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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-7120
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HARTE-HANKS, 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:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
- ------------------- ----------------------------
Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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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 1, 2000, based on the $21.9375 per share closing price for the
Company's Common Stock on the New York Stock Exchange on such date:
approximately $963,000,000. .
SHARES OUTSTANDING AT MARCH 1, 2000:
Common Stock - 68,245,117 shares
DOCUMENTS INCORPORATED BY REFERENCE:
The Company's Annual Report to Stockholders for the year ended December 31,
1999 (incorporated in Part II to the extent provided in Items 5, 6, 7 and 8
hereof).
Definitive Proxy Statement for the Company's May 2, 2000 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, 1999
<TABLE>
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Page
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Part I
Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
Part III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 11
Item 12. Security Ownership of Certain Beneficial Owners and
Management 11
Item 13. Certain Relationships and Related Transactions 11
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. 12
Signatures 16
</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 and interactive 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 in California and Florida, while its direct and interactive marketing
business operates both nationally and internationally. The Company believes that
marketing is undergoing a transition from traditional mass media marketing to
targeted marketing and customer relationship management. 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 customers. Direct and interactive marketing, which represents 67.4% of
the Company's revenue, is leading the movement toward highly targeted marketing
and customer relationship management (CRM). The Company's shopper business
applies similar targeting principles. 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
$829.8 million in 1999.
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 and interactive
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 and interactive marketing services. Harte-Hanks'
direct and interactive marketing clients include many of America's largest
retailers, high technology firms, banks, mutual funds companies, pharmaceutical
companies, healthcare organizations and insurance companies, along with a
growing number of clients in such emerging markets as telecommunications,
automotive, utilities and travel. Its client base is both domestic and
international. In 1999, Harte-Hanks Direct Marketing had revenues of $559.3
million, which accounted for 67.4% of the Company's revenues.
Harte-Hanks Direct Marketing offers a complete range of specialized,
coordinated and integrated direct and interactive marketing services from a
single source. These services are organized into three broad sectors -
CRM/response management, CRM/database and marketing services.
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In 1999, Harte-Hanks made three acquisitions in its direct and interactive
marketing business segment. In the CRM/response management sector, Harte-Hanks
expanded its services to the high-tech and communications industries through the
acquisition of ZD Market Intelligence, renamed Harte-Hanks Market Intelligence,
a leading provider of database products and solutions to the high-tech and
communications industries in the United States, Canada and Europe. Harte-Hanks
further expanded its CRM/database capabilities through the acquisition of LYNQS
Newmedia of Kansas City, Missouri, a developer of new media applications,
including sophisticated Internet and Intranet software applications, for the
financial services, pharmaceutical and other industries. Harte-Hanks also
strengthened its marketing services capabilities through the acquisition of
Direct Marketing Associates, Inc. of Baltimore, Maryland, a leading provider of
integrated direct marketing services to commercial, government and non-profit
organizations.
CRM/RESPONSE MANAGEMENT
Harte-Hanks Response Management manages the inquiries clients receive from
their marketing efforts, whether from World Wide Web sites, email, 1-800
numbers, trade shows or fax programs. These inquiries or 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 12.5
million transactions in 1999, an increase of more than 80% over 1998. In
addition to qualifying and distributing sales leads, the Internet is being used
to register attendees for seminars and training events, to manage open-ended
electronic mail responses traditionally handled by phone and to provide e-care
services. 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 expanded its services to the high-tech and communications
industries by the October 1999 acquisition of ZD Market Intelligence, renamed
Harte-Hanks Market Intelligence, a leading provider of database products and
solutions to the high-tech and communications industries. The combination
creates strong cross-selling opportunities among both Harte-Hanks and
Harte-Hanks Market Intelligence customers. Harte-Hanks Market Intelligence's
database content combined with Harte-Hanks resources in CRM/response management
and CRM/database integration creates real end-to-end marketing solutions for
technology customers.
The Company increased its Internet-driven opportunities by forming a number
of strategic alliances in the interactive arena. Harte-Hanks signed a reseller
and systems integration agreement with E.piphany, a leader in customer-centric
analytic applications, which allows the Company to offer E.piphany Web-based
applications to help businesses connect and analyze customer information.
Harte-Hanks entered into a strategic relationship and reseller agreement with
net.Genesis Corp., a leader in e-business intelligence solutions. Through this
alliance, the companies are working together to integrate net.Genesis software
with Harte-Hanks enterprise-side products. Harte-Hanks formed an alliance with
BroadVision, a worldwide supplier of one-to-one e-business applications for
relationship management across the extended enterprise. The alliance allows the
Company to provide clients full-spectrum customer relationship management
solutions utilizing the enterprise business and e-commerce power of Broadvision.
Harte-Hanks entered into a strategic alliance and made an equity investment in
Digital Impact, a leader in the e-mail marketing industry, enabling the Company
to offer its clients privately labeled e-mail marketing services. Harte-Hanks
further strengthened its e-mail marketing services through an alliance with
eGain, a developer of e-mail response management systems. These alliances allow
comprehensive customer relationship management, including pre-sale, sale and
post-sale services. With these additions, the Company now provides multiple
options for live interaction, e-commerce and e-fulfillment, e-mail response
services, 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 CRM/response management
activities. These databases help clients measure the return on their marketing
communications and make more informed decisions about future marketing efforts.
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The Company provides CRM/response management services at its facilities in
Austin, Texas; Dallas, Texas; Los Angeles, California; La Jolla, California; San
Diego, California; Sunnyvale, California; West Bridgewater, Massachusetts;
Cambridge, Massachusetts; Cherry Hill, New Jersey; Clearwater, Florida; and
Langhorne, Pennsylvania. These centers have some industry specialization and are
linked together to support certain clients that have volume spikes or high
growth needs.
The Company also provides CRM/response management services internationally
through offices in Darmstadt, Germany; Dublin, Ireland; Hasselt, Belgium;
Madrid, Spain; Sevres, France; and Thatcham, United Kingdom.
CRM/DATABASE
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 introduced an
interactive Customer Relationship Management system called Allink Agent(TM) that
enables marketers to optimize customer and prospect communications across all
touch points in the enterprise. 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 new Relationship Builder(TM) product is a
combination of software tools and processes to construct and maintain customer
centric databases. Allink Segment(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 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.
CRM/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 CRM/database services
to new industries and markets by modifying its existing technology. The Company
currently provides CRM/database services to all of its primary markets in
addition to a range of emerging markets for which 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 comes the translation into marketing
programs. Increasingly clients seek execution programs as part of the data-based
offerings. These are provided by the Harte-Hanks database agencies which create
the plan to manage direct and interactive marketing communication efforts. These
efforts, which have a base in the health care/insurance and telecommunication
markets have been expanded into retail and utilities and will further expand
into other markets. The capabilities of the CRM/database services group were
increased by the formation of an Internet marketing arm, Harte-Hanks
Interactive, and the recently acquired LYNQS Newmedia.
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The Company provides CRM/database services at its facilities in Baltimore,
Maryland; Billerica, Massachusetts; Heathrow, Florida; Kansas City, Kansas; New
York, New York; Piscataway, New Jersey; River Edge, New Jersey; Langhorne,
Pennsylvania; and Woodstock, New York.
The Company also provides CRM/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.
Harte-Hanks strengthened its marketing services sector through its May
acquisition of Direct Marketing Associates, Inc. (DMA) of Baltimore, Maryland, a
leading provider of integrated direct marketing services to commercial,
government and non-profit organizations. During 1999 DMA combined with
Harte-Hanks' marketing services business in Baltimore to take advantage of the
expanded capabilities and operational synergies existing between the two
operations.
Depending upon the needs of clients, Harte-Hanks marketing services
capabilities are provided in a specialized, coordinated and integrated approach
through eleven primary facilities nationwide.
SALES AND MARKETING
Harte-Hanks' national direct and interactive 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; Hasselt, Belgium; Darmstadt, Germany; Madrid Spain;
Dublin, Ireland; Thatcham United Kingdom; Sevres, France Additionally, the
Company has affiliates in Singapore. The sales forces, with industry specific
knowledge and experience, emphasize cross-selling the range of direct and
interactive 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 and interactive marketing services. For certain CRM/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 CRM/response management and planning
fees for many of the data-based solutions.
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FACILITIES
Direct and interactive marketing services are provided at the following
facilities:
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CRM/RESPONSE MANAGEMENT MARKETING SERVICES (CONTINUED)
Austin, Texas Cincinnati, Ohio
Cambridge, Massachusetts Dallas/Fort Worth, Texas
Cherry Hill, New Jersey Deerfield Beach, Florida
Clearwater, Florida Forty Fort, Pennsylvania
Dallas, Texas Fullerton, California
La Jolla, California Jacksonville, Florida
Langhorne, Pennsylvania Kansas City, Kansas
Los Angeles, California Memphis, Tennessee
San Diego, California New York, New York
Sunnyvale, California Sacramento, California
West Bridgewater, Massachusetts West Bridgewater, Massachusetts
Westville, New Jersey
CRM/DATABASE
Baltimore, Maryland NATIONAL SALES HEADQUARTERS
Billerica, Massachusetts Cincinnati, Ohio
Heathrow, Florida Kansas City, Kansas
Kansas City, Kansas
Langhorne, Pennsylvania INTERNATIONAL OFFICES
New York, New York Darmstadt, Germany
Piscataway, New Jersey Dublin, Ireland
River Edge, New Jersey Hasselt, Belgium
Woodstock, New York London, England
Madrid, Spain
MARKETING SERVICES Melbourne, Australia
Baltimore, Maryland Sao Paulo, Brazil
Bellmawr, New Jersey Sevres, France
Bloomfield, Connecticut Thatcham, United Kingdon
Toronto, Canada
</TABLE>
COMPETITION
Harte-Hanks' direct and interactive 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 CRM/database and CRM/response management 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
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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, 1999, Shoppers delivered approximately 9.5 million
shopper packages 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, Sacramento and Stockton) and South
Florida. (Shopper publications overlap in approximately 200,000 households in
South Orange County.) The Company's California publications account for 88% of
Shopper's weekly circulation.
Harte-Hanks publishes 783 individual shopper editions each week distributed
to zones of approximately 12,100 households each. This allows single-location,
local advertisers to saturate a single geographic zone, while enabling
multiple-location advertisers to saturate multiple zones. This unique delivery
system gives large and small advertisers alike a cost-effective way to reach
their target markets. The Company believes that its zoning capabilities and
production technologies have enabled it to saturate and target 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 1999,
Harte-Hanks Shoppers had revenues of $270.5 million, accounting for
approximately 32.6% of the Company's revenues.
During the period 1995 through 1999, 1.0 million 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 8.4 million
households in California, or nearly 72% of the state's total.
PUBLICATIONS
The following table sets forth certain information with respect to shopper
publications:
<TABLE>
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December 31, 1999
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Number of
Market Publication Name Circulation Zones
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Greater Los Angeles PennySaver/South 4,959,000 422
Coast Shopper
Greater San Diego PennySaver/Bargain 1,421,000 117
Bulletin/El Informador
Northern California PennySaver/Magic Ads 2,020,000 151
South Florida The Flyer 1,096,000 93
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Total: 9,496,000 783
</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
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audiotext voice mail in a pay-per-call format. In addition, shoppers offer
advertising over its internet sites - www.pennysaverusa.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.
