paperless order entry
system on a Unix platform, SAMS has built-in error-reducing safeguards,
minimizing costly sales adjustments. In addition, SAMS facilitates placement of
advertising in multiple-zoned editions. The Company has expanded SAMS so that,
in addition to allowing advertising information to be entered for immediate
publication, it will build a relational customer database, enabling sales
personnel to access customer history by designated variables, thereby
identifying similar potential customers and assisting follow-up with existing
customers.
FACILITIES
Harte-Hanks shoppers are produced at owned or leased facilities in the
markets they serve. The Company has five production facilities -- three in
Southern California, one in Northern California and one in its Florida market --
and 32 sales offices. At the end of 1998, the Company consolidated two Northern
California production facilities into one in the Sacramento area and invested in
two new Goss Magnum presses. The consolidation will facilitate future expansions
in the Northern California marketplace. The new press lines will reduce
newsprint consumption and will provide the Northern California publications with
improved color capacity.
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, internet sites, 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, 1998, Harte-Hanks employed 6,031 full-time employees
and 1,067 part-time employees, as follows: direct marketing - 4,164 full-time
and 604 part-time employees; shoppers-- 1,841 full-time and 463 part-time
employees; and corporate office -- 26 full-time employees. None of the work
force is represented by labor unions. The Company considers its relations with
its employees to be good.
FACILITIES
Harte-Hanks' executive offices are located in San Antonio, Texas and
occupy approximately 17,000 square feet in leased premises. The Company's
business is conducted in facilities nationwide containing aggregate space of
approximately 2.8 million square feet. Approximately 2.6 million square feet are
held under leases, which expire at dates through 2014. The balance of the
properties, which are used primarily in the Company's Southern California
shopper operations, are owned by the Company.
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. Accordingly,
computer systems that rely on two digits to define an applicable year may
recognize a date using "00" as the year 1900, rather than the Year 2000 (the
"Year 2000 Issue"). This could result in a system failure or miscalculations
causing disruptions of operations, including, but not limited to, a temporary
inability to process or transmit data or engage in normal business activities.
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The Company relies on computer hardware, information technology ("IT
Systems") and non-information technology systems ("Non-IT Systems") to operate
its business. IT Systems are used in the creation and delivery of the Company's
products and services, as well as the Company's internal operations such as
billing and accounting. IT Systems include systems which use information
provided by third-party data suppliers to update the Company's databases. The
Company also relies on Non-IT Systems (primarily consisting of embedded
technology), such as microprocessors in tape drives, printing and inserting
equipment, and elevators, and on utilities, such as telecommunications and
power.
The Company has defined Year 2000 Compliant to mean that a process will
continue to run in the same manner when dealing with dates on or after January
1, 2000, as it did before January 1, 2000. The Company has conducted a
comprehensive review of its IT Systems and Non-IT Systems to identify those that
could be affected by the Year 2000 Issue, and has developed a remediation plan
to resolve the issue. The most important areas of focus of the Company's Year
2000 remediation plan are the Company's products and services (including its
databases, software that manipulates these databases and software provided to
customers); business operation support systems (billing, ordering, tracking
systems, payroll and technical infrastructure (such as LANs, mail systems and
websites)); and suppliers, facilities and equipment. The Company is utilizing
both internal and external resources to correct or reprogram, and test the
systems for the Year 2000 compliance.
The Company's compliance objectives include products and services the
Company has provided to customers in the past and will provide to customers in
the future; all internal operating software systems and equipment; and the
services, products, equipment and systems the Company has obtained and will
obtain in the future from outside vendors. The Company's first objective was to
remediate all products and services the Company has, or will provide, to
customers. This included informing customers of their need to make their
applications Year 2000 compliant to provide or accept associated files for
services provided by the Company. This objective was deemed the top priority and
was initiated in late 1997. In early 1998, the Company initiated action to
remediate all internal business operation support systems and the associated
equipment it runs on. As part of this process, the Company developed a standard
Year 2000 compliance certification memorandum to be sent to all vendors who have
or are currently providing products or services to the Company, revised customer
standard contract language to include a Year 2000 statement, and instituted a
review process for formally responding to customer inquiries on the Company's
Year 2000 compliance plans and status. The Company has contacted its critical
suppliers and other entities to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. While the Company has not been informed of any
material risks associated with these entities, there is no guarantee that the
systems of these critical suppliers or other entities on which the Company
relies, will be timely converted and will not have an adverse effect on the
Company's systems or operations. In addition to the above, the Company formed a
Year 2000 Compliance Council in June 1998 to monitor the status of compliance
efforts and to ensure that all compliance issues are consistently addressed.
The Company's Year 2000 remediation plan consists of four key phases:
Inventory/Assessment, Repair/Replacement, Testing and Compliance/Internal
Certification. As related to the Company's products and services, the Company is
100%, 95%, 85% and 85% completed, respectively. With regards to business
operation support systems, the Company is 100%, 95%, 90%, and 90% completed,
respectively. Finally, suppliers, facilities and equipment are 100%, 95%, 75%
and 75% completed, respectively. It is anticipated that all reprogramming and
testing efforts will be completed by June 30, 1999; however, the Company can
provide no assurance in this regard.
The Company has spent $2.8 million of cost incurred to date related to
the Year 2000 Issue. The total remaining cost of the Year 2000 project is
presently estimated at $1.2 million. The costs of the project and the date on
which the Company believes it will complete the Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material
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differences include, but are not limited to, the availability and cost of
personnel trained in this areas and the ability to locate and correct all
relevant computer codes.
The Company presently believes that with modifications to existing
software and, in certain instances, conversions to new software, the Year 2000
Issue can be mitigated. As noted above, the Company has not yet completed all
necessary phases of the Year 2000 remediation program. In the event that the
Company does not complete any additional phases, it could experience disruptions
in its operations, including among other things, a temporary inability to
fulfill customer direct marketing requests (such as sales leads and personalized
mailings), process financial transactions, or engage in similar normal business
activities. In addition, disruptions in the economy generally resulting from the
Year 2000 Issues could also materially adversely affect the Company. The Company
could be subject to litigation for computer systems failures, equipment
shutdowns or failure to properly date business records. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
Contingency plans are currently being developed and are anticipated to
be completed by June 30, 1999. This includes developing contingency plans for
products and services, as well as business operation support systems.
Contingency plans already in the development process include identifying
alternate providers in case the primary providers cannot meet delivery
requirements, and providing specific 100-year interval windowing techniques to
customers in the event their applications could not be made Year 2000 compliant.
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, 1998 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, 1998 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, 1998 at pages 13 through 18.
<PAGE> 12
12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company is exposed to interest rate risk primarily thorough its
portfolio of cash equivalents and short-term marketable securities. The Company
does not believe that it has significant exposure to market risks associated
with changing interest rates as of December 31, 1998 because the Company's
intention is to maintain a liquid portfolio to take advantage of investment
opportunities. The Company does not use derivative financial instruments in its
operations.
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, 1998, 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, 1998 is not deemed filed
as part of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. MANAGEMENT
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 26, 1999 for the May 4, 1999 Annual
Meeting of Stockholders under the caption "Management -- Directors and Executive
Officers" on pages 4 and 5.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 26, 1999 for the May 4, 1999 Annual
Meeting of the Stockholders under the caption, "Executive Compensation and Other
Information" on pages 6 through 10.
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 26, 1999 for the May 4, 1999 Annual
Meeting of Stockholders under the caption "Security Ownership of Management and
Principal Stockholders" on pages 3 and 4.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE> 13
13
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, 1998 attached hereto:
Consolidated Balance Sheets, December 31, 1998 and 1997
Consolidated Statements of Operations, Years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Cash Flows, Years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity, Years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a) (2) The following accountants' report and financial schedule for years
ending December 31, 1998, 1997 and 1996 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.
<PAGE> 14
14
(a) (3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- -------- ---------------------- --------
<S> <C> <C>
2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a) to
the Company's Registration Statement No. 33-69202 and
incorporated by reference herein).
2(b) Agreement and Plan of Merger dated as of February 4, 1996 among
Harte-Hanks Communications, Inc., HHD Acquisition Corp. and
DiMark, Inc. (filed as Appendix A to the Company's Registration
Statement No. 333-02047 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 nine months ended September 30, 1996
and incorporated by reference herein).
3(d) Amendment dated May 5, 1998 to Amended and Restated Certificate
of Incorporation (filed as Exhibit 3(d) to the Company's Form
10-Q for the six months ended June 30, 1998 and incorporated by
reference herein).
</TABLE>
<PAGE> 15
15
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- -------- ---------------------- --------
<S> <C> <C>
3(e) Amended and Restated Certificate of Incorporation as amended
through May 5, 1998 (filed as Exhibit 3(e) to the Company's Form
10-Q for the six months ended June 30, 1998 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) 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(d) 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 (filed as
Exhibit 10(f) to the Company's Form 10-K for the year ended
December 31, 1997 and incorporated by reference herein).
10(e) Harte-Hanks, Inc. Restoration Pension Plan
(filed as Exhibit 10(j) to the Company's Registration Statement
No. 33-69202 and incorporated by reference herein).
10(f) Harte-Hanks Communications, Inc. 1996 Incentive Compensation
Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the
nine months ended September 30, 1996 and incorporated by reference
herein).
10(g) Harte-Hanks, Inc. Amended and Restated 1991 Stock Option Plan
(filed as Exhibit 10(g) to the Company's Form 10-Q for the six
months ended June 30, 1998 and incorporated by reference herein).
10(h) Harte-Hanks, Inc. 1998 Director Stock Plan (filed as Exhibit 10(h)
to the Company's Form 10-Q for the six months ended June 30, 1998
and incorporated by reference herein).
</TABLE>
<PAGE> 16
16
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- -------- ---------------------- --------
<S> <C> <C>
*10(i) Harte-Hanks, Inc. Deferred Compensation Plan 20
*10(j) Amendment to Harte-Hanks, Inc. Restoration Pension Plan 25
*11 Statement Regarding Computation of Net Income (Loss) Per Common
Share 27
*13 Annual Report to Securityholders (only those portions incorporated
by reference into the Form 10-K are filed herewith). 28
*21 Subsidiaries of the Company. 48
*23 Consent of KPMG LLP 49
*27 Financial Data Schedule. 50
</TABLE>
- ----------
*Filed herewith
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(continued)
14(c) Exhibits -- The response to this portion of item 14 is submitted as a
separate section of this report on pages 20 to 50.
14(d) Financial Statement Schedule -- The response to this portion of Item 14
is submitted as a separate section of this report on page 19.
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> 17
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Harte-Hanks, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HARTE-HANKS, 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 29, 1999
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.
<TABLE>
<S> <C>
/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
</TABLE>
<PAGE> 18
18
INDEPENDENT AUDITORS' REPORT 10-K SCHEDULE
The Board of Directors and Stockholders
Harte-Hanks, Inc.:
Under date of January 25, 1999, we reported on the consolidated balance sheets
of Harte-Hanks, Inc. and subsidiaries as of December 31, 1998 and 1997 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, 1998,
as contained in the 1998 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 1998. 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 LLP
San Antonio, Texas
January 25, 1999
<PAGE> 19
19
Harte-Hanks, 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, 1998 .... $ 2,835 $ 2,193 $ 1,782 $ 3,246
========== ========== ========== ==========
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
========== ========== ========== ==========
</TABLE>
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- -------- ---------------------- --------
<S> <C> <C>
*10(i) Harte-Hanks, Inc. Deferred Compensation Plan 20
*10(j) Amendment to Harte-Hanks, Inc. Restoration Pension Plan 25
*11 Statement Regarding Computation of Net Income (Loss) Per Common
Share 27
*13 Annual Report to Securityholders (only those portions incorporated
by reference into the Form 10-K are filed herewith). 28
*21 Subsidiaries of the Company. 48
*23 Consent of KPMG LLP 49
*27 Financial Data Schedule. 50
</TABLE>
- ----------
*Filed herewith
<PAGE> 1
EXHIBIT 10(i)
HARTE-HANKS, INC.
DEFERRED COMPENSATION PLAN
WHEREAS, Harte-Hanks, Inc. (the "Company") desires to adopt an unfunded
deferred compensation plan to permit certain members of its senior management to
elect to defer receipt of all or a portion of their base salary and/or cash
performance bonuses;
NOW THEREFORE, the Company hereby adopts the following unfunded
deferred compensation plan (the "Plan"):
1. ELIGIBILITY. Under the terms of this Plan any officer of the Company
designated by the Board of Directors (hereinafter referred to as an "eligible
manager") may elect to defer all or a portion of (i) his or her base salary
and/or (ii) any one or more of his or her cash performance bonuses to be
received from the Company.
2. ELECTION. Any eligible manager may elect on or before December 31st
of any year to defer receipt of all or a portion of his or her base salary
and/or cash bonus earned during the calendar year of such election. Any such
election shall be made by delivering a written notice of election to the
Secretary of the Company.
3. SEPARATE MEMORANDUM ACCOUNT. The Company shall maintain a separate
memorandum account of the compensation deferred by each eligible manager and
shall credit such account with interest on the principal amount deferred from
the date such amount would otherwise have been paid to such manager until such
amount is paid out to the manager at a rate of interest per annum equal to the
rate of interest announced publicly by Bank of America, from time to time, as
its base or prime rate, such interest to be credited and compounded annually at
the end of each calendar year.
<PAGE> 2
4. PAYMENT OF DEFERRED COMPENSATION. Subject to the provisions of
paragraph 5, an eligible manager who has elected to defer any compensation for
any year shall be entitled to be paid an amount equal to the balance in such
manager's separate memorandum account, computed in accordance with Section 3, on
the first to occur of (i) the 15th day of January following the end of the
calendar year in which such manager ceases to be an employee of the Company or
(ii) the date on which he or she has elected to be paid at the time of election.
In lieu of receiving the amount to which the manager may be entitled pursuant to
the provisions of the foregoing sentence at the time specified therein, an
eligible manager may elect (an "installment election"), by delivering to the
Secretary of the Company at any time prior to December 31st of the calendar year
preceding the calendar year in which he or she ceases to be an employee of the
Company (or, if earlier, the year in which he or she has elected to be paid at
the time of election), written notice of the manager's election to receive the
amount credited to his or her separate memorandum account in such number of
approximately equal quarterly, semi-annual or annual installments (not to exceed
installments extending over 10 years) and commencing on such date (which date
shall be no earlier than the date on which the balance in the manager's account
would otherwise be paid to the manager) as is specified in the written notice.
The amount of each installment shall be determined by assuming that the rate of
interest in effect when the first installment is paid will remain in effect
throughout the payout period. Any surplus or shortfall resulting from a change
in the interest rate shall be taken into account in making the last installment;
provided, however, that if there is a significant change in the interest rate
the Company may, in its discretion, recalculate the amount of the remaining
installments by assuming that the rate of interest then in effect will remain in
effect throughout the balance of the payout period. A manager may modify an
installment election or rescind an installment election in its entirety, at any
time prior to the December 31st date referred to in this paragraph.
<PAGE> 3
5. DEATH OF ELIGIBLE MANAGER. If any eligible manager dies in office,
or thereafter, before receiving all funds deferred for such manager's account,
the entire unpaid amount deferred, together with accrued interest thereon, shall
be paid in one lump sum to the beneficiary designated by such manager by written
notice delivered to the Secretary of the Company, or, if no beneficiary has been
so designated, to the manager's estate, on the 15th day of January first
occurring after the calendar year in which such death occurs. Any such
beneficiary designation may be revoked and a new designation made at any time
and from time to time.
6. AMOUNTS DUE NOT BE TO FUNDED. The Company's liability to pay
deferred compensation and interest to eligible managers shall not be funded in
any way, but shall merely be reflected as a liability on the Company's books in
a separate memorandum account for each eligible manager electing deferral.
7. COPY OF PLAN TO BE PROVIDED. The Secretary of the Company shall
provide a copy of this Plan to each eligible manager together with a form of
letter attached hereto as Exhibit A for use in notifying the Company of his or
her election to defer compensation in accordance with the Plan. The president of
the Company, or any officer designated by him, is hereby authorized to execute
such documents and take such other action as he considers necessary or
appropriate to carry out the purposes of this Plan.
8. INTERPRETATION AND ADMINISTRATION OF PLAN. Any decision made or
action taken by the Board of Directors of the Company arising out of or in
connection with the construction, administration, interpretation and effect of
the Plan shall lie within the absolute discretion of the Board of Directors and
shall be conclusive and binding upon all persons.
<PAGE> 4
EXHIBIT A
- ----------------
(Date)
Corporate Secretary
Harte-Hanks, Inc.
P.O. Box 269
San Antonio, Texas 78291
I understand that I am eligible under the Harte-Hanks, Inc. Deferred
Compensation Plan to elect to defer receipt of all or a portion of (i) my base
salary and/or (ii) my cash performance bonus, if any, to be earned for the
current year. I have received a copy of the Plan and am familiar with its
provisions.
1. This is to advise you that I hereby elect pursuant to
paragraph 2 of the Plan:
(A) to defer receipt of my base salary for the calendar year
_____, as follows (select one):
( ) no deferral
( ) defer $__________ per month
( ) defer entire base salary over $__________ per month
AND/OR
(B) to defer receipt of any cash performance bonus earned by
me for the calendar year ________, as follows (select one):
( ) defer entire bonus
( ) defer entire bonus over $____________
( ) defer entire bonus up to $____________
<PAGE> 5
-2-
2. I hereby elect to be paid the amount credited to my separate
memorandum account pursuant to Section 3 of the Plan in a lump sum on
_______________________.
3. In the event of my death prior to receipt of the entire amount
credited to my separate memorandum account, I hereby designate
__________________________ _____________________________ as my beneficiary to
receive the funds so accumulated.
[optional clause]
4. In lieu of receiving the amount which will be credited to my
separate memorandum account in a lump sum as provided in the first sentence of
paragraph 4 of the Plan, I elect to receive such amount in approximately
____________________ equal __________________ installments commencing on
_______________________.
Very truly yours,
<PAGE> 1
EXHIBIT 10(j)
AMENDMENT TWO TO
HARTE-HANKS COMMUNICATIONS, INC.
RESTORATION PENSION PLAN
WHEREAS, effective as of January 1, 1994, Harte-Hanks Communications,
Inc. (the "Corporation") established the Harte-Hanks Communications, Inc.
Restoration Pension Plan (the "Plan") to provide retirement and
retirement-related benefits for a select group of highly compensated employees;
WHEREAS, by the terms of Section 8 of the Plan, the Plan may be amended
by the Board of Directors of the Corporation; and
WHEREAS, the Board of Directors of the Corporation has approved the
amendment to the Plan set forth below in order to change the name of the Plan
and provide for the restoration of certain retirement benefits to a select group
of highly compensated employees who are participants in the Harte-Hanks, Inc.
Pension Plan (herein referred to as the "Basic Plan") and whose benefit accruals
under the Basic Plan are frozen effective as of December 31, 1998;
NOW, THEREFORE, the Plan is hereby amended, effective as of December
31, 1998, as follows:
1. Section 1 of the Plan is hereby amended to read in its entirety as
follows:
"1. Introduction
The following are the provisions of the HARTE-HANKS, INC.
RESTORATION PENSION PLAN (hereinafter referred to as the "Restoration
Plan") which is established by Harte-Hanks, Inc. (hereinafter referred
to as "Harte-Hanks"), effective as of January 1, 1994, in order to
provide for the payment of retirement and retirement-related benefits
to a certain select group of highly compensated employees who are
participants in the HARTE-HANKS, INC PENSION PLAN (hereinafter referred
to as the "Basic Plan") as in effect from time to time on and after the
effective date hereof and whose benefits under the Basic Plan are
restricted because of the application of the limitations of Section
401(a)(17) and/or Section 415 of the Internal Revenue Code of 1986, as
amended (hereinafter referred to as the "Code"), and because of the
freezing of benefit accruals effective as of December 31, 1998.
Harte-Hanks intends and desires by the adoption of this Restoration
Plan to recognize the value to Harte-Hanks of the past and present
services of its employees covered by the Restoration Plan and to
<PAGE> 2
-2-
encourage and assure their continued service to Harte-Hanks by making
more adequate provisions for their future retirement security."
2. Clauses (a) and (b) of Section 5 of the Plan are amended to read in
their entirety as follows:
"(a) January 1, 1996, if the Participant is an officer of the
Employer with the title of a Senior Vice President or a higher
position; or
(b) the later to occur of (i) January 1, 1999, and (ii) the
date on which he or she attains age 55 years or completes 20 years of
Credited Service if the Participant is an officer of the Employer with
a title below a Senior Vice President."
3. Section 6(a)(i) of the Plan is amended to read in its entirety as
follows:
"(i) the monthly benefit, if any, that would have been payable to
such Participant, or on his or her behalf to the Participant's
Beneficiary or Beneficiaries, as of his or her date of
termination of employment with the Employer under the Basic
Plan as then in effect, if (aa) the provisions of the Basic
Plan had been administered without regard to the limitations
imposed by Section 415 of the Code and without the limitation
imposed by Section 401(a)(17) of the Code on the amount of his
or her Compensation under the Basic Plan, (bb) the
Participant's Compensation for a given calendar year were
equal to his or her Covered Compensation for such calendar
year, and (cc) benefit accruals under the Basic Plan
(including determinations of the Participant's Credited
Service, Final Average Monthly Compensation, and Accrued
Deferred Monthly Retirement Income Commencing at Normal
Retirement Date) had not been frozen as of December 31, 1998."
IN WITNESS WHEREOF, HARTE-HANKS, INC. has caused this instrument to be
executed by its duly authorized officer on the 15th day of December, 1998, to be
effective as of December 31, 1998.
HARTE-HANKS, INC.