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 31 sales offices. At the end of 1998 and during 1999, the Company
consolidated two Northern California production facilities into one in the
Sacramento. The consolidation will facilitate future expansions in the Northern
California marketplace.
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.
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EMPLOYEES
As of December 31, 1999, Harte-Hanks employed 7,157 full-time employees and
988 part-time employees, as follows: direct marketing - 5,319 full-time and 580
part-time employees; shoppers - 1,817 full-time and 407 part-time employees; and
corporate office - 21 full-time employees and 1 part-time employee. None of the
work force is represented by labor unions. The Company considers its relations
with its employees to be good.
FACILITIES
Harte-Hanks' executive offices are located in San Antonio, Texas and occupy
approximately 17,000 square feet in leased premises. The Company's business is
conducted in facilities nationwide containing aggregate space of approximately
3.2 million square feet. Approximately 3.1 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 and
Westville, New Jersey marketing service 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.
The Company made the necessary coversions to make the Company Year 2000
compatible, spending $4.9 million in this effort. No material problems were
encountered throughout the Company associated with the date rollover. The minor
problems that were encountered did not affect mission critical systems, did not
affect customers, did not disrupt business operations, did not impact revenue
and were corrected in a timely manner.
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, 1999 at page 31.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from the Company's Annual Report to
Stockholders for the year ended December 31, 1999 at page 30.
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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, 1999 at pages 13 through 17.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are affected by changes in short-term interest rates
as a result of its revolving credit agreements, which bear interest at floating
rates. The Company does not believe that it has has significant exposure to
market risks associated with changing interest rates as of December 31, 1999.
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, 1999, which is incorporated herein
by reference: All Consolidated Financial Statements (pages 18 through 21); all
Notes to Consolidated Financial Statements (pages 22 through 29); and the
Independent Auditors' Report (page 31). With the exception of the information
herein expressly incorporated by reference, the Company's Annual Report to
Stockholders for the year ended December 31, 1999 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 27, 2000 for the May 2, 2000 Annual
Meeting of Stockholders under the caption "Management -- Directors and Executive
Officers" on page 7.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 27, 2000 for the May 2, 2000 Annual
Meeting of the Stockholders under the caption, "Executive Compensation and Other
Information" on pages 8 through 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the information in the Company's
definitive proxy statement dated March 27, 2000 for the May 2, 2000 Annual
Meeting of Stockholders under the caption "Security Ownership of Management and
Principal Stockholders" on pages 5 and 6.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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12
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, 1999 attached hereto:
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Operations, Years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Cash Flows, Years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity, Years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) The following accountants' report and financial schedule for years
ending December 31, 1999, 1998 and 1997 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> 13
13
(a) (3) EXHIBITS
Exhibit
No. Description of Exhibit
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).
<PAGE> 14
14
Exhibit
No. Description of Exhibit
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) 364-Day Credit Agreement dated as of November 4, 1999 between
Harte-Hanks, Inc. and the Lenders named therein [$100 million] (filed
as Exhibit 4(a) to the Company's form 10-Q for the nine months ended
September 30, 1999 and incorporated by reference herein).
4(b) Three-Year Credit Agreement dated as of November 4, 1999 between
Harte-Hanks, Inc. and the Lenders named therein [$100 million] (filed
as Exhibit 4(b) to the Company's form 10-Q for the nine months ended
September 30, 1999 and incorporated by reference herein).
4(c) Other long term debt instruments are not being filed pursuant to
Section (b) (4) (ii) 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) Form of Severance Agreement between Harte-Hanks, Inc. and Richard M.
Hochhauser dated as of January 25, 2000.
*10(f) Harte-Hanks, Inc. Amended and Restated Restoration Pension Plan dated
as of January 1, 2000.
<PAGE> 15
15
Exhibit
No. Description of Exhibit
10(g) 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(h) 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(i) 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).
10(j) Harte-Hanks, Inc. Deferred Compensation Plan (filed as Exhibit 10(I)
to the Company's Form 10-K for the year ended December 31, 1998 and
incorporated by reference herein).
*11 Statement Regarding Computation of Net Income (Loss) Per Common Share.
*13 Annual Report to Stockholders (only those portions incorporated by
reference into the Form 10-K are filed herewith).
*21 Subsidiaries of the Company
*23 Consent of KPMG LLP
*27 Financial Data Schedule
- ---------------------
*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 55.
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> 16
16
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
Chairman & Chief Executive Officer
By: /s/ Jacques D. Kerrest
---------------------------------------
Jacques D. Kerrest
Senior Vice President, Finance and
Chief Financial Officer
Date: March 29, 2000
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, Vice Chairman Christopher M. Harte, Director
/s/ Larry Franklin /s/ James L. Johnson
- -------------------------------- -----------------------------------
Larry Franklin, Chairman 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> 17
INDEPENDENT AUDITORS' REPORT 10-K SCHEDULE
The Board of Directors and Stockholders
Harte-Hanks, Inc.:
Under date of January 26, 2000, we reported on the consolidated balance sheets
of Harte-Hanks, Inc. and subsidiaries as of December 31, 1999 and 1998 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, 1999,
as contained in the 1999 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 1999. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule as referred to 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 26, 2000
<PAGE> 18
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, 1999 ...... $3,246 $1,825 $1,320 $3,751
====== ====== ====== ======
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
====== ====== ====== ======
</TABLE>
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a)
to the Company's Registration Statement No. 33-69202 and
incorporated by reference herein).
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> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <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) 364-Day Credit Agreement dated as of November 4, 1999
between Harte-Hanks, Inc. and the Lenders named therein
[$100 million] (filed as Exhibit 4(a) to the Company's form
10-Q for the nine months ended September 30, 1999 and
incorporated by reference herein).
4(b) Three-Year Credit Agreement dated as of November 4, 1999
between Harte-Hanks, Inc. and the Lenders named therein
[$100 million] (filed as Exhibit 4(b) to the Company's form
10-Q for the nine months ended September 30, 1999 and
incorporated by reference herein).
4(c) Other long term debt instruments are not being filed
pursuant to Section (b)(4)(ii) 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) Form of Severance Agreement between Harte-Hanks, Inc. and
Richard M. Hochhauser dated as of January 25, 2000.
*10(f) Harte-Hanks, Inc. Amended and Restated Restoration Pension
Plan dated as of January 1, 2000.
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10(g) 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(h) 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(i) 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).
10(j) Harte-Hanks, Inc. Deferred Compensation Plan (filed as
Exhibit 10(I) to the Company's Form 10-K for the year ended
December 31, 1998 and incorporated by reference herein).
*11 Statement Regarding Computation of Net Income (Loss) Per
Common Share.
*13 Annual Report to Stockholders (only those portions
incorporated by reference into the Form 10-K are filed
herewith).
*21 Subsidiaries of the Company
*23 Consent of KPMG LLP
*27 Financial Data Schedule
</TABLE>
- ---------------------
*Filed herewith
<PAGE> 1
1 EXHIBIT 10(e)
AMENDED
SEVERANCE AGREEMENT
AGREEMENT made as of the 25th of January, 2000, between Harte-Hanks, Inc.,
a Delaware corporation (the "Company"), and Richard M. Hochhauser (the
"Executive").
WHEREAS, the Executive has served as President of the Company since 1999,
as Chief Operating Officer since 1998 and as a member of the Board of Directors
(the "Board") since 1996; and
WHEREAS, the Executive possesses an intimate knowledge of the business and
affairs of the Company, its policies, methods, personnel and plans for the
future and has acquired contacts of considerable value to the Company; and
WHEREAS, the Board recognizes that the Executive's contribution to the
growth and success of the Company has been substantial and wishes to offer an
inducement to the Executive to remain in the employ of the Company; and
WHEREAS, the Company desires to amend Executive's existing severance
agreement to read as hereinafter provided, in order to recognize Executive's
increased responsibilities with the Company;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, this Agreement sets
forth benefits which the Company will pay to Executive in the event of
termination of Executive's employment during the Term of this Agreement:
1. Term. The term of this Agreement shall be effective upon its execution
and continue until the earlier of (i) the expiration of the tenth anniversary of
such execution, provided, that if the Executive's employment with the Company is
terminated (other than for reasons set forth in Section 3(a)(1)(i), (ii) or
(iii)), then this Agreement will continue until the expiration of the second
anniversary of the Termination Date, (ii) the Executive's death or (iii) the
Executive's earlier voluntary retirement (except as provided in Section 3(a)(2))
(the "Term").
2. Definitions.
(a) Cause. For "Cause" means that the Executive shall have committed:
(i) an intentional material act of fraud or embezzlement in
connection with his duties or in the course of his employment with the
Company;
(ii) intentional wrongful material damage to property of the
Company; or
(iii) intentional wrongful disclosure of material secret processes
or material confidential information of the Company.
For the purposes of this Agreement, no act, or failure to act, on the
part of the Executive will be deemed "intentional" unless done, or
omitted to be done, by the Executive not in
<PAGE> 2
2
good faith and without reasonable belief that his action or omission was
in the best interest of the Company.
(b) Code. The "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) Disability. "Disability" shall have the meaning given to disability
in the Company's disability insurance plan.
(d) Severance Compensation. The "Severance Compensation" shall be a lump
sum cash amount equal to 200% of the sum of (A) the annual base salary of
the Executive in effect immediately prior to the Termination Date, plus
(B) the average of the bonus or incentive compensation of the Executive
received from the Company for the two fiscal years preceding the
Termination Date.
(e) Termination Date. The "Termination Date" shall be the date upon
which the Executive or the Company effectively terminates the employment
of the Executive.
3. Rights of Executive Upon Termination.
(a) The Company shall provide the Executive, within ten days following
the Termination Date, Severance Compensation in lieu of compensation to
the Executive for periods subsequent to the Termination Date, if any of
the following events shall occur:
(1) the Company terminates the Executive's employment during the
Term of this Agreement other than for any of the following reasons:
(i) the Executive dies;
(ii) the Executive suffers a Disability and is unable to work
for a period of 180 consecutive days; or
(iii) for Cause,
(2) the Executive terminates his employment after the occurrence of
at least one of the following events:
(i) Without the mutual agreement of the Company and the
Executive (a) a change in the nature or scope of the authorities,
functions or duties attached to the position with the Company that
the Executive had immediately prior to the Termination Date; (b) a
reduction in the Executive's salary, bonus or incentive
compensation; (c) a significant reduction in scope or value of other
monetary or nonmonetary benefits (other than benefits pursuant to a
broad based employee benefit plan) to which the Executive was
entitled from the Company; any of which is not remedied within ten
calendar days after receipt by the Company of written notice from
the Executive of such change, reduction, alteration or termination,
as the case may be;
<PAGE> 3
3
(ii) A determination by the Executive made in good faith that as
a result of a change in policy of the Company made by the Board, he
has been rendered substantially unable to carry out, or has been
substantially hindered in the performance of, the authorities,
functions or duties attached to his position immediately prior to
the Termination Date, which situation is not remedied within ten
calendar days after receipt by the Company of written notice from
the Executive of such determination;
(iii) The Company shall require the Executive to relocate his
principal location of work from the location thereof at the time
this Agreement was entered or to travel away from his office in the
course of discharging his responsibilities or duties significantly
more than required of him at the time this Agreement was entered
without, in either case, the Executive's prior written consent; or
(iv) The Company commits any material breach of this Agreement.