By /s/ [ILLEGIBLE]
-----------------------------------
Title: Senior Vice President, Legal
---------------------------------
<PAGE> 1
EXHIBIT 11
HARTE-HANKS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
-----------------------------------------------
Year Ended December 31,
In thousands, except per share amounts 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
BASIC EPS
Income from continuing operations ................................ $ 68,371 $ 44,271 $ 23,084
Income from discontinued operations .............................. -- 292,352 17,537
Extraordinary item ............................................... -- (875) --
---------- ---------- ----------
Net income ....................................................... $ 68,371 $ 335,748 $ 40,621
========== ========== ==========
Weighted-average common shares
outstanding used in earnings
per share computations ........................................ 72,716 73,998 72,830
========== ========== ==========
Earnings per share:
Continuing operations ......................................... $ 0.94 $ 0.60 $ 0.32
Discontinued operations ....................................... -- 3.95 0.24
Extraordinary item ............................................ -- (0.01) --
---------- ---------- ----------
Net income .................................................... $ 0.94 $ 4.54 $ 0.56
========== ========== ==========
DILUTED EPS
Income from continuing operations ................................ $ 68,371 $ 44,271 $ 23,084
Income from discontinued operations .............................. -- 292,352 17,537
Extraordinary item ............................................... -- (875) --
---------- ---------- ----------
Net income ....................................................... $ 68,371 $ 335,748 $ 40,621
========== ========== ==========
Shares used in earnings per
share computations ............................................ 76,057 77,000 77,154
========== ========== ==========
Earnings per share:
Continuing operations ......................................... $ 0.90 $ 0.57 $ 0.30
Discontinued operations ....................................... -- 3.80 0.23
Extraordinary item ............................................ -- (0.01) --
---------- ---------- ----------
Net income .................................................... $ 0.90 $ 4.36 $ 0.53
========== ========== ==========
Computation of Shares Used in Earnings Per Share Computations
Average outstanding common shares ................................ 72,716 73,998 72,830
Average common equivalent shares --
dilutive effect of option shares .............................. 3,341 3,002 4,324
---------- ---------- ----------
Shares used in earnings
per share computations ........................................ 76,057 77,000 77,154
========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 13
FINANCIAL CONTENTS
<TABLE>
<S> <C>
Management's Discussion & Analysis .............................. 13
Consolidated Balance Sheets ..................................... 19
Consolidated Statements of Operations ........................... 20
Consolidated Statements of Cash Flows ........................... 21
Consolidated Statements of Stockholders' Equity ................. 22
Notes to Consolidated Financial Statements ...................... 23
Five-Year Financial Summary ..................................... 31
Independent Auditors' Report .................................... 32
Corporate Information ........................................... 32
Directors, Officers and Harte-Hanks Operations .................. 33
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's overall performance reflects its commitment to its growth strategy
of being a market leader in the targeted media industry, 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 enabled the
Company to focus on the targeted marketing industry and on helping customers
build one-to-one relationships with their customers. As a result, Harte-Hanks
has grown revenues 46.6% since December 31, 1996, excluding the results of
operations sold by the Company during that time. On the same basis, operating
income increased 64.3%.
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 sales of its
newspaper and television operations to fund
13
<PAGE> 2
several acquisitions in 1997 and 1998. These acquisitions, as well as several
previous acquisitions, have enhanced the Company's growth over the past three
years. Harte-Hanks has funded $213.5 million in acquisitions during the period
1996 through 1998. These acquisitions have all been in the Company's direct
marketing and shoppers 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/Divestitures." 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 by general national economic
trends. The Company's principal expense items are payroll, postage,
transportation and paper. Overall postal rates, which typically increase every
three to four years, increased in January 1999; however, the base rates for the
distribution of the shoppers did not increase. 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 occurred in the first half of 1997 in its shopper operations as a
result of the 1996 postal reclassification. Increased postage costs are not
expected in 1999 in its shopper operations as a result of the 1999 postal rate
case, although total postage costs may increase depending on the proportion of
overweight pieces. Paper prices began decreasing in 1996 and the Company began
to benefit from the lower prices at the end of 1996 and throughout 1997. Paper
prices increased slightly at the beginning of 1998, but leveled out towards the
end of 1998.
- -------------------------------------------------------------------------------
RESULTS OF CONTINUING OPERATIONS
As described in Note N of the "Notes to Consolidated Financial Statements"
included herein, on October 15, 1997, the Company sold its newspaper and
television operations. 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 1998 % Change 1997 % Change 1996(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $748,546 17.3 $638,349 23.8 $515,460
Operating expenses 646,588 15.2 561,257 23.7 453,563
-------- -------- --------
Operating income $101,958 32.3 $ 77,092 24.5 $ 61,897
======== ======== ========
</TABLE>
(a) Excludes 1996 one-time merger costs (discussed under
"Acquisitions/Divestitures"). Including these costs, operating expenses
and operating income were $465.7 million and $49.8 million,
respectively.
Consolidated revenues grew 17.3% to $748.5 million and operating income grew
32.3% to $102.0 million in 1998 compared to 1997. The Company's overall growth
resulted from acquisitions, increased business with both new and existing
customers and from the sale of new products and services. Overall operating
expenses increased 15.2% to $646.6 million as a result of the overall revenue
growth.
Overall growth in the Company's 1997 revenues and operating income from
continuing operations 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.
- -------------------------------------------------------------------------------
DIRECT MARKETING
Direct marketing operating results were as follows:
<TABLE>
<CAPTION>
In thousands 1998 % Change 1997 % Change 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $493,898 16.1 $425,489 28.8 $330,255
Operating expenses 424,250 14.3 371,129 30.0 285,461
-------- -------- --------
Operating income $ 69,648 28.1 $ 54,360 21.4 $ 44,794
======== ======== ========
</TABLE>
Direct marketing revenues increased $68.4 million, or 16.1%, in 1998 compared to
1997. Revenue increases were led by database marketing, which had significant
revenue growth for the year, followed by response management and marketing
services, both of which experienced good internal revenue growth for the year.
Database marketing revenues increased primarily due to the growth in data
processing, database development and updating, hardware sales, software sales,
account services, brokered customer lists, and in consultative, integration and
analytical work. Database marketing revenues were also impacted by the November
1997 acquisition of Mercantile Software Systems, which contributed to the
increased hardware sales and consultative integration work. The retail industry
sector provided the largest revenue increase for database marketing. Response
management revenues increased due to increased telemarketing and Internet
business with existing customers, new customers, the November 1997 acquisition
of Tele Support Services and to a lesser extent the May 1997 opening of the
Langhorne, PA call center and the August 1998 acquisition of Cornerstone
Integrated
14
<PAGE> 3
Services. The traditional growth oriented business-to-business activities of
response management had significant growth; however, total response management
results were influenced by revenue declines in the outbound credit card business
beginning in the third quarter and continuing in the fourth quarter of 1998. The
high technology industry sector contributed significantly to overall response
management revenue growth. Marketing services revenues, led by logistics
operations, increased due to increased product sales as well as new product
sales to new and existing customers, primarily in the retail and financial
services industries. The November 1998 acquisition of Printing Management
Systems, Inc. also contributed slightly to the marketing services revenue
increase. 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, financial services, high technology, insurance,
telecommunications and pharmaceutical industries.
Operating expenses rose $53.1 million, or 14.3%, in 1998 compared to
1997. Payroll costs increased $20.7 million due to expanded hiring to support
revenue growth. In addition, production costs increased $21.5 million due to
increased volumes. General and administrative expense increased $6.5 million due
to increased professional and outside services fees and increased employee
expenses related to growth. Depreciation expense increased $3.3 million due to
the higher levels of capital investment. The acquisitions mentioned above also
contributed to the increased operating expenses.
Direct marketing revenues increased $95.2 million, or 28.8%, in 1997
compared to 1996. Response management, database marketing, and marketing
services sectors all experienced significant revenue growth. Response management
growth was 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 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.
- ------------------------------------------------------------------------------
SHOPPERS
Shopper operating results were as follows:
<TABLE>
<CAPTION>
In thousands 1998 % Change 1997 % Change 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $254,648 19.6 $212,860 14.9 $185,205
Operating expenses 214,141 17.8 181,771 12.8 161,188
-------- -------- --------
Operating income $ 40,507 30.3 $ 31,089 29.4 $ 24,017
======== ======== ========
</TABLE>
Shopper revenues increased $41.8 million, or 19.6%, in 1998 compared to 1997.
The increase was primarily due to the September 1997 acquisition of the ABC
Shoppers Group, which accounted for $45.5 million of the revenue increase,
partially offset by the sale of the Dallas-Fort Worth Shoppers Guide and the
Wichita, Kansas and Springfield, Missouri PennyPower in May 1998, which resulted
in a $4.8 million revenue decrease. Excluding the effects of the acquisition and
the divestiture discussed above, revenues remained flat. However, 1998 had 52
publication weeks while 1997 had 53 publication weeks. After eliminating the
effects of an extra publication week in 1997, revenues grew slightly. This
increase was due to growth in preprinted inserts, four-color glossy print and
deliver products and in-book employment related advertising. Gains in these
categories were partially offset by declines in standard print and deliver
products and in automotive and real estate related in-book advertising.
Shopper operating expenses rose $32.4 million, or 17.8%, in 1998
compared to 1997. The acquisition of the ABC Shoppers Group accounted for a
$39.6 million increase in operating costs. The sale of the Dallas-Fort Worth
Shoppers Guide and the Wichita, Kansas and Springfield, Missouri PennyPower
resulted in a $4.9 million reduction in operating expenses. Excluding the
acquisition and divestiture mentioned above, operating costs decreased 1.2%.
Operating expenses declined primarily due to decreased labor costs of $2.3
million which were influenced by improved production efficiencies, staff
reductions and lower fringe benefit costs, as well as decreased bad debt expense
of $1.6 million, partially offset by higher production and distribution costs
which were due primarily to higher printing and higher overweight postage.
Shopper revenues increased $27.7 million, or 14.9%, in 1997 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. The 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.
15
<PAGE> 4
ACQUISITIONS/DIVESTITURES
As described in Note B of the "Notes to Consolidated Financial Statements"
included herein, the Company made several acquisitions in the past three years.
The Company acquired Cornerstone Integrated Services of Austin, Texas,
a leading provider of technical and marketing support services to major computer
hardware and software manufacturers, as well as other manufacturers in the high
technology industry in August 1998; Printing Management Systems, Inc. of
Bellmawr, New Jersey, a leading provider of direct marketing services geared to
addressing clients' needs in database marketing, inventory control, information
processing, fulfillment and direct mail in November 1998; and Spectral
Resources, Inc. of Woodstock, New York, a leading provider of interactive
solutions to the pharmaceutical industry in December 1998.
The Company sold three of its smallest shopper publications, located in
Dallas, TX, Wichita, KS and Springfield, MO, in May 1998.