(b) Severance Compensation will not be subject to offset or mitigation.
(c) Upon termination of the Executive's employment (except for reasons
set forth in Section 3(a)(1)(i), (ii) or (iii)), all stock options not yet
exercised will become vested and fully exercisable by the Executive. Such
options shall remain exercisable for their original term, notwithstanding
the Executive's termination of employment; provided, however, that the
Company has the right to require the Executive to exercise such options
within 90 days after receipt of written notice to the Executive. If the
Executive fails to exercise his options within such 90-day period the
Company has the right to cancel the options.
(d) If the Executive's employment is terminated (except for reasons set
forth in Section 3(a)(1)(i), (ii) or (iii)), the Company shall pay to the
Executive, in addition to the Severance Compensation payable hereunder, a
lump sum cash payment in the amount necessary to make continuation
coverage (COBRA) payments under the Company's group health insurance plan
for a period of 18 months following the Termination Date.
(e) Notwithstanding the above or any other provisions of this Agreement,
in no event shall the Company pay or be obligated to pay the Executive an
amount which would be an Excess Parachute Payment. For purposes of this
Agreement, the term "Excess Parachute Payment" means any payment or any
portion thereof which would be an "excess parachute payment" within the
meaning of Section 280G of the Code, and would result in the imposition of
an excise tax under Section 4999 of the Code, in the opinion of tax
counsel selected by the Company and acceptable to the Executive. In the
event, and only to the extent that the payment hereunder must be reduced
to avoid any Excess Parachute Payment, such reduction shall be applied in
the following order:
(i) to cash amounts payable as Severance Compensation;
(ii) to amounts payable for the maintenance of continuation coverage
(COBRA) payments under the Company's group health insurance plan;
<PAGE> 4
4
(iii) to the accelerated vesting of options as provided in Section
3(c).
4. Successors; Binding Agreement. This Agreement will be binding upon the
Company, its successors and assigns, and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
5. Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or received after being mailed by
United States registered mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Richard M. Hochhauser
c/o Harte-Hanks, Inc.
200 Concord Plaza Drive, Suite 800
San Antonio, Texas 78216
If to the Company:
Harte-Hanks, Inc.
200 Concord Plaza Drive, Suite 800
San Antonio, Texas 78216
Attention: Donald R. Crews
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
6. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, unless specifically
referred to herein, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the substantive laws of the State of Delaware, without regard to principles
of conflicts of law. This Agreement amends in full and replaces all prior
agreements, both written and oral, between the Company and the Executive with
respect to the subject matter of this Agreement.
7. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
<PAGE> 5
5
8. Employment Rights. Nothing expressed or implied in this Agreement shall
create any right or duty on the part of the Company or the Executive to have the
Executive remain in the employment of the Company. The Executive may, at any
time during the Term, upon the giving of 30 days prior written notice, terminate
his employment. If this Agreement or the employment of the Executive is
terminated under circumstances in which the Executive is not entitled to any
Severance Compensation, neither the Executive nor the Company will have any
further obligation or liability hereunder.
9. Withholding of Taxes. The Company may withhold from any amounts payable
under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling; provided,
however, that no withholding pursuant to Section 4999 of the Code shall be made
unless, in the opinion of tax counsel selected by the Company and acceptable to
the Executive, such withholding relates to payment which result in the
imposition of an excise tax pursuant to Section 4999 of the Code.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
the date and year first above written.
HARTE-HANKS, INC.
By: /s/ Larry Franklin
------------------------------------
Title: Chairman and CEO
---------------------------------
/s/ Richard M. Hochhauser
----------------------------------------
Richard M. Hochhauser
<PAGE> 1
EXHIBIT 10(f)
1
HARTE-HANKS INC.
RESTORATION PENSION PLAN
As Amended and Restated Effective January 1, 2000
1. Introduction
The HARTE-HANKS, INC. RESTORATION PENSION PLAN (hereinafter referred to as
the "Restoration Plan") was 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
(except as otherwise provided under Section 4 hereof) 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. Effective as of January 1,
2000, the Restoration Plan is being amended and restated in its entirety as
hereinafter set forth in this instrument. 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 encourage and assure their continued service to Harte-Hanks by making more
adequate provisions for their future retirement security.
2. Definitions
As used herein, the term "Participant" means an individual who has become a
participant in this Restoration Plan in accordance with the provisions of
Section 4 hereof and whose interest hereunder has not been fully paid. The term
"Employer" shall include Harte-Hanks and each Employer as defined in the Basic
Plan. "Covered Compensation" shall mean Compensation as defined in the Basic
Plan without regard to the limitation imposed by Section 401(a)(17) of the Code,
except that (a) the amount of bonus that otherwise would have been included in
the Participant's Compensation for a given calendar year shall not exceed an
amount equal to the 100% potential bonus level established for that Participant
for the year for which such bonus was paid and (b) any salary or bonuses
deferred by the Participant under an unfunded, nonqualified deferred
compensation plan of the Employer pursuant to the Participant's election shall
be included in the Participant's Covered Compensation for the purposes of the
Restoration Plan in the calendar year during which such salary or bonuses would
have been paid to the Participant in the absence of such election to defer. The
term "Vesting Date" is defined in Section 5 hereof. All other terms used in this
Restoration Plan shall have the same meaning assigned to them under the
provisions of the Basic Plan unless otherwise qualified by the context.
3. Administration
This Restoration Plan shall be administered by a committee appointed by the
Board of Directors of Harte-Hanks from time to time (hereinafter referred to as
the "Committee"). The Committee shall administer the Restoration Plan in a
manner consistent with the administration of the Basic Plan, as from
<PAGE> 2
2
time to time amended and in effect, except that this Restoration Plan shall be
administered as an unfunded plan that is not intended to meet the qualification
requirements of Section 401(a) of the Code. The Committee shall have full power
and authority to interpret, construe, and administer this Restoration Plan and
the Committee's interpretations and construction thereof, and actions
thereunder, including the amount or recipient of the payment to be made, shall
be binding and conclusive on all persons for all purposes, subject to any rights
of the Participant to make a claim for benefits under Title I of the Employee
Retirement Income Security Act of 1974, as amended.
4. Participation
Participation in this Restoration Plan shall be limited to those employees
of the Employer who are designated as Participants hereunder by the Board of
Directors of Harte-Hanks, whether or not such persons are eligible for benefits
under the Basic Plan. If an employee designated by the Board of Directors to
participate in this Restoration Plan is not a participant in the Basic Plan,
then, for purposes of this Restoration Plan, such person shall be considered as
though he were a participant eligible for a benefit under the Basic Plan and the
Credited Service of such person shall be deemed to commence on the later of such
person's date of hire or the date on which such person's Employer was acquired
by Harte-Hanks. No person shall have an automatic right to be selected as a
Participant or to continue as an active Participant once selected.
5. Eligibility for Benefits
A Participant shall be eligible for a benefit under the Restoration Plan if
as of his or her date of termination of employment with the Employer, he or she
has reached his or her "Vesting Date." The term "Vesting Date" as used herein
shall mean either:
(a) January 1, 1996, if the Participant is an officer of Harte-Hanks with
the title of a Senior Vice President or a higher position; or
(b) the earlier to occur of the date on which he or she attains age 55
years or the date on which he or she completes 20 years of Credited
Service, if the Participant is an officer of Harte-Hanks with a title
below a Senior Vice President.
If the employment of a Participant is terminated prior to his or her Vesting
Date, no benefit shall be payable under the Restoration Plan.
6. Amount of Benefit Provided Under Restoration Plan
The monthly benefit payable under this Restoration Plan to or on behalf of
a Participant whose service with the Employer is terminated for any reason on or
after his or her Vesting Date shall be an amount equal to the lesser of:
(a) an amount equal to:
(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
<PAGE> 3
3
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;
minus
(ii) the monthly benefit that is actually 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;
or
(b) an amount equal to:
(i) 50% of the Participant's average monthly Covered Compensation, for
the five successive calendar years out of the 10 completed
calendar years immediately preceding the first day of the month
coincident with or next following his or her date of termination
of employment that give the highest average monthly rate;
minus
(ii) the monthly benefit that is actually 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.
Provided, however, in the event that the Participant's Basic Plan benefits are
increased after the date of commencement of the Participant's benefits under the
Basic Plan due to any cost-of-living adjustment announced by the Internal
Revenue Service pursuant to the provisions of Section 415(d) of the Code or for
any other reason, and any such increase would cause a reduction in the amount
determined under the above provisions of this section, the amount of the
benefits payable to or on behalf of the Participant under this Restoration Plan
on and after the date of such increase shall be correspondingly reduced.
<PAGE> 4
4
7. Payment of Restoration Plan Benefit
The benefit payable to a Participant, or on his or her behalf to the
Participant's Beneficiary, under this Restoration Plan shall be payable
coincident with and in the same manner as the payment of the benefits to such
Participant or Beneficiary under the Basic Plan; provided, however, that if a
Participant in this Restoration Plan is not a participant in the Basic Plan,
then the benefit payable to such Participant under this Restoration Plan shall
be paid or commence as of the earliest date that a benefit would have been
payable to the Participant under the Basic Plan (if he were participating in the
Basic Plan) and shall be paid in the normal form of payment provided under the
Basic Plan unless such Participant elects in writing prior to the calendar year
of payment to receive his benefit under this Restoration Plan in an optional
form provided under the Basic Plan, in which case the benefit under this
Restoration Plan shall be paid in such optional form and shall be subject to the
same adjustment factors as are used under the Basic Plan to convert the normal
form to such optional form. The Beneficiary or Beneficiaries of a Participant
under the Basic Plan shall be the Beneficiary or Beneficiaries of such
Participant under this Restoration Plan; provided, however, any Participant in
the Restoration Plan who is not a participant in the Basic Plan shall be
entitled to complete a beneficiary designation form provided by the Committee to
designate a Beneficiary under this Restoration Plan. For the purposes of this
Restoration Plan, a Participant's service with the Employer shall not be
considered to have terminated so long as such Participant is in the employment
of the Employer or a Controlled Group Member.
In the event that a Participant's benefits under the Basic Plan commence
prior to his or her date of termination of employment with the Employer, the
Participant's benefit under this Restoration Plan, for the period the
Participant remains employed with the Employer, shall be determined as though
his or her employment had terminated on the date of commencement of his or her
benefits under the Basic Plan, and upon the Participant's actual termination of
employment with the Employer, his or her benefit under this Restoration Plan
shall be redetermined.
All benefits payable under this Restoration Plan shall be paid from the
general assets of Harte-Hanks. Harte-Hanks shall not be required to set aside
any funds to discharge its obligations hereunder, but Harte-Hanks may set aside
such funds if it chooses to do so. Any and all funds so set aside shall remain
subject to the claims of the general creditors of Harte-Hanks, present and
future. No Participant, the Participant's Beneficiary or Beneficiaries, or any
other person shall have, under any circumstances, any interest whatever in any
particular property or assets of Harte-Hanks by virtue of this Restoration Plan,
and the rights of the Participant, the Participant's Beneficiary or
Beneficiaries, or any other person who may claim a right to receive benefits
under this Restoration Plan shall be no greater than the rights of an unsecured
general creditor of Harte-Hanks.
8. Amendment and Termination
The Board of Directors of Harte-Hanks may at any time, retroactively or
prospectively, amend or terminate this Restoration Plan subject to the following
restrictions. No amendment may be made which would deprive a Participant,
without his or her consent, of a right to receive benefits hereunder which have
already vested and matured in such Participant. If this Restoration Plan should
be terminated, Harte-Hanks shall be liable for any vested benefits accrued under
this Restoration Plan as of the date of such action. For each Participant who is
an active Employee and who had reached his or her Vesting Date as of such date
of termination, the amount of the Participant's vested accrued benefit shall be
the benefit under Section 6 hereof, determined as of the date of termination of
this Restoration
<PAGE> 5
5
Plan (determined on the basis of such Participant's presumed termination of
service on such date of termination of this Restoration Plan but the offset for
the Basic Plan in Section 6(a)(ii) or 6(b)(ii) hereof shall be determined as of
the actual date of his or her termination of service). Payment of such accrued
benefit shall be deferred until the date the Participant's benefits commence
under the Basic Plan or, if he or she is not a participant in the Basic Plan,
the earliest date on which the Participant's benefits would have commenced under
the Basic Plan if he or she were a participant in the Basic Plan. If the
Participant had not reached his or her Vesting Date as of such date of
termination of this Restoration Plan, no benefit shall be payable under this
Restoration Plan. For each Participant who is a former Employee, the vested
accrued benefit shall be the actuarially determined benefit as of such date of
termination which such Participant or his or her Beneficiary is receiving under
this Restoration Plan.
9. Benefits Nonforfeitable Upon Change of Control
In the event of a "Change of Control" (as defined below), each Participant
who is in the employment of the Employer shall be deemed to have reached his or
her Vesting Date as of such date of "Change of Control."
A "Change of Control" of Harte-Hanks shall have occurred if any of the
following events shall occur:
(a) Harte-Hanks is merged, consolidated or reorganized into or with
another corporation or other legal person and as a result of such merger,
consolidation or reorganization less than 60% of the combined voting power
of the then outstanding securities of the remaining corporation or legal
person or its ultimate parent immediately after such transaction is
received in respect of or in exchange for voting securities of Harte-Hanks
pursuant to such transaction;
(b) Harte-Hanks sells all or substantially all of its assets to any
other corporation or other legal person and as a result of such sale less
than 60% of the combined voting power of the then outstanding securities of
such corporation or legal person or its ultimate parent immediately after
such transaction is received in respect of or in exchange for voting
securities of Harte-Hanks pursuant to such sale;
(c) Any person (including any "person" as such term is used in
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), has become the
beneficial owner (as the term "beneficial owner" is defined under Rule
13d-3 or any successor rule or regulation promulgated under the Exchange
Act) of securities which when added to any securities already owned by such
person would represent in the aggregate 30% or more of the combined voting
power of the then outstanding securities of Harte-Hanks; or
(d) Such other events that cause a change of control of Harte-Hanks
as determined by the Board in its sole discretion.
10. Restrictions on Assignment
The benefits provided hereunder are intended for the personal security of
persons entitled to payment under this Restoration Plan and are not subject in
any manner to the debts or other obligations of the persons to whom they are
payable. The interest of a Participant or his or her Beneficiary or
Beneficiaries may not be sold, transferred, assigned, or encumbered in any
manner, either voluntarily or
<PAGE> 6
6
involuntarily, and any attempt so to anticipate, alienate, sell, transfer,
assign, pledge, encumber, or charge the same shall be null and void; neither
shall the benefits hereunder be liable for or subject to the debts, contracts,
liabilities, engagements, or torts of any person to whom such benefits or funds
are payable, nor shall they be subject to garnishment, attachment, or other
legal or equitable process nor shall they be an asset in bankruptcy, except that
no amount shall be payable hereunder until and unless any and all amounts
representing debts or other obligations owed to the Employer by the Participant
with respect to whom such amount would otherwise be payable shall have been
fully paid and satisfied.
11. Continued Employment
Nothing contained in this Restoration Plan shall be construed as conferring
upon any employee the right to continue in the employment of the Employer in any
capacity.
12. Liability of Committee
Unless resulting from his or her own fraud or willful misconduct, no member
of the Committee shall be liable for any loss arising out of any action taken or
failure to act by the Committee or a member thereof in connection with this
Restoration Plan. The Committee and any individual member of the Committee and
any agent thereof shall be fully protected in relying upon the advice of the
following professional consultants or advisors employed by Harte-Hanks or the
Committee: any attorney insofar as legal matters are concerned, any accountant
insofar as accounting matters are concerned, and any actuary insofar as
actuarial matters are concerned.
13. Indemnification
Harte-Hanks hereby indemnifies and agrees to hold harmless the members of
the Committee and all directors, officers and employees of the Employer against
any loss, claim, cost, expense (including attorneys' fees), judgment or
liability arising out of any action taken or failure to act by the Committee or
such individual in connection with their administration of this Restoration Plan
on behalf of Harte-Hanks; provided, however, that this indemnity shall not apply
to an individual if such loss, claim, cost, expense, judgment or liability is
due to such individual's fraud or willful misconduct.
14. Change in Participation Status
Notwithstanding any provision herein to the contrary, in the event that
Harte-Hanks, in its sole discretion, determines, for any reason, that a
Participant is at any time prior to his or her termination of employment with
the Employer no longer a designated Participant in this Restoration Plan, such
Participant shall cease to be an active Participant in this Restoration Plan as
of the date such determination is made and such Participant shall not accrue any
additional benefits under this Restoration Plan. If the Participant had reached
his or her Vesting Date as of the date he or she ceased active participation in
this Restoration Plan, payment of his or her accrued benefits shall be deferred
until the date the Participant's benefits commence under the Basic Plan or, if
he or she is not a participant in the Basic Plan, the earliest date on which the
Participant's benefits would have commenced under the Basic Plan if he or she
were a participant in the Basic Plan. The amount of the Participant's benefit
under Section 6 hereof shall be determined as of the date the Participant ceased
active participation in this Restoration Plan (determined on the basis of such
Participant's presumed termination of service on the date he or she ceased
active participation but the offset for the Basic Plan in Section 6(a)(ii) or
6(b)(ii) hereof shall be determined as of the actual date of his or her
termination of service). If the Participant had
<PAGE> 7
7
not reached his or her Vesting Date as of the date he or she ceased active
participation in this Restoration Plan, no benefit shall be payable under this
Restoration Plan.
15. Termination of Service for Dishonesty
If a Participant's service with the Employer is terminated because of
dishonest conduct injurious to the Employer, or if it is determined during the
lifetime of the Participant and within one year after his or her service with
the Employer is terminated that a Participant engaged in dishonest conduct
injurious to the Employer, the Committee may terminate such Participant's
interest and benefits under this Restoration Plan.
The dishonest conduct injurious to the Employer committed by a Participant
shall be determined and decided by the Committee only after a full investigation
of such alleged dishonest conduct and an opportunity has been given the
Participant or the Participant's representative to appear before the Committee
to present his or her case. The decision made by the Committee in such cases
shall be final and binding on all Participants and other persons affected by
such decision.
16. Claims Procedure
(a) Any person claiming a benefit, requesting an interpretation or ruling
under this Restoration Plan, or requesting information under this Restoration
Plan shall present the request in writing to the Committee which shall respond
in writing as soon as practicable.
(b) If the claim or request is denied, the written notice of denial shall
state:
(i) The reasons for denial, with specific reference to the provisions
on which the denial is based.
(ii) A description of any additional material or information required
and an explanation of why it is necessary.
(iii) An explanation of the claim review procedure.
(c) Any person whose claim or request is denied or who has not received a
response within thirty (30) days may request review by notice given in writing
to the Committee who may, but shall not be required to, grant the claimant a
hearing. On review, the claimant may have representation, examine pertinent
documents, and submit issues and comments in writing.
(d) The decision on review shall normally be made within sixty (60) days.
If an extension of time is required for a hearing or other special
circumstances, the claimant shall be so notified and the time limit shall be one
hundred twenty (120) days. The decision shall be in writing and shall state the
reasons and the relevant Restoration Plan provisions. All decisions by the
Committee on review shall be final and bind all parties concerned.
17. Law Governing
This Restoration Plan shall be construed in accordance with and governed by
the laws of the State of Texas, except to the extent preempted by applicable
federal law.
<PAGE> 8
8
18. Severability
In the event any provision of this Restoration Plan shall be held invalid
for any reason, any illegality or invalidity shall not affect the remaining
parts of the Restoration Plan, but the Restoration Plan shall be construed and
enforced as if the illegal or invalid provision had never been inserted.
IN WITNESS WHEREOF, Harte-Hanks Inc. has caused this instrument to be
executed by its duly authorized officer on the 10th day of March, 2000,
effective as of January 1, 2000.
HARTE-HANKS INC.
BY /s/ DONALD R. CREWS
---------------------------------
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 1999 1998 1997
- -------------------------------------- ------- ------- ---------
<S> <C> <C> <C>
BASIC EPS
Income from continuing operations .................................. $72,941 $68,371 $ 44,271
Income from discontinued operations ................................ -- -- 292,352
Extraordinary item ................................................. -- -- (875)
------- ------- ---------
Net income ......................................................... $72,941 $68,371 $ 335,748
======= ======= =========
Weighted-average common shares
outstanding used in earnings per
share computations .............................................. 69,914 72,716 73,998
======= ======= =========
Earnings per share:
Continuing operations ........................................... $ 1.04 $ 0.94 $ 0.60
Discontinued operations ......................................... -- -- 3.95
Extraordinary item .............................................. -- -- (0.01)
------- ------- ---------
Net income ...................................................... $ 1.04 $ 0.94 $ 4.54
======= ======= =========
DILUTED EPS
Income from continuing operations .................................. $72,941 $68,371 $ 44,271
Income from discontinued operations ................................ -- -- 292,352
Extraordinary item ................................................. -- -- (875)
------- ------- ---------
Net income ......................................................... $72,941 $68,371 $ 335,748
======= ======= =========
Shares used in earnings per
share computations .............................................. 72,144 76,057 77,000
======= ======= =========
Earnings per share:
Continuing operations ........................................... $ 1.01 $ 0.90 $ 0.57
Discontinued operations ......................................... -- -- 3.80
Extraordinary item .............................................. -- -- (0.01)
------- ------- ---------
Net income ...................................................... $ 1.01 $ 0.90 $ 4.36
======= ======= =========
Computation of Shares Used in Earnings Per Share Computations
Average outstanding common shares .................................. 69,914 72,716 73,998
Average common equivalent shares --
dilutive effect of option shares ................................ 2,230 3,341 3,002
------- ------- ---------
Shares used in earnings per
share computations .............................................. 72,144 76,057 77,000
======= ======= =========
</TABLE>
<PAGE> 1
EXHIBIT 13
FINANCIAL CONTENTS
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS ................................................................13
CONSOLIDATED BALANCE SHEETS .........................................................................18
CONSOLIDATED STATEMENTS OF OPERATIONS ...............................................................19
CONSOLIDATED STATEMENTS OF CASH FLOWS ...............................................................20
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY .....................................................21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..........................................................22
FIVE-YEAR FINANCIAL SUMMARY .........................................................................30
INDEPENDENT AUDITORS' REPORT ........................................................................31
CORPORATE INFORMATION ...............................................................................31
DIRECTORS, OFFICERS AND HARTE-HANKS OPERATIONS ......................................................32
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company's overall performance reflects its commitment to its growth
strategy of being a market leader in the targeted media industry,
introducing new products and entering new markets, investing in
technology and people, and increasing shareholder value. Harte-Hanks
now operates as an international direct and interactive marketing
services company that provides a full scope of solutions to a wide
range of industries in the customer relationship management arena. The
Company also publishes highly targeted advertising shopper publications
which reach over 9.5 million households each week. Harte-Hanks' focus
on the targeted marketing industry and on helping customers build and
manage one-to-one relationships with their customers was greatly
sharpened by the sale of the Company's newspaper and television
operations in 1997 (see Note N of "Notes to Consolidated Financial
Statements"). Since December 31, 1997 Harte-Hanks has grown revenues
32% and operating income 52.6%, excluding the results of operations
sold by the Company during that time.