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 acquired Information for Marketing Limited, a London-based
database provider 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 helped strengthen the international
services, and supported and expanded the technology base of the database
marketing sector. The Company also expanded its international capabilities in
the response management sector through the October 1997 acquisition of Tele
Support Services, a Belgium-based provider of response management services to
the high technology industry in Europe.
Also described in Note B to the "Notes to Consolidated Financial
Statements" included herein, on April 30, 1996, DiMark was merged with a wholly
owned subsidiary of the Company, and each outstanding share of DiMark common
stock was converted into 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.
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% and 55% for 1997 and 1996, respectively.
Interest expense decreased $6.0 million in 1998 over 1997 due to the
October 1997 extinguishment of $306.3 million of long-term debt, using proceeds
from the October 15, 1997 sale of the Company's newspaper and television
operations, as described in Note N of the "Notes to Consolidated Financial
Statements" included herein. Total interest expense decreased in 1997 when
compared to 1996 for the same reasons.
Interest income increased $9.1 million in 1998 over 1997 due to the
short-term investment of the proceeds from the sale of newspaper and television
operations after debt extinguishment, operational fundings and income tax
payments. These cash and short-term investments are comprised of both taxable
and non-taxable components with an aggregated balance of $169.2 million at
December 31, 1998. (See Note C of the "Notes to Consolidated Financial
Statements.") Interest income increased $3.7 million in 1997 compared to 1996
due to the short-term investment of the proceeds from the sale of newspaper and
television operations after debt extinguishment and operational fundings.
PENSION CURTAILMENT GAIN
The Company recognized a pension curtailment gain of $2.15 million and related
income tax expense of $0.8 million in 1998. This non-recurring gain resulted
from the freezing of benefits under its defined benefit plan. (See Note F of the
"Notes to Consolidated Financial Statements.") Excluding the non-recurring gain
and related tax, net income was $67.1 million for the year ended December 31,
1998.
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 1997 in the amount of $0.9 million, or
one cent per share.
INCOME TAXES
Excluding income taxes related to the 1998 pension curtailment gain and the 1996
merger costs, income tax expenses increased $16.1 million in 1998 and $7.7
million in 1997 due to higher income levels. The effective income tax rate
(excluding the unusual items) was 41.2%, 41.1%, and 42.1% in 1998, 1997 and
1996, respectively.
CAPITAL INVESTMENTS
Net cash used in investing activities for 1998 included $47.4 million for
acquisitions and $24.4 million for capital expenditures. In addition to the cash
outlay for acquisitions, the Company issued stock with a value of $5.8 million
in connection with its November 1998 acquisition. The acquisition investments
were made in the direct marketing segment, discussed under "Direct Marketing."
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 the northern California operations consolidation,
replacement of northern California's order entry and related accounts receivable
applications and a new inserting machine. Additionally, the Company continued
with its implementation of new accounting systems software which had begun in
December 1997. The Company also invested in facility expansions in its database
marketing, response management and marketing services sectors.
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
16
<PAGE> 5
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 invested significantly
in its financial systems through the purchase of a 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 sectors.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of continuing operations for 1998 was
$95.4 million. Net cash used by discontinued operations in 1998 of $265.7
million relates to the payment of income taxes on the sale of discontinued
operations in 1997. Net cash inflows from investing activities were $185.2
million for 1998, resulting primarily from the sale and maturities of short-term
investments to pay the tax liability described above. Total cash outflows in
1998 related to acquisitions were $47.4 million (see Note B of the "Notes to
Consolidated Financial Statements" included herein for further information). Net
cash outflows from financing activities in 1998 were $68.3 million. The cash
outflow from financing activities is attributable primarily to the repurchase of
treasury stock in the second and third quarters of 1998 totaling $71.4 million.
Cash provided by operating activities of continuing operations was
$68.5 million for 1997 and $39.8 million for 1996. Net cash inflows from
investing activities were $231.7 million in 1997, while there were net cash
outflows of $61.1 million in 1996. 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 were $114.6 million (see Note B of
the "Notes to Consolidated Financial Statements" included herein for further
information).
Capital resources were available from, and provided through, the
Company's unsecured credit facility, through October 15, 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
expenditures needs for the foreseeable future.
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 - response management, database marketing and marketing
services. 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
1999. 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.
Accordingly, computer systems that rely on two digits to define an applicable
year may recognize a date using "00" as the year 1900, rather than the Year 2000
(the "Year 2000 Issue"). This could result in a system failure or
miscalculations causing disruptions of operations, including, but not limited
to, a temporary inability to process or transmit data or engage in normal
business activities.
The Company relies on computer hardware, information technology ("IT
Systems") and non-information technology systems ("Non-IT Systems") to operate
its business. IT Systems are used in the creation and delivery of the Company's
products and services, as well as the Company's internal operations such as
billing and accounting. IT Systems include systems which use information
provided by third-party data suppliers to update the Company's databases. The
Company also relies on Non-IT Systems (primarily consisting of embedded
technology), such as microprocessors in tape drives, printing and inserting
equipment, and elevators, and on utilities, such as telecommunications and
power.
The Company has defined Year 2000 Compliant to mean that a process will
continue to run in the same manner when dealing with
17
<PAGE> 6
dates on or after January 1, 2000, as it did before January 1, 2000. The Company
has conducted a comprehensive review of its IT Systems and Non-IT Systems to
identify those that could be affected by the Year 2000 Issue, and has developed
a remediation plan to resolve the issue. The most important areas of focus of
the Company's Year 2000 remediation plan are the Company's products and services
(including its databases, software that manipulates these databases and software
provided to customers); business operation support systems (billing, ordering,
tracking systems, payroll and technical infrastructure such as LANs, mail
systems and websites); and suppliers, facilities and equipment. The Company is
utilizing both internal and external resources to correct or reprogram, and test
the systems for the Year 2000 compliance.
The Company's compliance objectives include products and services the
Company has provided to customers in the past and will provide to customers in
the future; all internal operating software systems and equipment; and the
services, products, equipment and systems the Company has obtained and will
obtain in the future from outside vendors. The Company's first objective was to
remediate all products and services the Company has, or will provide, to
customers. This included informing customers of their need to make their
applications Year 2000 compliant to provide or accept associated files for
services provided by the Company. This objective was deemed the top priority and
was initiated in late 1997. In early 1998, the Company initiated action to
remediate all internal business operation support systems, and the associated
equipment it runs on. As part of this process, the Company developed a standard
Year 2000 compliance certification memorandum to be sent to all vendors who have
or are currently providing products or services to the Company, revised customer
standard contract language to include a Year 2000 statement, and instituted a
review process for formally responding to customer inquiries on the Company's
Year 2000 compliance plans and status. The Company has contacted its critical
suppliers and other entities to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. While the Company has not been informed of any
material risks associated with these entities, there is no guarantee that the
systems of these critical suppliers or other entities on which the Company
relies, will be timely converted and will not have an adverse effect on the
Company's systems or operations. In addition to the above, the Company formed a
Year 2000 Compliance Council in June 1998 to monitor the status of compliance
efforts and to ensure that all compliance issues are consistently addressed.
The Company's Year 2000 remediation plan consists of four key phases:
Inventory/Assessment, Repair/Replacement, Testing and Compliance/Internal
Certification. As related to the Company's products and services, the Company is
100%, 95%, 85% and 85% completed, respectively. With regards to business
operation support systems, the Company is 100%, 95%, 90%, and 90% completed,
respectively. Finally, suppliers, facilities and equipment are 100%, 95%, 75%
and 75% completed, respectively. It is anticipated that all reprogramming and
testing efforts will be completed by June 30, 1999; however, the Company can
provide no assurance in this regard.
The Company has spent $2.8 million of cost incurred to date related to
the Year 2000 Issue. The total remaining cost of the Year 2000 project is
presently estimated at $1.2 million. The costs of the project and the date on
which the Company believes it will complete the Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area and the
ability to locate and correct all relevant computer codes.
The Company presently believes that with modifications to existing
software and, in certain instances, conversions to new software, the Year 2000
Issue can be mitigated. As noted above, the Company has not yet completed all
necessary phases of the Year 2000 remediation program. In the event that the
Company does not complete any additional phases, it could experience disruptions
in its operations, including among other things, a temporary inability to
fulfill customer direct marketing requests (such as sales leads and personalized
mailings), process financial transactions, or engage in similar normal business
activities. In addition, disruptions in the economy generally resulting from the
Year 2000 Issues could also materially adversely affect the Company. The Company
could be subject to litigation for computer systems failures, equipment
shutdowns or failure to properly date business records. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
Contingency plans are currently being developed and are anticipated to
be completed by June 30, 1999. This includes developing contingency plans for
products and services, as well as business operation support systems.
Contingency plans already in the development process include identifying
alternate providers in case the primary providers cannot meet delivery
requirements, and providing specific 100-year interval windowing techniques to
customers in the event their applications could not be made Year 2000 compliant.
18
<PAGE> 7
- --------------------------------------------------------------------------------
HARTE-HANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
In thousands, except per share and share amounts 1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ............................................ $ 30,367 $ 83,675
Short-term investments ............................................... 138,874 388,145
Accounts receivable (less allowance for doubtful
accounts of $3,246 in 1998 and $2,835 in 1997) .................. 127,518 109,340
Inventory ............................................................ 6,485 7,703
Prepaid expenses ..................................................... 8,727 8,473
Current deferred income tax asset .................................... 8,339 12,518
Other current assets ................................................. 5,503 3,285
--------- ---------
Total current assets ............................................ 325,813 613,139
--------- ---------
Property, plant, and equipment
Land ................................................................. 2,951 3,069
Buildings and improvements ........................................... 21,419 20,913
Software ............................................................. 18,527 13,175
Equipment and furniture .............................................. 143,219 141,161
--------- ---------
186,116 178,318
Less accumulated depreciation ........................................ (98,068) (91,072)
--------- ---------
88,048 87,246
Construction and equipment installations in progress ................. 4,226 2,105
--------- ---------
Net property, plant and equipment ............................... 92,274 89,351
--------- ---------
Intangible and other assets
Goodwill (less accumulated amortization
of $40,485 in 1998 and $34,307 in 1997) ......................... 290,831 250,363
Other assets ......................................................... 6,295 2,070
--------- ---------
Total intangible and other assets ............................... 297,126 252,433
--------- ---------
Total assets .................................................... $ 715,213 $ 954,923
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ..................................................... $ 56,397 $ 49,918
Accrued payroll and related expenses ................................. 23,208 23,097
Customer deposits and unearned revenue ............................... 23,139 17,944
Income taxes payable ................................................. 8,412 270,440
Other current liabilities ............................................ 5,328 9,950
--------- ---------
Total current liabilities ....................................... 116,484 371,349
Other long-term liabilities (including deferred
income taxes of $9,989 in 1998 and $9,723 in 1997) .............. 21,638 17,337
--------- ---------
Total liabilities ............................................... 138,122 388,686
--------- ---------
Stockholders' equity
Common stock, $1 par value, authorized 250,000,000 shares
Issued 1998: 75,789,355; 1997: 74,842,982 shares ................ 75,789 74,843
Additional paid-in capital ........................................... 189,698 177,238
Accumulated other comprehensive income (loss) ........................ -- (577)
Retained earnings .................................................... 425,999 362,000
--------- ---------
691,486 613,504
Less treasury stock, 1998: 4,531,303; 1997: 1,648,608
shares at cost .............................................. (114,395) (47,267)
--------- ---------
Total stockholders' equity ...................................... 577,091 566,237
--------- ---------
Total liabilities and stockholders' equity ...................... $ 715,213 $ 954,923
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
19
<PAGE> 8
HARTE-HANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands, except per share amounts 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues ............................................................. $ 748,546 $ 638,349 $ 515,460
--------- --------- ---------
Operating expenses
Payroll ......................................................... 268,957 236,319 187,765
Production and distribution ..................................... 284,572 243,423 204,729
Advertising, selling, general and administrative ................ 64,082 59,054 43,632
Depreciation .................................................... 21,087 17,327 13,779
Goodwill amortization ........................................... 7,890 5,134 3,658
Merger costs .................................................... -- -- 12,136
--------- --------- ---------
646,588 561,257 465,699
--------- --------- ---------
Operating income ..................................................... 101,958 77,092 49,761
Other expenses (income)
Interest expense ................................................ 193 6,189 7,346
Interest income ................................................. (13,474) (4,412) (717)
Other, net ...................................................... 1,230 196 395
Pension curtailment gain ........................................ (2,150) -- --
--------- --------- ---------
(14,201) 1,973 7,024
--------- --------- ---------
Income from continuing operations
before income taxes ............................................. 116,159 75,119 42,737
Income tax expense ................................................... 47,788 30,848 19,653
--------- --------- ---------
Income from continuing operations .................................... 68,371 44,271 23,084
--------- --------- ---------
Income from discontinued operations, net of income taxes ............. -- 15,483 17,537
Gain on sale, net of income taxes .................................... -- 276,869 --
--------- --------- ---------
Total discontinued operations ........................................ -- 292,352 17,537
--------- --------- ---------
Income before extraordinary item ..................................... 68,371 336,623 40,621
Extraordinary item -- loss due to early extinguishment of debt,
net of income tax benefit of $586 ............................... -- (875) --
--------- --------- ---------
Net income ........................................................... $ 68,371 $ 335,748 $ 40,621
========= ========= =========
Basic earnings per common share
Continuing operations ........................................... $ 0.94 $ 0.60 $ 0.32
Discontinued operations ......................................... -- 3.95 0.24
Extraordinary item, net of income taxes ......................... -- (0.01) --
--------- --------- ---------
Basic earnings per common share ............................ $ 0.94 $ 4.54 $ 0.56
========= ========= =========
Weighted-average common shares outstanding ...................... 72,716 73,998 72,830
--------- --------- ---------
Diluted earnings per common share
Continuing operations ........................................... $ 0.90 $ 0.57 $ 0.30
Discontinued operations ......................................... -- 3.80 0.23
Extraordinary item, net of income taxes ......................... -- (0.01) --
--------- --------- ---------
Diluted earnings per common share .......................... $ 0.90 $ 4.36 $ 0.53
========= ========= =========
Weighted-average common and
common equivalent shares outstanding ....................... 76,057 77,000 77,154
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE> 9
HARTE-HANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income ........................................................................... $ 68,371 $ 335,748 $ 40,621
Adjustments to reconcile net income to net cash provided by continuing operations:
Income from discontinued operations ............................................. -- (15,483) (17,537)
Gain on sale of discontinued operations ......................................... -- (276,869) --
Depreciation .................................................................... 21,087 17,327 13,779
Goodwill amortization ........................................................... 7,890 5,134 3,658
Amortization of option-related compensation ..................................... 592 769 661
Deferred income taxes ........................................................... 4,130 2,716 333
Pension curtailment gain ........................................................ (2,150) -- --
Extraordinary item .............................................................. -- 1,461 --
Other, net ...................................................................... 534 1,680 1,158
Changes in operating assets and liabilities, net of effects from acquisitions
and divestitures:
Increase in accounts receivable, net ............................................ (12,415) (12,737) (17,495)
Decrease in inventory ........................................................... 900 2,435 7,900
Decrease (increase) in prepaid expenses and other current assets ................ (2,549) 2,454 (3,313)
Increase (decrease) in accounts payable ......................................... (2,206) 7,818 1,703
Increase (decrease) in other accrued expenses and other liabilities ............. 10,034 (2,408) 8,550
Other, net ...................................................................... 1,210 (1,546) (250)
--------- --------- ---------
Net cash provided by continuing operations ...................................... 95,428 68,499 39,768
Net cash provided by (used in) discontinued operating activities ................... (265,650) 24,250 32,717
--------- --------- ---------
Net cash provided by (used in) operating activities ............................. (170,222) 92,749 72,485
--------- --------- ---------
Cash Flows from Investing Activities
Acquisitions ......................................................................... (47,386) (114,589) (32,749)
Purchases of property, plant and equipment ........................................... (24,443) (28,396) (23,885)
Proceeds from the sale of property, plant and equipment .............................. 1,385 1,997 408
Proceeds from divestiture ............................................................ 5,769 -- --
Net sales and maturities (purchases) of available-for-sale short-term investments .... 249,840 (386,687) --
Discontinued operations:
Purchases of property, plant and equipment ...................................... -- (4,548) (3,529)
Proceeds from the sale of property, plant and equipment ......................... -- 34 270
Payments on film contracts ...................................................... -- (1,481) (1,572)
Proceeds from divestiture ....................................................... -- -- --
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 ........................ 185,165 231,668 (61,057)
--------- --------- ---------
Cash Flows from Financing Activities
Long-term borrowings ................................................................. -- 497,600 244,573
Payments on debt, including current maturities and financing costs ................... -- (714,465) (267,224)
Issuance of common stock ............................................................. 7,452 14,334 7,488
Issuance of treasury stock ........................................................... 23 -- --
Purchase of treasury stock ........................................................... (71,354) (47,267) --
Dividends paid ....................................................................... (4,372) (2,961) (2,350)
--------- --------- ---------
Net cash (used in) financing activities .................................... (68,251) (252,759) (17,513)
--------- --------- ---------
Net increase (decrease) in cash ...................................................... (53,308) 71,658 (6,085)
Cash and cash equivalents at beginning of period ..................................... 83,675 12,017 18,102
--------- --------- ---------
Cash and cash equivalents at end of period ........................................... $ 30,367 $ 83,675 $ 12,017
========= ========= =========
Supplemental cash flow information:
Non-cash investing and financing activities:
Acquisitions -- stock (1998 and 1997) and debt issued (1996) .................... $ 5,752 $ 6,255 $ 18,765
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE> 10
HARTE-HANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Accumulated Accumulated
Additional Deficit) Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
In thousands Stock Capital Earnings Stock Income (Loss) Equity
--------- ---------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ......................... $ 72,088 $ 138,826 $ (9,058) $ -- $ -- $ 201,856
Common stock issued-- employee
benefit plans ................................. 208 2,441 -- -- -- 2,649
Exercise of stock options .......................... 1,192 4,699 -- -- -- 5,891
Tax benefit of options exercised ................... -- 2,766 -- -- -- 2,766
Dividends paid ($0.0335 per share) ................. -- -- (2,350) -- -- (2,350)
Net income ......................................... -- -- 40,621 -- -- 40,621
Stock issued in conjunction with
acquisition earnout ........................... 116 1,143 -- -- -- 1,259
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 ....................... 73,604 149,875 29,213 -- -- 252,692
Common stock issued -- employee
benefit plans ................................. 278 3,370 -- -- -- 3,648
Exercise of stock options .......................... 2,250 8,566 -- -- -- 10,816
Tax benefit of options exercised ................... -- 7,841 -- -- -- 7,841
Dividends paid ($0.04 per share) ................... -- -- (2,961) -- -- (2,961)
Stock issued in conjunction with
acquisition ................................... 360 5,937 -- -- -- 6,297
Treasury stock repurchase .......................... (1,649) 1,649 -- (47,627) -- (47,267)
Comprehensive income, net of tax:
Net income .................................... -- -- 335,748 -- -- 335,748
Unrealized loss on short-term investments
(net of tax of $311) ..................... -- -- -- -- (577) (577)
---------
Total comprehensive income ......................... 335,171
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 ....................... 74,843 177,238 362,000 (47,267) (577) 566,237
Common stock issued -- employee
benefit plans ................................. 218 4,018 -- -- -- 4,236
Exercise of stock options .......................... 728 2,862 -- -- -- 3,590
Tax benefit of options exercised ................... -- 4,031 -- -- -- 4,031
Dividends paid ($0.04 per share) ................... -- -- (4,372) -- -- (4,372)
Treasury stock issued in conjunction
with acquisition .............................. -- 1,545 -- 4,207 -- 5,752
Treasury stock issued .............................. -- 4 -- 19 -- 23
Treasury stock repurchase .......................... -- -- -- (71,354) -- (71,354)
Comprehensive income, net of tax:
Net income .................................... -- -- 68,371 -- -- 68,371
Change in unrealized gain (loss) on short-
term investments net of reclassification
adjustments (net of tax of $311) ......... -- -- -- -- 577 577
---------
Total comprehensive income ......................... 68,948
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 ....................... $ 75,789 $ 189,698 $ 425,999 $(114,395) $ -- $ 577,091
========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
22
<PAGE> 11
HARTE-HANKS, 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, Inc. and subsidiaries (the "Company"). The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods.
All intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified for comparative
purposes.
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 equity securities and debt 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 component of accumulated other comprehensive income.
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 3 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 and dilutive common stock
equivalents from the assumed exercise of stock options using the treasury stock
method.
BUSINESS SEGMENTS
During the year ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 131 entitled "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Under SFAS No. 131, business segments are defined on the same basis that the
company is managed versus the product or market approach previously used. The
adoption of SFAS No. 131 did not have a material effect on the Company's primary
financial statements, but did affect the disclosure of segment information
contained elsewhere herein (Note P).
REVENUE RECOGNITION
The Company recognizes revenue at the time the service is rendered or the
product is delivered. Shopper services are considered rendered when all
printing, sorting, labeling and ancillary services have been provided and the
mailing material has been received by the United States Postal Service. Direct
marketing revenue from the production and delivery of data is recognized upon
completion and shipment of the work. Revenue from software is recognized in
accordance with the American Institute of Certified Public Accountants' (AICPA)
Statement of Position ("SOP") 97-2 "Software Revenue Recognition," as amended by
SOP 98-4 and SOP 98-9. Revenue from software licensing arrangements is generally
recognized after execution of a licensing agreement and shipment of the
software. Service revenue from time-and-materials services is recognized as the
services are provided. Revenue from service contracts is recognized over the
contractual period, using the percentage-of-completion method based on
individual costs incurred to date compared with total estimated contract costs.