13
<PAGE> 2
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 and its excess cash flows to fund several
acquisitions in 1997, 1998 and 1999. These acquisitions, as well as several
previous acquisitions, have enhanced the Company's growth over the past three
years. Harte-Hanks has funded $317.2 million in acquisitions during the period
1997 through 1999. These acquisitions have all been in the Company's direct and
interactive marketing and shoppers segments, which now comprise 100% of the
Company's revenues.
Harte-Hanks derives the majority of its revenues from the sale of direct
and interactive 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 and interactive 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.
Increased postage costs are not expected in 2000 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 and the amount of shopper
circulation growth. Postage rates are expected to increase in 2001. Paper prices
increased slightly at the beginning of 1998, but leveled out towards the end of
1998. The Company benefited from decreasing paper prices throughout 1999,
although prices increased in the fourth quarter.
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:
<TABLE>
<CAPTION>
In thousands 1999 % CHANGE 1998 % CHANGE 1997
- ------------ ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 829,752 10.8 $ 748,546 17.3 $ 638,349
Operating expenses 711,524 10.0 646,588 15.2 561,257
--------- --------- ---------
Operating income $ 118,228 16.0 $ 101,958 32.3 $ 77,092
========= ========= =========
</TABLE>
Consolidated revenues grew 10.8% to $829.8 million and operating income grew
16.0% to $118.2 million in 1999 compared to 1998. 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 10.0% to $711.5 million as a result of the overall revenue
growth.
Overall growth in the Company's 1998 revenues and operating income 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 1999 % CHANGE 1998 % CHANGE 1997
- ------------ ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 559,262 13.2 $ 493,898 16.1 $ 425,489
Operating expenses 480,098 13.2 424,250 14.3 371,129
--------- --------- ---------
Operating income $ 79,164 13.7 $ 69,648 28.1 $ 54,360
========= ========= =========
</TABLE>
Direct and interactive marketing revenues increased $65.4 million, or 13.2%, in
1999 compared to 1998. CRM/response management and marketing services both
experienced significant revenue growth in 1999, while CRM/database revenues were
soft for the year. CRM/response management revenues increased due to increased
internet, consulting and fulfillment business with both existing and new
customers, the October 1999 acquisition of ZD Market Intelligence, renamed
Harte-Hanks Market Intelligence, and to a lesser extent the August 1998
acquisition of Cornerstone Integrated Services. The traditional growth oriented
business-to-business activities of CRM/response management had significant
growth; however, total CRM/response management results were influenced by
revenue declines in the outbound credit card business beginning in the third
quarter of 1998. The high technology, mutual funds and government/
not-for-profit industry sectors contributed significantly to overall
CRM/response management revenue growth. Marketing services revenues, led by its
targeted mail and logistics operations, increased due to increased product sales
as well as new product sales to new and existing customers, primarily in the
retail, government/not-for-profit, and non-bank finance industry sectors. The
November 1998 acquisition of Printing Management Systems, Inc. and the May 1999
acquisition of Direct Marketing Associates, Inc. also contributed to the
marketing services revenue growth. CRM/database revenues were soft, primarily
due to the slowdowns in the healthcare, managed care and business services
markets as well as a strong first half of 1998. This softness was partially
offset by increases in the retail, pharmaceutical and banking industries.
CRM/database experienced revenue growth in data processing and software sales,
offset by softness in brokered production, hardware sales, and brokered customer
lists. Overall, revenue growth for direct and interactive marketing increased as
a result of increased business with both new and existing customers across
several industry sectors including
14
<PAGE> 3
retail, financial services, high technology, pharmaceutical, automotive and
telecommunications industries, and acquisitions.
Operating expenses rose $55.8 million, or 13.2%, in 1999 compared to 1998
due primarily to revenue growth contributed by acquisitions, which accounted for
$43.0 million of the increase. Excluding these acquisitions, operating expenses
increased 3.1%. This remaining increase was due to increased production costs
directly associated with increased product volumes, increased payroll costs due
to expanded hiring to support revenue growth and increased general and
administrative expense from professional and outside service fees. Depreciation
and amortization expense increased $5.7 million due to goodwill associated with
acquisitions and higher levels of capital investment to support growth.
Direct and interactive marketing revenues increased $68.4 million, or
16.1%, in 1998 compared to 1997. Revenue increases were led by CRM/database,
which had significant revenue growth for the year, followed by CRM/response
management and marketing services, both of which experienced good internal
revenue growth for the year. CRM/database 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. CRM/database 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
CRM/database. CRM/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 Services. The traditional growth oriented
business-to-business activities of CRM/response management had significant
growth; however, total CRM/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 CRM/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 and interactive marketing increased as a result of
providing services 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.
SHOPPERS
Shopper operating results were as follows:
<TABLE>
<CAPTION>
In thousands 1999 % CHANGE 1998 % CHANGE 1997
- ------------ ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 270,490 6.2 $ 254,648 19.6 $ 212,860
Operating expenses 223,475 4.4 214,141 17.8 181,771
--------- --------- ---------
Operating income $ 47,015 16.1 $ 40,507 30.3 $ 31,089
========= ========= =========
</TABLE>
Shopper revenues increased $15.8 million, or 6.2%, in 1999 when compared to
1998. Excluding the effects of the sale of the Dallas-Fort Worth Shoppers Guide
and the Wichita, Kansas and Springfield, Missouri PennyPower in May 1998,
revenues increased $20.7 million, or 8.3%. Revenue increases were the result of
improved sales in established markets as well as geographic expansions into new
neighborhoods in both Northern and Southern California. At December 31, 1999,
total weekly shopper circulation was 9.5 million households. On a product basis,
revenues increased due to growth in in-book products, primarily employment and
core sales, and distribution products, primarily four-color glossy flyers and
pre-printed inserts. These increases were partially offset by declining revenues
in the personals advertising segment.
Shopper operating expenses rose $9.3 million, or 4.4%, in 1999 compared to
1998. Excluding the divestiture mentioned above, the increase in operating
expenses was primarily due to increases in payroll costs of $4.8 million and
additional production costs of $6.9 million, including increased postage of $4.0
million due to increased volumes.
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
15
<PAGE> 4
production and distribution costs which were due primarily to higher printing
and higher overweight postage.
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.
In October 1999, the Company acquired ZD Market Intelligence, renamed
Harte-Hanks Market Intelligence, for $101 million in cash from Ziff-Davis, Inc.
Harte-Hanks Market Intelligence is a leading provider of database products and
solutions to the high technology and communications industries in the United
States, Canada and Europe.
The Company acquired Direct Marketing Associates, Inc. of Baltimore,
Maryland, a leading provider of integrated direct marketing services to
commercial, government and non-profit organizations in May 1999 and LYNQS
Newmedia of Kansas City, Missouri, a developer of new media applications for the
financial services, pharmaceutical and other industries in June 1999.
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, Texas, Wichita, Kansas and Springfield, Missouri, 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 six 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 CRM/database
sector. The Company also expanded its international capabilities in the
CRM/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.
INTEREST EXPENSE/INTEREST INCOME
Interest expense increased $0.2 million in 1999 over 1998 due primarily to
interest and commitment charges from the two unsecured revolving credit
facilities the Company obtained in November 1999, as described in Note D of the
"Notes to Consolidated Financial Statements" included herein. Total interest
expense decreased in 1998 when compared to 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.
Interest income decreased $7.8 million in 1999 over 1998 due to the sale of
all of the Company's short-term investments, the proceeds of which were used to
fund acquisitions and repurchase the Company's treasury stock. 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 were comprised of both taxable and non-taxable components
with an aggregated balance of $169.2 million at December 31, 1998. At December
31, 1999 the Company did not hold any short-term investments. (See Note C of the
"Notes to Consolidated Financial Statements" included herein.)
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" included herein.) 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, income
taxes increased $2.9 million in 1999 and $16.1 million in 1998 due to higher
income levels. The effective income tax rate (excluding the unusual items) was
40.6%, 41.2%, and 41.1% in 1999, 1998 and 1997, respectively.
CAPITAL INVESTMENTS
Net cash used in investing activities for 1999 included $136.5 million for
acquisitions and $28.9 million for capital expenditures. The acquisition
investments were made in the direct and interactive marketing segment, discussed
under "Direct Marketing." In addition, the Company made equity investments
totaling $4.0 million in three companies in order to further strengthen its CRM
capabilities. The capital expenditures consisted primarily of additional
computer capacity, technology, systems and equipment upgrades for the direct and
interactive 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 southern California's order entry and
related accounting applications and new press and computer equipment.
Additionally, the Company continued with its implementation of new accounting
systems software begun in December 1997. The Company also invested in facility
expansions in its CRM/database, CRM/response management and marketing services
sectors.
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 and interactive marketing segment, discussed
under "Direct Marketing." The capital expenditures consisted primarily of
additional computer capacity, technology, systems and equipment upgrades for the
direct and interactive 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
16
<PAGE> 5
machine. Additionally, the Company continued with its implementation of new
accounting systems software begun in December 1997. The Company also invested in
facility expansions in its CRM/database marketing, CRM/response management and
marketing services sectors.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of continuing operations for 1999 was
$115.4 million. Net cash outflows from investing activities were $29.6 million
for 1999, resulting primarily from the acquisitions described above and funded
by the sale and maturity of short-term investments. Total cash outflows in 1999
related to acquisitions were $136.5 million (see Note B of the "Notes to
Consolidated Financial Statements" included herein for further information). Net
cash outflows from financing activities in 1999 were $81.0 million. The cash
outflow from financing activities is attributable primarily to the repurchase of
treasury stock throughout 1999 totaling $87.6 million.
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 maturity 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.
Capital resources are available from, and provided through, the Company's
two unsecured credit facilities. These credit facilities, two $100 million
variable rate, revolving loan commitments, were put in place on November 4,
1999. All borrowings under the $100 million revolving 364-Day Credit Agreement
are to be repaid by November 3, 2000 unless the Company requests and is granted
a 364-day extension. All borrowings under the $100 million revolving Three-Year
Credit Agreement are to be repaid by November 4, 2002.