In other instances, progress toward completion is based on performance
milestones specified in the contract where such milestones fairly reflect
progress toward contract completion. Payments received in advance of the
performance of services are recorded as deferred revenue until such time as the
services are performed.
23
<PAGE> 12
NOTE B -- ACQUISITIONS/DIVESTITURES
DIVESTITURES
In May 1998, the Company sold three of its smallest shopper publications,
located in Dallas, TX, Wichita, KS and Springfield, MO.
PURCHASES
In December 1998, the Company acquired Spectral Resources, Inc. of Woodstock,
NY, a leading provider of interactive solutions to the pharmaceutical industry.
In November 1998, the Company acquired Printing Management Systems,
Inc. of Bellmawr, NJ, a leading provider of direct marketing services geared to
addressing clients' needs in database marketing, inventory control, information
processing, fulfillment and direct mail.
In August 1998, the Company acquired Cornerstone Integrated Systems of
Austin, TX, a leading provider of technical and marketing support services to
major computer hardware and software manufacturers, as well as other
manufacturers in the high technology industry.
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 September 1997, the Company acquired the ABC Shoppers Group from an
indirect subsidiary of The Walt Disney Company for approximately $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 January 1997, the Company acquired Information for Marketing
Limited, a London-based database provider servicing the United Kingdom.
In November 1996, the Company acquired Marketing Communications, Inc.,
a Kansas City-based integrated database marketing company that serves the
pharmaceutical 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.
In January 1996, DiMark acquired PRO Direct Response Corp., a
telemarketing company that serves the financial services industry.
The total cash outlay in 1998 for acquisitions was $47.4 million. In
addition, the Company issued stock with a value of $5.8 million for its November
1998 acquisition. 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.
No proforma data is presented because the Company considers the
proforma effects of purchase acquisitions immaterial to historical operating
results.
POOLING-OF-INTERESTS
Effective April 30, 1996, DiMark, Inc. ("DiMark") was merged with a wholly-owned
subsidiary of the Company, and each outstanding share of DiMark common stock was
converted into the right to acquire 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 financial statement preparation. Merger
expenses related to the transaction were $12.1 million ($8.7 million, net of
income taxes).
Combined and separate results of the Company and DiMark during the reporting
period in 1996 preceding the merger were as follows:
<TABLE>
<CAPTION>
Three Months
Ended
In thousands March 31, 1996
--------------
<S> <C>
Revenues from continuing operations
Harte-Hanks ................................. $ 89,794
DiMark ...................................... 27,377
Adjustments ................................. (1,665)
---------
Combined .................................... $ 115,506
=========
Income from continuing operations
Harte-Hanks ................................. $ 3,056
DiMark ...................................... 1,932
---------
Combined .................................... $ 4,988
=========
</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, 1998
Gross
Amortized Unrealized Fair
In thousands Cost Gain (Loss) Value
---------- ---------- ----------
<S> <C> <C> <C>
Tax exempt auction rate
securities .................................. $ 3,000 $ -- $ 3,000
Taxable commercial paper ......................... 81,414 -- 81,414
Taxable certificates of deposit .................. 41,725 -- 41,725
Taxable federal securities ....................... 12,735 -- 12,735
---------- ---------- ----------
Total ............................................ $ 138,874 $ -- $ 138,874
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
Gross
Amortized Unrealized Fair
In thousands Cost Gain (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>
24
<PAGE> 13
The fair value of the Company's investment in securities by contractual maturity
is as follows:
<TABLE>
<CAPTION>
In thousands December 31, 1998
-----------------
<S> <C>
Due in less than 1 year ........... $135,485
Due in 1 to 5 years ............... 3,389
--------
Total ............................. $138,874
========
</TABLE>
The gross realized gains and losses on the sale of available-for-sale securities
were immaterial for the years ended December 31, 1998 and 1997.
NOTE D -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
In thousands 1998 1997
---------- ----------
<S> <C> <C>
Miscellaneous notes payable,
interest rates ranging from
7.3% to 8%, due on various
dates through 1998 .......................... $ -- $ 1,240
---------- ----------
-- 1,240
Less current maturities .......................... -- 1,240
---------- ----------
$ -- $ --
========== ==========
</TABLE>
CREDIT FACILITY
The Company extinguished its $320 million revolving credit facility on October
15, 1997. As of December 31, 1998, the Company had no long-term debt. Cash
payments for interest were $0.1 million, $10.5 million and $13.5 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
BANK LINE
The Company has one uncommitted short-term borrowing arrangement. Under this
arrangement, the Company can borrow up to a maximum of $30 million. As of
December 31, 1998, the Company had no borrowings related to this bank line.
NOTE E -- INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current
Federal ...................... $ 34,646 $ 23,216 $ 16,475
State and local .............. 9,012 4,916 2,845
-------- -------- --------
Total current ........... $ 43,658 $ 28,132 $ 19,320
======== ======== ========
Deferred
Federal ...................... $ 4,175 $ 2,201 $ (23)
State and local .............. (45) 515 356
-------- -------- --------
Total deferred .......... $ 4,130 $ 2,716 $ 333
======== ======== ========
</TABLE>
Included in income tax expense for 1998 is tax expense of $0.8 million related
to the pension curtailment gain. Included in income tax expense for 1996 is a
tax benefit of $3.4 million related to merger costs.
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 1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Computed expected
income tax expense ........... $ 40,656 35% $ 26,292 35% $ 14,958 35%
Net effect of state
income taxes ................. 5,891 5% 3,531 5% 2,081 5%
Effect of goodwill
amortization ................. 1,230 1% 1,017 1% 977 2%
Effect of non-taxable
investment income ............ (424) 0% (912) (1)% -- --
Merger costs ...................... -- -- -- -- 1,498 4%
Change in the beginning
of the year balance
of the valuation allowance ... (63) 0% -- -- (95) 0%
Other, net ........................ 498 0% 920 1% 234 0%
-------- -------- -------- -------- -------- --------
Income tax expense
for the period ............... $ 47,788 41% $ 30,848 41% $ 19,653 46%
======== ======== ======== ======== ======== ========
</TABLE>
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Continuing operations ............. $ 47,788 $ 30,848 $ 19,653
Discontinued operations ........... -- 275,548 15,064
Extraordinary items ............... -- (586) --
Stockholders' equity .............. (3,720) (8,152) (2,766)
--------- --------- ---------
Total ........................ $ 44,068 $ 297,658 $ 31,951
========= ========= =========
</TABLE>
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
In thousands 1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
State net income tax ............................. $ 1,094 $ 4,967
Deferred compensation and retirement plans ....... 4,751 4,651
Accrued expenses not deductible until paid ....... 4,183 3,743
Accounts receivable, net ......................... 702 439
Other, net ....................................... 235 253
State net operating loss carryforwards ........... 189 191
-------- --------
Total gross deferred tax assets ............. 11,154 14,244
Less valuation allowance .................... (189) (191)
-------- --------
Net deferred tax assets ..................... 10,965 14,053
-------- --------
Deferred tax liabilities:
Property, plant and equipment .................... (7,800) (8,643)
Goodwill ......................................... (4,812) (2,324)
Other, net ....................................... (3) (291)
-------- --------
Total gross deferred tax liabilities ........ (12,615) (11,258)
-------- --------
Net deferred tax assets (liabilities) ....... $ (1,650) $ 2,795
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1997 was
$67,000. The valuation allowance at December 31, 1998 and
25
<PAGE> 14
1997 relate to state net operating losses, which are not expected to be
realized.
The net deferred tax asset (liabilities) 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 $319.1 million ($265.7 million
related to gain on sale of discontinued operations), $25.7 million, and $19.8
million in 1998, 1997 and 1996, respectively.
NOTE F -- EMPLOYEE BENEFIT PLANS
Prior to January 1, 1999, the Company maintained a defined benefit pension plan
for which most of its employees were eligible. In conjunction with significant
enhancements to the Company's 401(k) plan, the Company elected to freeze
benefits under this defined benefit pension plan as of December 31, 1998,
resulting in recognition of a curtailment gain of $2.15 million.
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. The benefits under this supplemental pension plan will
continue to accrue as if the principal pension plan had not been frozen.
The status of Harte-Hanks' defined benefit pension plans at year-end was as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1998 1997
-------- --------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year .......... $ 80,035 $ 72,822
Service cost ..................................... 4,207 3,564
Interest cost .................................... 5,759 5,549
Actuarial loss ................................... 16,321 6,516
Benefits paid .................................... (4,835) (4,075)
Curtailments ..................................... (15,155) (4,341)
-------- --------
Benefit obligation at end of year ................ 86,332 80,035
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year ... 79,392 65,316
Actual return on plan assets ..................... 9,730 15,132
Employer contribution ............................ 1,261 3,019
Benefits paid .................................... (4,835) (4,075)
-------- --------
Fair value of plan assets at end of year ......... 85,548 79,392
-------- --------
Funded status .................................... (784) (643)
Unrecognized actuarial loss (gain) ............... 529 (990)
Unrecognized prior service cost .................. 997 1,100
-------- --------
Prepaid (accrued) benefit cost ................... $ 742 $ (533)
======== ========
</TABLE>
The Company's non-qualified pension plan has an accumulated benefit obligation
in excess of its assets of $4.7 million at December 31, 1998.
The weighted-average assumptions used for measurement of the defined pension
plans were as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Weighted-average assumptions
as of December 31
Discount rate ...................... 6.00% 7.25% 7.75%
Expected return on plan assets ..... 10.00% 10.00% 10.00%
Rate of compensation increase (1998,
non-qualified plan only) ...... 4.00% 4.00% 4.00%
</TABLE>
Net pension cost for both plans included the following components:
<TABLE>
<CAPTION>
December 31,
In thousands 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Components of net periodic
benefit cost (income)
Service cost ................................ $ 4,207 $ 3,564 $ 3,937
Interest cost ............................... 5,759 5,549 5,134
Expected return on plan assets .............. (8,243) (6,772) (5,724)
Amortization of prior service costs ......... (26) (26) (26)
Recognized actuarial loss ................... 57 22 193
Recognized curtailment loss (gain) .......... (2,150) (4,149) --
---------- ---------- ----------
Net periodic benefit cost (income) .......... (396) (1,812) 3,514
Less: net periodic benefit cost (income)
-- discontinued operations ........ -- (3,574) 1,011
---------- ---------- ----------
Net periodic benefit cost (income)
-- continuing operations ............... $ (396) $ 1,762 $ 2,503
========== ========== ==========
</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 was included in the calculation of the gain on the sale of
discontinued operations.
Prior to January 1, 1999, the Company also sponsored several 401(k)
plans to provide employees with additional income upon retirement. The Company
generally matched a portion of employees' voluntary before-tax contributions.
Employees were fully vested in their own contributions and generally vested in
the Company's matching contributions upon three years of service. Effective
January 1, 1999 changes were made that combined all 401(k) plans and allowed for
immediate vesting of enhanced Company matching contributions. Total 401(k)
expense recognized by the Company in 1998, 1997 and 1996 was $1.4 million, $1.3
million, and $1.0 million, respectively.
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 864,093
at December 31, 1998.
NOTE G -- STOCKHOLDERS' EQUITY
In January 1999, the Company announced an increase in the regular quarterly
dividend from 1.5 cents to 2 cents per share payable March 15, 1999 to holders
of record on March 1, 1999.
In May 1998, the Company amended its Certificate of Incorporation to
increase its authorized capitalization to 250,000,000 shares of common stock.
During 1998 the Company repurchased 3,108,700 shares of its common
stock for $71.4 million under its stock repurchase program. In September 1998,
the Company authorized an increase of three million shares in the Company's
stock repurchase program. Under its stock repurchase program, the Company has
repurchased 6.3 million shares at December 31, 1998, and under such program has
authorization to repurchase an additional 4.3 million shares.
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 exercis-
26
<PAGE> 15
able five years after date of grant. At December 31, 1998, 1997 and 1996,
options to purchase 340,800 shares, 629,000 shares and 939,600 shares,
respectively, were outstanding under the 1984 Plan, with exercise prices ranging
from $1.67 to $3.33 per share at December 31, 1998. 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, 1998, 1997 and 1996, market
price options to purchase 5,058,550 shares, 4,194,650 shares and 4,324,000
shares, respectively, were outstanding with exercise prices ranging from $3.33
to $25.56 per share at December 31, 1998. Market price options granted prior to
January 1998 become exercisable after the fifth anniversary of their date of
grant. Beginning January 1998, market price options become exercisable in 25%
increments on the second, third, fourth and fifth anniversaries of their date of
grant. The weighted-average exercise price for outstanding options and
exercisable options at December 31, 1998 was $11.54 and $5.32, respectively. The
weighted-average remaining life for outstanding options was 6.88 years.
At December 31, 1998, 1997 and 1996, performance options to purchase
724,700 shares, 737,800 shares and 994,250 shares, respectively, were
outstanding with exercise prices ranging from $0.33 to $1.00 per share at
December 31, 1998. 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 $0.6
million, $0.8 million and $1.0 million was recognized for the performance
options for the years ended December 31, 1998, 1997 and 1996 respectively. The
weighted-average exercise price for outstanding options and exercisable options
at December 31, 1998 was $0.48 and $0.33, respectively. The weighted-average
remaining life for outstanding options was 4.84 years.
DIMARK
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, 1998, 1997 and 1996, DiMark options
to purchase 182,864 shares, 435,466 shares and 2,534,684 shares, respectively,
were outstanding with exercise prices ranging from $8.31 to $10.48 per share at
December 31, 1998. As of December 31, 1998 all outstanding DiMark options were
exercisable. The weighted-average exercise price at December 31, 1998 was $8.44
and the weighted-average remaining life was 1.30 years.
The following summarizes all stock option plans activity during 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Weighted-
Number Average
of Shares Option Price
---------- ------------
<S> <C> <C>
Options outstanding
at January 1, 1996 ........... 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
Granted ........................... 1,315,050 19.13
Exercised ......................... (727,980) 4.45
Cancelled ......................... (277,072) 12.05
-----------
Options outstanding at
December 31, 1998 ............ 6,306,914 $ 9.72
===========
Exercisable at
December 31, 1998 ............ 2,486,464 $ 4.26
===========
</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.
Had compensation expense for the Company's options been determined
based on the fair value at the grant date for awards since January 1, 1995,
consistent with the provisions of SFAS No. 123, the Company's income from
continuing operations, net income and diluted 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 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income from continuing
operations -- as reported ............... $ 68,371 $ 44,271 $ 23,084
Income from continuing
operations -- pro forma ................. 65,636 42,512 21,630
Net income -- as reported .................... 68,371 335,748 40,621
Net income -- pro forma ...................... 65,636 333,989 39,021
Diluted earnings per share
from continuing operations
-- as reported .......................... 0.90 0.57 0.30
Diluted earnings per share
from continuing operations
-- pro forma ............................ 0.86 0.55 0.28
Diluted earnings per share
-- as reported .......................... 0.90 4.36 0.53
Diluted earnings per share
-- pro forma ............................ 0.86 4.34 0.51
</TABLE>
27
<PAGE> 16
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 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Expected dividend yield ................ 0.3% 0.3% 0.3%
Expected stock price volatility ........ 21.0% 20.3% 22.1%
Risk free interest rate ................ 6.0% 6.4% 6.3%
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 1998,
1997 and 1996 was $7.79, $5.12 and $4.07, respectively. The weighted-average
fair value and exercise price of performance options was $16.82 and $1.00 in
1998, $8.96 and $0.71 in 1997, and $7.32 and $0.57 in 1996, 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, trade payables,
and miscellaneous notes receivable and payable.
NOTE J -- COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company had outstanding letters of credit in the
amount of $4.0 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 $18.5 million, $16.0 million and $13.0 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
The future minimum rental commitments for all non-cancellable operating leases
with terms in excess of one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
In thousands
<S> <C>
1999............................... $15,310
2000............................... 27,493
2001............................... 11,683
2002............................... 8,106
2003............................... 5,115
After 2003 19,431
-------
$87,138
=======
</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. For the year ended December
31, 1997, 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
A reconciliation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands, except per share amounts 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
BASIC EPS
Income from continuing operations .................................... $ 68,371 $ 44,271 $ 23,084
Income from discontinued operations .................................. -- 292,352 17,537
Extraordinary item ................................................... -- (875) --
------------ ------------ ------------
Net income ........................................................... $ 68,371 $ 335,748 $ 40,621
============ ============ ============
Weighted-average common shares
outstanding used in earnings
per share computations .......................................... 72,716 73,998 72,830
============ ============ ============
Earnings per share:
Continuing operations ........................................... $ 0.94 $ 0.60 $ 0.32
Discontinued operations ......................................... -- 3.95 0.24
Extraordinary item .............................................. -- (0.01) --
------------ ------------ ------------
Net income ...................................................... $ 0.94 $ 4.54 $ 0.56
============ ============ ============
DILUTED EPS
Income from continuing operations .................................... $ 68,371 $ 44,271 $ 23,084
Income from discontinued operations .................................. -- 292,352 17,537
Extraordinary item ................................................... -- (875) --
------------ ------------ ------------
Net income ........................................................... $ 68,371 $ 335,748 $ 40,621
============ ============ ============
Shares used in earnings per
share computations .............................................. 76,057 77,000 77,154
============ ============ ============
Earnings per share:
Continuing operations ........................................... $ 0.90 $ 0.57 $ 0.30
Discontinued operations ......................................... -- 3.80 0.23
Extraordinary item .............................................. -- (0.01) --
------------ ------------ ------------
Net income ...................................................... $ 0.90 $ 4.36 $ 0.53
============ ============ ============
Computation of Shares Used In Earnings Per Share Computations
Average outstanding common shares .................................... 72,716 73,998 72,830
Average common equivalent shares--
dilutive effect of option shares ................................ 3,341 3,002 4,324
------------ ------------ ------------
Shares used in net earnings
per share computations .......................................... 76,057 77,000 77,154
============ ============ ============
</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 $13.2 million for working capital. This
transaction resulted in gain on sale of $276.9 million, or $3.60 per share, 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."
28
<PAGE> 17
Summarized operating results for the combined newspaper and television
discontinued operations are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues .......................... $ -- $ 121,169 $ 150,413
Income from discontinued
operations before
income tax expense ........... $ -- $ 28,231 $ 32,601
Income tax expense ................ -- 12,748 15,064
------------ ------------ ------------
Income from discontinued
operations ................... $ -- $ 15,483 $ 17,537
============ ============ ============
</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 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income from discontinued
operations ........................ $ -- $ 15,483 $ 17,537
Depreciation and goodwill
amortization ...................... -- 9,062 11,357
Film amortization ...................... -- 1,369 1,347
Payment of taxes on gain
on sale ........................... (265,650) -- --
Other, net ............................. -- (1,664) 2,476
---------- ---------- ----------
Net cash provided by (used in)
discontinued operations ........... $ (265,650) $ 24,250 $ 32,717
========== ========== ==========
</TABLE>
NOTE O -- SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 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 .............. $ 200,658 $ 183,409 $ 186,806 $ 177,673
Operating income from continuing operations ...... 29,682 26,463 26,688 19,125
Income from continuing operations ................ 20,336(b) 16,920 17,010 14,105
Income before extraordinary items ................ 20,336(b) 16,920 17,010 14,105
Net income ....................................... 20,336(b) 16,920 17,010 14,105
Basic earnings per share:
Continuing operations ............................ .29(b) .23 .23 .19
Discontinued operations .......................... -- -- -- --
Net income ....................................... .29(b) .23 .23 .19
Diluted earnings per share:
Continuing operations ............................ .28(b) .22 .22 .18
Discontinued operations .......................... -- -- -- --
Net income ....................................... .28(b) .22 .22 .18
<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(c) 5,968
Income before extraordinary items ................ 294,712 15,549 16,345(c) 10,017
Net income ....................................... 293,837 15,549 16,345(c) 10,017
Basic earnings per share:
Continuing operations ............................ .24 .14 .14(c) .08
Discontinued operations .......................... 3.80 .07 .08 .05
Net income ....................................... 4.02 .21 .22(c) .13
Diluted earnings per share:
Continuing operations ............................ .23 .13 .13(c) .08
Discontinued operations .......................... 3.67 .07 .07 .05
Net income ....................................... 3.88 .20 .21(c) .13
</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.
(b) Includes non-recurring net pension gain of $1.3 million, or two cents per
share.
(c) Includes one-time non-operating net gain of $0.4 million, or one-half cent
per share.
NOTE P -- BUSINESS SEGMENTS
Harte-Hanks is a highly focused targeted media company with continuing
operations in two segments - direct marketing and shoppers. Since the sale of
the Company's newspaper and television operations on October 15, 1997
represented divestiture of entire business segments, their results are reported
as "discontinued operations" for all periods presented (see Note N).
Harte-Hanks direct marketing segment offers a complete range of
specialized, coordinated and integrated direct marketing services from a single
source. Response management, database marketing and marketing services are
provided in the direct marketing segment. Response Management's revenues were
$113.4 million, $99.7 million and $72.3 million in 1998, 1997 and 1996,
respectively. Database Marketing's revenues were $196.1 million, $158.4 million
and $131.9 million in 1998, 1997 and 1996, respectively. Marketing Services'
revenues were $183.6 million, $165.0 million and $123.5 million in 1998, 1997
and 1996, respectively. The Company utilizes advanced technologies to enable its
customers to identify, reach, influence and nurture specific consumers or
businesses. 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.
Harte-Hanks shoppers segment produces 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.
Included in Corporate Activities are general corporate expenses. Assets
of Corporate Activities include unallocated cash and short-term investments and
deferred income taxes.
Information as to the operations of Harte-Hanks in different business
segments is set forth below based on the nature of the products and services
offered. Harte-Hanks evaluates performance based on several factors, of which
the primary financial measures are segment revenues and operating income. The
accounting policies of the business segments are the same as those described in
the summary of significant accounting policies (Note A).