Management believes that its credit facilities, together with cash provided
by operating activities, will be sufficient to fund operations and anticipated
acquisitions and capital expenditures needs for the foreseeable future. As of
December 31, 1999, the Company had $195.0 million of unused borrowing capacity
under its credit facilities.
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 and interactive 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 and interactive 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 and interactive marketing
business faces competition in each of its three sectors -- CRM/response
management, CRM/database 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,
and a rate increase is expected in 2001. Postal rates also influence the demand
for the Company's direct and interactive 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 and interactive
marketing revenues are dependent on national and international economics.
Employment -- The Company believes that its future prospects will depend in
large part upon its ability to attract, train and retain highly-skilled
technical, client services and administrative personnel. Qualified personnel are
in great demand and are likely to remain a limited resource for the foreseeable
future.
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 made the necessary conversions to make the Company Year 2000
compatible, spending $4.9 million in this effort. No material problems were
encountered throughout the Company associated with the date rollover. The minor
problems that were encountered did not affect mission critical systems, did not
affect customers, did not disrupt business operations, did not impact revenue
and were corrected in a timely manner.
17
<PAGE> 6
HARTE-HANKS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
In thousands, except per share and share amounts 1999 1998
- ------------------------------------------------ ---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................................................. $ 35,196 $ 30,367
Short-term investments ........................................................ -- 138,874
Accounts receivable (less allowance for doubtful
accounts of $3,751 in 1999 and $3,246 in 1998) .......................... 154,030 127,518
Inventory................................................................... 7,099 6,485
Prepaid expenses............................................................ 12,651 8,727
Current deferred income tax asset........................................... 6,848 8,339
Other current assets........................................................ 4,309 5,503
--------- ---------
Total current assets 220,133 325,813
========= =========
Property, plant, and equipment
Land........................................................................ 3,302 2,951
Buildings and improvements.................................................. 23,863 21,419
Software.................................................................... 22,736 18,527
Equipment and furniture..................................................... 163,848 143,219
--------- ---------
213,749 186,116
Less accumulated depreciation............................................... (113,376) (98,068)
--------- ---------
100,373 88,048
Construction and equipment installations in progress........................ 5,877 4,226
--------- ---------
Net property, plant and equipment....................................... 106,250 92,274
--------- ---------
Intangible and other assets
Goodwill and other intangibles (less accumulated amortization
of $51,118 in 1999 and $40,485 in 1998)................................. 409,791 290,831
Other assets................................................................ 33,253 6,295
--------- ---------
Total intangible and other assets........................................ 443,044 297,126
--------- ---------
Total assets............................................................ $ 769,427 $ 715,213
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................ $ 64,812 $ 56,397
Accrued payroll and related expenses........................................ 25,511 23,208
Customer deposits and unearned revenue ..................................... 35,622 23,139
Income taxes payable........................................................ 13,667 8,412
Other current liabilities................................................... 14,405 5,328
--------- ---------
Total current liabilities............................................... 154,017 116,484
Long-term debt................................................................. 5,000 --
Other long-term liabilities (including deferred
income taxes of $20,180 in 1999 and $9,989 in 1998)........................ 32,792 21,638
--------- ---------
Total liabilities....................................................... 191,809 138,122
========= =========
Stockholders' equity
Common stock, $1 par value, authorized 250,000,000 shares
Issued 1999: 76,392,063; 1998: 75,789,355 shares........................ 76,392 75,789
Additional paid-in capital..................................................... 197,454 189,698
Accumulated other comprehensive income......................................... 12,316 --
Retained earnings.............................................................. 493,362 425,999
--------- ---------
779,524 691,486
Less treasury stock, 1999: 8,285,966; 1998: 4,531,303
shares at cost............................................................. (201,906) (114,395)
--------- ---------
Total stockholders' equity..................................................... 577,618 577,091
--------- ---------
Total liabilities and stockholders' equity..................................... $ 769,427 $ 715,213
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE> 7
HARTE-HANKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
In thousands, except per share amounts 1999 1998 1997
- -------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Revenues ...................................................... $ 829,752 $ 748,546 $ 638,349
--------- --------- ---------
Operating expenses
Payroll .................................................... 300,336 268,957 236,319
Production and distribution ................................ 306,340 284,572 243,423
Advertising, selling, general and administrative ........... 70,060 64,082 59,054
Depreciation ............................................... 24,126 21,087 17,327
Goodwill and intangible amortization ....................... 10,662 7,890 5,134
--------- --------- ---------
711,524 646,588 561,257
--------- --------- ---------
Operating income .............................................. 118,228 101,958 77,092
Other expenses (income)
Interest expense ........................................... 349 193 6,189
Interest income ............................................ (5,662) (13,474) (4,412)
Other, net ................................................. 730 1,230 196
Pension curtailment gain ................................... -- (2,150) --
--------- --------- ---------
(4,583) (14,201) 1,973
--------- --------- ---------
Income from continuing operations
before income taxes ........................................ 122,811 116,159 75,119
Income tax expense ............................................ 49,870 47,788 30,848
--------- --------- ---------
Income from continuing operations ............................. 72,941 68,371 44,271
--------- --------- ---------
Income from discontinued operations, net of income taxes ...... -- -- 15,483
Gain on sale, net of income taxes ............................. -- -- 276,869
--------- --------- ---------
Total discontinued operations ................................. -- -- 292,352
--------- --------- ---------
Income before extraordinary item .............................. 72,941 68,371 336,623
Extraordinary item -- loss due to early extinguishment of debt,
net of income tax benefit of $586 .......................... -- -- (875)
--------- --------- ---------
Net income .................................................... $ 72,941 $ 68,371 $ 335,748
========= ========= =========
Basic earnings per common share
Continuing operations ...................................... $ 1.04 $ 0.94 $ 0.60
Discontinued operations .................................... -- -- 3.95
Extraordinary item, net of income taxes .................... -- -- (0.01)
--------- --------- ---------
Basic earnings per common share ......................... $ 1.04 $ 0.94 $ 4.54
========= ========= =========
Weighted-average common shares outstanding ................. 69,914 72,716 73,998
========= ========= =========
Diluted earnings per common share
Continuing operations ...................................... $ 1.01 $ 0.90 $ 0.57
Discontinued operations .................................... -- -- 3.80
Extraordinary item, net of income taxes .................... -- -- (0.01)
--------- --------- ---------
Diluted earnings per common share ....................... $ 1.01 $ 0.90 $ 4.36
========= ========= =========
Weighted-average common and
common equivalent shares outstanding .................... 72,144 76,057 77,000
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
19
<PAGE> 8
HARTE-HANKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
In thousands 1999 1998 1997
- ------------ ---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income ................................................................. $ 72,941 $ 68,371 $ 335,748
Adjustments to reconcile net income to net cash provided by
continuing operations:
Income from discontinued operations .................................... -- -- (15,483)
Gain on sale of discontinued operations ................................ -- -- (276,869)
Depreciation ........................................................... 24,126 21,087 17,327
Goodwill and intangible amortization ................................... 10,662 7,890 5,134
Amortization of option-related compensation ............................ 430 592 769
Deferred income taxes .................................................. 10,572 4,130 2,716
Pension curtailment gain ............................................... -- (2,150) --
Extraordinary item ..................................................... -- -- 1,461
Other, net ............................................................. 224 534 1,680
Changes in operating assets and liabilities, net of effects from
acquisitions and divestitures:
Increase in accounts receivable, net ................................ (13,827) (12,415) (12,737)
(Increase) decrease in inventory .................................... (848) 900 2,435
(Increase) decrease in prepaid expenses and other current assets .... (2,058) (2,549) 2,454
Increase (decrease) in accounts payable ............................. 5,597 (2,206) 7,818
Increase (decrease) in other accrued expenses and other liabilities . 10,826 10,034 (2,408)
Other, net .......................................................... (3,281) 1,210 (1,546)
--------- --------- ---------
Net cash provided by continuing operations ...................... 115,364 95,428 68,499
Net cash provided by (used in) discontinued operating activities .... -- (265,650) 24,250
--------- --------- ---------
Net cash provided by (used in) operating activities ............. 115,364 (170,222) 92,749
========= ========= =========
Cash Flows from Investing Activities
Acquisitions ............................................................... (136,469) (47,386) (114,589)
Purchases of property, plant and equipment ................................. (28,928) (24,443) (28,396)
Proceeds from the sale of property, plant and equipment .................... 976 1,385 1,997
Proceeds from divestiture .................................................. -- 5,769 --
Net sales and maturities (purchases) of
available-for-sale short-term investments .............................. 138,874 249,840 (386,687)
Other investing activities ................................................. (4,005) -- --
Discontinued operations:
Purchases of property, plant and equipment ............................. -- -- (4,548)
Proceeds from the sale of property, plant and equipment ................ -- -- 34
Payments on film contracts ............................................. -- -- (1,481)
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 ............. (29,552) 185,165 231,668
========= ========= =========
Cash Flows from Financing Activities~Long-term borrowings ...................... 5,000 -- 497,600
Payments on debt, including current maturities and financing costs ......... -- -- (714,465)
Issuance of common stock ................................................... 7,082 7,452 14,334
Issuance of treasury stock ................................................. 87 23 --
Purchase of treasury stock ................................................. (87,574) (71,354) (47,267)
Dividends paid ............................................................. (5,578) (4,372) (2,961)
--------- --------- ---------
Net cash used in financing activities ........................... (80,983) (68,251) (252,759)
--------- --------- ---------
Net increase (decrease) in cash ............................................ 4,829 (53,308) 71,658
Cash and cash equivalents at beginning of period ........................... 30,367 83,675 12,017
--------- --------- ---------
Cash and cash equivalents at end of period ................................. $ 35,196 $ 30,367 $ 83,675
========= ========= =========
Supplemental Cash Flow Information:
Non-cash investing and financing activities:
Acquisitions -- stock issued ........................................ $ -- $ 5,752 $ 6,255
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE> 9
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, 1997 .................. $ 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 -- (47,267) -- (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 ($0.06 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
Common stock issued -- employee
benefit plans ........................... 215 4,172 -- -- -- 4,387
Exercise of stock options ................... 388 2,307 -- -- -- 2,695
Tax benefit of options exercised ............ -- 1,253 -- -- -- 1,253
Dividends paid ($0.08 per share) ............ -- -- (5,578) -- -- (5,578)
Treasury stock issued ....................... -- 24 -- 63 -- 87
Treasury stock repurchase ................... -- -- -- (87,574) -- (87,574)
Comprehensive income, net of tax:
Net income .............................. -- -- 72,941 -- -- 72,941
Change in unrealized gain (loss) on
long-term investments, net of
reclassification adjustments (net of
tax of $6,632) ...................... -- -- -- -- 12,316 12,316
---------
Total comprehensive income .................. 85,257
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 ................ $ 76,392 $ 197,454 $ 493,362 $(201,906) $ 12,316 $ 577,618
========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE> 10
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 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 AND OTHER INTANGIBLES
Goodwill and other intangibles are stated on the basis of cost, adjusted as
discussed below. Goodwill is amortized on a straight-line basis over 15 to 40
year periods. Other intangibles are amortized on a straight-line basis over a
period of 10 years.
For each of its investments, the Company assesses the recoverability of its
goodwill and other intangibles by determining whether the amortization of the
intangible 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 an unamortized intangible
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.