The operating results of Harte-Hanks Direct Marketing include the
acquisitions of Cornerstone Integrated Services in August 1998; Printing
Management Systems, Inc. in November 1998; and Spectral Resources Inc. in
December 1998.
29
<PAGE> 18
NOTE P -- BUSINESS SEGMENTS (CONTINUED)
Information about the Company's operations in different industry segments:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operating revenues
Direct Marketing ..................................................... $ 493,898 $ 425,489 $ 330,255
Shoppers ............................................................. 254,648 212,860 185,205
---------- ---------- ----------
Total operating revenues ........................................ $ 748,546 $ 638,349 $ 515,460
========== ========== ==========
Operating income
Direct Marketing ..................................................... $ 69,648 $ 54,360 $ 44,794
Shoppers ............................................................. 40,507 31,089 24,017
Corporate Activities ................................................. (8,197) (8,357) (19,050)(a)
---------- ---------- ----------
Total operating income .......................................... $ 101,958 $ 77,092 $ 49,761
========== ========== ==========
Income from continuing operations before income taxes
Operating income ..................................................... $ 101,958 $ 77,092 $ 49,761
Interest expense ..................................................... (193) (6,189) (7,346)
Interest income ...................................................... 13,474 4,412 717
Other, net ........................................................... (1,230) (196) (395)
Pension curtailment gain ............................................. 2,150 -- --
---------- ---------- ----------
Total income from continuing operations before income taxes ..... $ 116,159 $ 75,119 $ 42,737
========== ========== ==========
Depreciation
Direct Marketing ..................................................... $ 15,977 $ 12,673 $ 9,139
Shoppers ............................................................. 5,025 4,572 4,600
Corporate Activities ................................................. 85 82 40
---------- ---------- ----------
Total depreciation .............................................. $ 21,087 $ 17,327 $ 13,779
========== ========== ==========
Goodwill amortization
Direct Marketing ..................................................... $ 3,703 $ 2,659 $ 1,791
Shoppers ............................................................. 4,187 2,475 1,867
---------- ---------- ----------
Total goodwill amortization ..................................... $ 7,890 $ 5,134 $ 3,658
========== ========== ==========
Total assets
Direct Marketing ..................................................... $ 341,653 $ 272,847 $ 231,365
Shoppers ............................................................. 197,885 207,541 99,061
Corporate Activities ................................................. 175,675 474,535 12,579
---------- ---------- ----------
Total assets .................................................... $ 715,213 $ 954,923 $ 343,005
========== ========== ==========
Capital expenditures
Direct Marketing ..................................................... $ 18,655 $ 22,434 $ 20,706
Shoppers ............................................................. 5,764 5,912 2,929
Corporate Activities ................................................. 24 50 250
---------- ---------- ----------
Total capital expenditures ...................................... $ 24,443 $ 28,396 $ 23,885
========== ========== ==========
</TABLE>
(a) Included is $12.1 million in merger expenses. See Note B of Notes to
Consolidated Financial Statements.
Information about the Company's operations in different geographic areas:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues(a)
United States ..................... $ 724,659 $ 620,272 $ 506,847
Other countries ................... 23,887 18,077 8,613
------------ ------------ ------------
Total operating revenues ..... $ 748,546 $ 638,349 $ 515,460
============ ============ ============
Long-lived assets(b)
United States ..................... $ 89,905 $ 87,575 $ 71,910
Other countries ................... 2,369 1,776 285
------------ ------------ ------------
Total long-lived assets ...... $ 92,274 $ 89,351 $ 72,195
============ ============ ============
</TABLE>
(a) Geographic revenues are based on the location of the customer.
(b) Long-lived assets are based on physical location.
30
<PAGE> 19
Five-Year Financial Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands, except per share amounts 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues ......................................... $ 748,546 $ 638,349 $ 515,460 $ 453,302 $ 410,212
Operating expenses
Payroll, production and distribution ........ 553,529 479,742 392,494 347,520 321,995
Selling, general and administrative ......... 64,082 59,054 43,632 41,619 38,483
Depreciation ................................ 21,087 17,327 13,779 11,135 9,072
Goodwill amortization ....................... 7,890 5,134 3,658 3,244 2,909
Merger costs ................................ -- -- 12,136(a) -- --
--------- --------- --------- --------- ---------
Total operating expenses ............... 646,588 561,257 465,699 403,518 372,459
--------- --------- --------- --------- ---------
Operating income ...................................... 101,958 77,092 49,761 49,784 37,753
Interest expense, net ................................. (13,281) 1,777 6,629 7,221 6,851
Income from continuing operations(b) .................. 68,371(c) 44,271(d) 23,084(e) 24,301(f) 16,262
Income from continuing operations after
extraordinary items, net of taxes ................ 68,371 43,396(g) 23,084 24,301 16,262
Earnings from continuing operations per
common share--diluted ............................ 0.90(c) 0.57(d) 0.30(e) 0.32(f) 0.23
Earnings from continuing operations after
extraordinary items per common share-- diluted ... 0.90(c) 0.56(g) 0.30(e) 0.32(f) 0.23
Cash dividends per common share .................. 0.06 0.04 0.03 0.03 --
Weighted-average common and common
equivalent shares outstanding-- diluted .......... 76,057 77,000 77,154 75,338 74,186
Segment Data
Revenues
Direct Marketing ............................ 493,898 425,489 330,255 268,257 233,751
Shoppers .................................... 254,648 212,860 185,205 185,045 176,461
--------- --------- --------- --------- ---------
Total revenues .............................. $ 748,546 $ 638,349 $ 515,460 $ 453,302 $ 410,212
========= ========= ========= ========= =========
Operating income
Direct Marketing ............................ $ 69,648 $ 54,360 $ 44,794 $ 37,774 $ 27,910
Shoppers .................................... 40,507 31,089 24,017 20,020 17,743
General corporate ........................... (8,197) (8,357) (19,050) (8,010) (7,900)
--------- --------- --------- --------- ---------
Total operating income ...................... $ 101,958 $ 77,092 $ 49,761 $ 49,784 $ 37,753
========= ========= ========= ========= =========
Other Data
Operating cash flow(h) ...................... $ 130,935 $ 99,553 $ 67,198(i) $ 64,163 $ 49,734
Capital expenditures ........................ 24,443 28,396 23,885 17,441 13,759
Balance Sheet Data (at end of period)
Property, plant and equipment ............... $ 92,274 $ 89,351 $ 72,195 $ 59,878 $ 53,081
Goodwill, net ............................... 290,831 250,363 142,053 99,528 92,391
Total assets ................................ 715,213 954,923 343,005 268,994 246,166
Total long-term debt ........................ -- -- 218,005 220,468 294,499
Total stockholders' equity .................. 577,091 566,237 252,692 201,856 137,845
</TABLE>
(a) Merger costs of $12.1 million related to DiMark merger. See Note B of Notes
to Consolidated Financial Statements.
(b) Represents income and earnings from continuing operations per common share
before extraordinary items.
(c) Includes non-recurring pension gain of $1.3 million, or two cents per share,
net of $0.8 million income tax expense. Excluding this gain, earnings were
$0.88 per share.
(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 $0.41 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 $0.31
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) Operating cash flow is defined as operating income plus depreciation and
goodwill amortization. Operating cash flow is not intended to represent cash
flow or any other measure of performance in accordance with generally
accepted accounting principles.
(i) Excluding 1996 merger costs, operating cash flow was $79,334.
31
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Harte-Hanks, Inc.:
We have audited the accompanying consolidated balance sheets of Harte-Hanks,
Inc. and subsidiaries as of December 31, 1998 and 1997, 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, 1998. 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,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
San Antonio, Texas
January 25, 1999
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 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
High Low High Low
-------- -------- -------- --------
<S> <C> <C> <C> <C>
First Quarter 23 7/8 17 3/8 14 7/8 12 7/8
Second Quarter 25 13/16 20 15/16 15 9/16 13 3/8
Third Quarter 26 21 9/16 16 15/32 14 21/32
Fourth Quarter 28 1/2 18 5/16 19 3/16 16 3/8
</TABLE>
In 1998, quarterly dividends were paid at the rate of 1.5 cents per share. In
1997, quarterly dividends were paid at the rate of 1 cent per share. 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 2,900 holders of record.
TRANSFER AGENT AND REGISTRAR
BankBoston
c/o 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 4, 1999, 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, Inc.
P.O. Box 269
San Antonio, Texas 78291-0269
32
<PAGE> 1
EXHIBIT 21
RESTRICTED SUBSIDIARIES
OF HARTE-HANKS , INC.
<TABLE>
<CAPTION>
State of
Name of Corporation Organization % 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%(6)
Harte-Hanks Pty. Limited Australia 100%(3)
Harte-Hanks Response Management/Austin, Inc. Delaware 100%
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 (shell corporation) England 100%(5)
Marketing Communications, Inc. Missouri 100%
Mars Graphic Services, Inc. New Jersey 100%(4)
NSO, Inc. Ohio 100%
Printing Management Services, Inc. Delaware 100%
PRO Direct Response Corp. New Jersey 100%(2)
Southern Comprint Co. California 100%
Spectral Resources, Inc. New York 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) 99.5% Owned by Harte-Hanks Delaware, Inc.
.5% Owned by Harte-Hanks , Inc.
<PAGE> 1
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors
Harte-Hanks, 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, Inc. of (i) our report dated January 25, 1999 relating to the
consolidated balance sheets of Harte-Hanks, Inc. and subsidiaries as of December
31, 1998 and 1997, 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, 1998, which report appears in the 1998 annual report to
shareholders which is incorporated by reference in the December 31, 1998 annual
report on Form 10-K of Harte-Hanks, Inc. and (ii) our report dated January 25,
1999, relating to the related financial statement schedule as of and for each of
the years in the three-year period ended December 31, 1998, which report appears
in the December 31, 1998 annual report on Form 10-K of the Company.
/s/ KPMG LLP
San Antonio, Texas
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 30,367
<SECURITIES> 138,874
<RECEIVABLES> 130,764
<ALLOWANCES> 3,246
<INVENTORY> 6,485
<CURRENT-ASSETS> 325,813
<PP&E> 190,342
<DEPRECIATION> 98,068
<TOTAL-ASSETS> 715,213
<CURRENT-LIABILITIES> 116,484
<BONDS> 0
0
0
<COMMON> 75,789
<OTHER-SE> 501,302
<TOTAL-LIABILITY-AND-EQUITY> 715,213
<SALES> 748,546
<TOTAL-REVENUES> 748,546
<CGS> 553,529
<TOTAL-COSTS> 617,611
<OTHER-EXPENSES> (14,394)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193
<INCOME-PRETAX> 116,159
<INCOME-TAX> 47,788
<INCOME-CONTINUING> 68,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,371
<EPS-PRIMARY> .94
<EPS-DILUTED> .90
</TABLE>