At December 31, 1999 and 1998 the Company's goodwill balance was $405.9
million, net of $51.0 million of accumulated amortization, and $290.8 million,
net of $40.5 million of accumulated amortization, respectively.
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.
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
and interactive marketing revenue from the production and delivery of data is
recognized upon completion and shipment of the work. Revenue from database
subscriptions is recognized ratably over the term of the subscription. 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.
NOTE B - ACQUISITIONS/DIVESTITURES
PURCHASES
In October 1999, the Company acquired ZD Market Intelligence, renamed
Harte-Hanks Market Intelligence, for $101 million cash from Ziff-Davis, Inc.
Harte-Hanks Market Intelligence is a leading provider of database products and
solutions to the high technology and communications industries in the United
States, Canada and Europe.
In June 1999, the Company acquired LYNQS Newmedia of Kansas City, Missouri,
a developer of new media applications for the financial services, pharmaceutical
and other industries.
In May 1999, the Company acquired Direct Marketing Associates, Inc. of
Baltimore, Maryland, a leading provider of integrated direct marketing services
to commercial, government and non-profit organizations.
In December 1998, the Company acquired Spectral Resources, Inc. of
Woodstock, New York, a leading provider of interactive solutions to the
pharmaceutical industry.
22
<PAGE> 11
In November 1998, the Company acquired 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 August 1998, the Company acquired Cornerstone Integrated Systems 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 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.
In January 1997, the Company acquired Information for Marketing Limited, a
London-based database provider servicing the United Kingdom.
The total cash outlay in 1999 for acquisitions was $136.5 million. 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 operating results of the acquired companies have been included in the
accompanying Consolidated Financial Statements from the date of acquisition.
The following table summarizes, on an unaudited pro forma basis, the
estimated combined results of operations of the Company and the 1999
acquisitions (ZD Market Intelligence, LYNQS Newmedia and Direct Marketing
Associates) assuming the acquisitions had taken place on January 1, 1998. The
pro forma information includes adjustments for a reduction in interest income on
short-term investments used to finance the acquisitions and amortization of the
intangible assets acquired. The unaudited pro forma results of operations are
not necessarily indicative of the results that actually would have occurred had
the acquisitions been completed on January 1, 1998.
<TABLE>
<CAPTION>
In thousands, except For the years ended December 31,
per share amounts 1999 1998
- -------------------- ------------- ----------
<S> <C> <C>
Revenues ............... $875,825 $821,594
Net income ............. 72,824 67,299
Diluted earnings per
common share ...... 1.01 0.88
</TABLE>
DIVESTITURES
In May 1998, the Company sold three of its smallest shopper publications,
located in Dallas, Texas, Wichita, Kansas and Springfield, Missouri.
NOTE C - INVESTMENTS
SHORT-TERM INVESTMENTS
In 1999 the Company sold all of its short-term investments and at December 31,
1999 held no such investments. All short-term securities held at December 31,
1998 were considered to be available-for-sale and were classified as current
assets. Short-term investments at December 31, 1998 consisted 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>
The gross realized gains and losses on the sale of available-for-sale securities
were immaterial for the years ended December 31, 1999 and 1998.
LONG-TERM INVESTMENTS
In 1999 the Company made equity investments totaling $4.0 million in three
companies. These investments are classified as other assets. All such
investments for which fair value was readily determinable are considered to be
available-for-sale and are recorded at fair value and the related unrealized
gains and losses have been reported as a separate component of accumulated other
comprehensive income. All other equity investments have been recorded at cost.
Long-term investments for which the fair value was readily determinable at
December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999
Gross
Original Unrealized Fair
In thousands Cost Gain (Loss) Value
- ------------ -------- ------------------ --------
<S> <C> <C> <C>
Equity securities.......... $ 2,003 $ 18,948 $ 20,951
------- -------- --------
Total...................... $ 2,003 $ 18,948 $ 20,951
======= ======== ========
</TABLE>
NOTE D - LONG-TERM DEBT LONG-TERM DEBT CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
December 31,
In thousands 1999 1998
- ------------ --------- ---------
<S> <C> <C>
Revolving loan commitment, various
interest rates (effective rate of 7%
at December 31, 1999), due
November 4, 2002 ....................... $ 5,000 $ --
Less current maturities ..................... -- --
--------- ---------
$ 5,000 $ --
========= =========
</TABLE>
CREDIT FACILITY
On November 4, 1999 the Company obtained two unsecured revolving credit
facilities. All borrowings under the $100 million revolving 364-Day Credit
Agreement are to be repaid by November 3, 2000 unless the Company requests and
is granted a 364-day extension. All borrowings under the $100 million revolving
Three-Year Credit
23
<PAGE> 12
Agreement are to be repaid by November 4, 2002. The Company pays a commitment
fee of .1% and .125% on the unused portions of the 364-day facility and the
three-year facility, respectively, during the first six months of the agreement.
During this six month period the interest rate on drawn amounts for both
facilities is LIBOR plus .625%. Beginning April 4, 2000 the commitment fees for
undrawn amounts and interest rates for drawn amounts will convert to a grid
based on a ratio of the Company's total debt to earnings. Commitment fees on the
unused portions range from .08% to .125% for the 364-day facility, and .1% to
.15% for the three-year facility. Interest rates on drawn amounts range from
LIBOR plus .5% to LIBOR plus .875%. As of December 31, 1999, the Company had
$195 million of unused borrowing capacity under these credit facilities.
Cash payments for interest were $0.1 million, $0.1 million and $10.5
million for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE E - INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1999 1998 1997
- ------------ -------- -------- --------
<S> <C> <C> <C>
Current
Federal.................. $ 33,219 $ 34,646 $ 23,216
State and local.......... 6,079 9,012 4,916
-------- -------- --------
Total current........ $ 39,298 $ 43,658 $ 28,132
======== ======== ========
Deferred
Federal.................. $ 8,564 $ 4,175 $ 2,201
State and local.......... 2,008 (45) 515
-------- -------- --------
Total deferred....... $ 10,572 $ 4,130 $ 2,716
======== ======== ========
</TABLE>
Included in income tax expense for 1998 is tax expense of $0.8 million related
to the pension curtailment gain.
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 1999 1998 1997
- ------------ -------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Computed expected
income tax expense .... $ 42,984 35% $40,656 35% $ 26,292 35%
Net effect of state
income taxes .......... 5,256 4% 5,891 5% 3,531 5%
Effect of goodwill
amortization .......... 1,344 1% 1,230 1% 1,017 1%
Effect of non-taxable
investment income ..... (50) 0% (424) 0% (912) -1%
Change in the beginning
of the year balance
of the valuation
allowance ............. -- 0% (63) 0% -- --
Other, net ................. 336 0% 498 0% 920 1%
-------- ------- -------- -- -------- --
Income tax expense
for the period ........ $ 49,870 41% $ 47,788 41% $ 30,848 41%
======== ======= ======== == ======== ==
</TABLE>
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1999 1998 1997
- ------------ -------- --------- ----------
<S> <C> <C> <C>
Continuing operations........ $ 49,870 $ 47,788 $ 30,848
Discontinued operations...... -- -- 275,548
Extraordinary items.......... -- -- (586)
Stockholders' equity......... 5,379 (3,720) (8,152)
-------- -------- ---------
Total........................ $ 55,249 $ 44,068 $ 297,658
======== ======== =========
</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 1999 1998
- ------------ -------- --------
<S> <C> <C>
Deferred tax assets:
State income tax ............................. $ -- $ 1,094
Deferred compensation and retirement plans ... 4,229 4,751
Accrued expenses not deductible until paid ... 3,068 4,183
Accounts receivable, net ..................... 583 702
Other, net ................................... 157 235
State net operating loss carryforwards ....... 475 189
-------- --------
Total gross deferred tax assets .......... 8,512 11,154
Less valuation allowance ................. (475) (189)
-------- --------
Net deferred tax assets .................. 8,037 10,965
-------- --------
Deferred tax liabilities:
Property, plant and equipment ................ (12,823) (7,800)
Goodwill ..................................... (8,052) (4,812)
State income tax ............................. (493) --
Other, net ................................... (1) (3)
-------- --------
Total gross deferred tax liabilities ..... (21,369) (12,615)
-------- --------
Net deferred tax liabilities ............. $(13,332) $ (1,650)
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1998 was
$191,000. The valuation allowance at December 31, 1999 and 1998 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 $39.1 million, $302.1 million ($265.7
million related to gain on sale of discontinued operations), and $25.7 million
in 1999, 1998 and 1997, 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.
24
<PAGE> 13
The status of Harte-Hanks' defined benefit pension plans at year-end was as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1999 1998
- ------------ --------- ----------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year .......... $ 86,332 $ 80,035
Service cost ..................................... 365 4,207
Interest cost .................................... 5,215 5,759
Actuarial loss (gain) ............................ (18,708) 16,321
Benefits paid .................................... (4,519) (4,835)
Curtailments ..................................... -- (15,155)
--------- ---------
Benefit obligation at end of year ................ 68,685 86,332
--------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year ... 85,548 79,392
Actual return on plan assets ..................... 20,650 9,730
Employer contribution ............................ -- 1,261
Benefits paid .................................... (4,519) (4,835)
--------- ---------
Fair value of plan assets at end of year ......... 101,679 85,548
--------- ---------
Funded status .................................... 32,994 (784)
Unrecognized actuarial loss (gain) ............... (29,904) 529
Unrecognized prior service cost .................. 750 997
--------- ---------
Net amount recognized ............................ $ 3,840 $ 742
========= =========
</TABLE>
The Company's non-qualified pension plan has an accumulated benefit obligation
in excess of its assets of $4.9 million at December 31, 1999.
The weighted-average assumptions used for measurement of the defined pension
plans were as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31
Discount rate .................................... 8.00% 6.00% 7.25%
Expected return on plan assets ................... 10.00% 10.00% 10.00%
Rate of compensation increase (1999
and 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 1999 1998 1997
- ------------ ------- ------- -------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC
BENEFIT COST (INCOME)
Service cost ......................... $ 365 $ 4,207 $ 3,564
Interest cost ........................ 5,215 5,759 5,549
Expected return on plan assets ....... (8,351) (8,243) (6,772)
Amortization of prior service cost ... 65 4 5
Recognized actuarial loss ............ 151 27 (9)
Recognized curtailment loss (gain) ... -- (2,150) (4,149)
------- ------- -------
Net periodic benefit income .......... (2,555) (396) (1,812)
Less: net periodic benefit
income-- discontinued
operations ...................... -- -- (3,574)
------- ------- -------
Net periodic benefit cost
(income)-- continuing
operations ...................... $(2,555) $ (396) $ 1,762
======= ======= =======
</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 1999, 1998 and 1997 was $5.1 million, $1.4
million, and $1.3 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 649,482
at December 31, 1999.
NOTE G - STOCKHOLDERS' EQUITY
In January 2000, the Company announced an increase in the regular quarterly
dividend from 2 cents per share to 2.5 cents per share, payable March 15, 2000
to holders of record on March 1, 2000.
During 1999 the Company repurchased 3,757,900 shares of its common stock
for $87.6 million under its stock repurchase program. In November 1999, the
Company authorized an increase of four million shares in the Company's stock
repurchase program. Under its stock repurchase program, the Company has
repurchased 10.1 million shares at December 31, 1999, and under such program has
authorization to repurchase an additional 4.5 million shares.
In May 1998, the Company amended its Certificate of Incorporation to
increase its authorized capitalization to 250,000,000 shares of common stock.
NOTE H - STOCK OPTION PLANS
1984 PLAN
In 1984, the Company adopted a Stock Option Plan ("1984 Plan") pursuant to which
it issued to officers and key employees options to purchase shares of common
stock at prices equal to the market price on the grant date. Market price was
determined by the Board of Directors for purposes of granting stock options and
making repurchase offers. Options granted under the 1984 Plan become exercisable
five years after date of grant. At December 31, 1999, 1998 and 1997, options to
purchase 216,000 shares, 340,800 shares and 629,000 shares, respectively, were
outstanding under the 1984 Plan, with an exercise price of $3.33 per share at
December 31, 1999. 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, 1999, 1998 and 1997, market
price options to purchase 5,873,475 shares, 5,058,550 shares and 4,194,650
shares, respectively, were outstanding with exercise prices ranging from $3.33
to $26.19 per share at December 31, 1999. 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 generally become
25
<PAGE> 14
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, 1999 was $13.84 and
$4.99, respectively. The weighted-average remaining life for outstanding options
was 6.61 years.
At December 31, 1999, 1998 and 1997, performance options to purchase
739,400 shares, 724,700 shares and 737,800 shares, respectively, were
outstanding with exercise prices ranging from $0.33 to $2.00 per share at
December 31, 1999. 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 $0.4
million, $0.6 million and $0.8 million was recognized for the performance
options for the years ended December 31, 1999, 1998 and 1997, respectively. The
weighted-average exercise price for outstanding options and exercisable options
at December 31, 1999 was $0.54 and $0.37, respectively. The weighted-average
remaining life for outstanding options was 4.04 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, 1999, 1998 and 1997, DiMark options
to purchase 54,792 shares, 182,864 shares and 435,466 shares, respectively, were
outstanding with exercise prices ranging from $8.31 to $10.48 per share at
December 31, 1999. As of December 31, 1999 all outstanding DiMark options were
exercisable. The weighted-average exercise price at December 31, 1999 was $8.40
and the weighted-average remaining life was 0.35 years.
The following summarizes all stock option plans activity during 1999, 1998 and
1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES OPTION PRICE
---------- ------------
<S> <C> <C>
Options outstanding
at January 1, 1997 ..... 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
GRANTED ..................... 1,575,350 22.29
EXERCISED ................... (388,097) 6.76
CANCELLED ................... (610,500) 17.88
----------
OPTIONS OUTSTANDING
AT DECEMBER 31, 1999 ... 6,883,667 $ 12.04
==========
EXERCISABLE AT
DECEMBER 31, 1999 ...... 2,337,967 $ 3.74
==========
</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. For options issued with an exercise price below the market
price of the underlying stock on the date of grant, the Company recognizes
compensation expense 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 1999 1998 1997
- -------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Income from continuing operations
--as reported ................. $ 72,941 $ 68,371 $ 44,271
Income from continuing operations
--pro forma ................... 68,923 65,636 42,512
Net income-- as reported ........... 72,941 68,371 335,748
Net income-- pro forma ............. 68,923 65,636 333,989
Diluted earnings per share
from continuing
operations-- as reported ...... 1.01 0.90 0.57
Diluted earnings per share
from continuing
operations-- pro forma ........ 0.95 0.86 0.55
Diluted earnings per share
--as reported ................. 1.01 0.90 4.36
Diluted earnings per share
--pro forma ................... 0.95 0.86 4.34
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Expected dividend yield ............ 0.3% 0.3% 0.3%
Expected stock price volatility .... 22.0% 21.0% 20.3%
Risk free interest rate ............ 6.0% 6.0% 6.4%
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 1999,
1998 and 1997 was $9.24, $7.79 and $5.12, respectively. The weighted-average
fair value and exercise price of performance options granted was $22.54 and
$2.00 in 1999, $16.82 and $1.00 in 1998, and $8.96 and $0.71 in 1997,
respectively.
NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS
Because of their maturities and/or interest rates, certain financial instruments
of the Company have fair values approximating their carrying values. These
instruments include short-term investments, revolving credit agreements,
accounts receivable, trade payables, and miscellaneous notes receivable and
payable. The Company's equity investments which have a readily determinable fair
value are recorded at fair value. (See Note C.)
26
<PAGE> 15
NOTE J - COMMITMENTS AND CONTINGENCIES
At December 31, 1999, the Company had outstanding letters of credit in the
amount of $4.7 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 $23.0 million, $18.5 million and $16.0 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
The future minimum rental commitments for all non-cancellable operating leases
with terms in excess of one year as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
In thousands
- ------------
<S> <C>
2000 .................................... $ 20,367
2001 .................................... 17,926
2002 .................................... 14,397
2003 .................................... 9,448
2004 .................................... 6,342
After 2004 .............................. 27,073
--------
$ 95,553
========
</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 1999 1998 1997
- -------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
BASIC EPS
Income from continuing operations ...... $ 72,941 $ 68,371 $ 44,271
Income from discontinued operations .... -- -- 292,352
Extraordinary item ..................... -- -- (875)
---------- ---------- ----------
Net income ............................. $ 72,941 $ 68,371 $ 335,748
========== ========== ==========
Weighted-average common shares
outstanding used in earnings
per share computations ............ 69,914 72,716 73,998
========== ========== ==========
Earnings per share:
Continuing operations ............. $ 1.04 $ 0.94 $ 0.60
Discontinued operations ........... -- -- 3.95
Extraordinary item ................ -- -- (0.01)
---------- ---------- ----------
Net income ........................ $ 1.04 $ 0.94 $ 4.54
========== ========== ==========
DILUTED EPS
Income from continuing operations ...... $ 72,941 $ 68,371 $ 44,271
Income from discontinued operations .... -- -- 292,352
Extraordinary item ..................... -- -- (875)
---------- ---------- ----------
Net income ............................. $ 72,941 $ 68,371 $ 335,748
========== ========== ==========
Shares used in earnings per
share computations ................ 72,144 76,057 77,000
========== ========== ==========
Earnings per share:
Continuing operations ............. $ 1.01 $ 0.90 $ 0.57
Discontinued operations ........... -- -- 3.80
Extraordinary item ................ -- -- (0.01)
---------- ---------- ----------
Net income ........................ $ 1.01 $ 0.90 $ 4.36
========== ========== ==========
Computation of Shares Used in Earnings
Per Share Computations
Average outstanding common shares ...... 69,914 72,716 73,998
Average common equivalent shares--
dilutive effect of option shares .. 2,230 3,341 3,002
---------- ---------- ----------
Shares used in net earnings
per share computations ............ 72,144 76,057 77,000
========== ========== ==========
</TABLE>
As of December 31, 1999 the Company had 1,586,615 antidilutive market price
options outstanding.
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."
27
<PAGE> 16
Summarized operating results for the combined newspaper and television
discontinued operations are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
In thousands 1999 1998 1997
- ------------ -------- -------- --------
<S> <C> <C> <C>
Revenues ........................... $ -- $ -- $121,169
Income from discontinued
operations before
income tax expense ............ $ -- $ -- $ 28,231
Income tax expense ................. -- -- 12,748
-------- -------- --------
Income from discontinued
operations .................... $ -- $ -- $ 15,483
======== ======== ========
</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 1999 1998 1997
- ------------ ---------- ---------- ----------
<S> <C> <C> <C>
Income from discontinued
operations .................... $ -- $ -- $ 15,483
Depreciation and goodwill
amortization .................. -- -- 9,062
Film amortization .................. -- -- 1,369
Payment of taxes on gain on sale ... -- (265,650) --
Other, net ......................... -- -- (1,664)
---------- ---------- ----------
Net cash provided by (used in)
discontinued operations ....... $ -- $ (265,650) $ 24,250
========== ========== ==========
</TABLE>
NOTE O - SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1999 Quarter Ended 1998 Quarter Ended
In thousands, except ----------------------------------------------- ------------------------------------------------
per share amounts December 31 September 30 June 30 March 31 December 31 September 30 June 30 March 31
- -------------------- ----------- ------------ -------- -------- ----------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ..................... $236,959 $207,632 $197,033 $188,128 $200,658 $183,409 $186,806 $177,673
Operating income ............. 33,423 30,263 30,441 24,101 29,682 26,463 26,688 19,125
Net income ................... 20,236 18,603 18,768 15,334 20,336(a) 16,920 17,010 14,105
Basic earnings per share ..... 0.30 0.27 0.27 0.22 0.29(a) 0.23 0.23 0.19
Diluted earnings per share ... 0.29 0.26 0.26 0.21 0.28(a) 0.22 0.22 0.18
</TABLE>
(a) Includes non-recurring net pension gain of $1.3 million, or two cents per
share.
NOTE P - BUSINESS SEGMENTS
Harte-Hanks is a highly focused targeted media company with continuing
operations in two segments - direct and interactive 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 and interactive marketing segment offers a complete
range of specialized, coordinated and integrated direct marketing services from
a single source. CRM/response management, CRM/database and marketing services
are provided in the direct and interactive marketing segment. CRM/response
management's revenues were $122.4 million, $87.3 million and $76.7 million in
1999, 1998 and 1997, respectively. CRM/database's revenues were $221.1 million,
$226.5 million and $186.8 million in 1999, 1998 and 1997, respectively.
Marketing services' revenues were $214.9 million, $179.3 million and $159.6
million in 1999, 1998 and 1997, respectively. Revenues from list services have
been reclassified from CRM/response management to CRM/database for all periods
presented in order to be consistent with the current year treatment. The Company
utilizes advanced technologies to enable its customers to identify, reach,
influence and nurture specific consumers or businesses. Harte-Hanks' direct and
interactive 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 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 Direct Marketing Associates, Inc. in May 1999; LYNQS Newmedia in
June; and ZD Market Intelligence, renamed Harte-Hanks Market Intelligence, in
October 1999.
28
<PAGE> 17
NOTE P - BUSINESS SEGMENTS (CONTINUED)
Information about the Company's operations in different industry segments:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
In thousands 1999 1998 1997
- ------------ ---------- ---------- ----------
<S> <C> <C> <C>
Operating revenues
Direct Marketing ....................................... $ 559,262 $ 493,898 $ 425,489
Shoppers ............................................... 270,490 254,648 212,860
---------- ---------- ----------
Total operating revenues ........................... $ 829,752 $ 748,546 $ 638,349
========== ========== ==========
Operating income
Direct Marketing ....................................... $ 79,164 $ 69,648 $ 54,360
Shoppers ............................................... 47,015 40,507 31,089
Corporate Activities ................................... (7,951) (8,197) (8,357)
---------- ---------- ----------
Total operating income ............................. $ 118,228 $ 101,958 $ 77,092
========== ========== ==========
Income from continuing operations before income taxes
Operating income ....................................... $ 118,228 $ 101,958 $ 77,092
Interest expense ....................................... (349) (193) (6,189)
Interest income ........................................ 5,662 13,474 4,412
Other, net ............................................. (730) (1,230) (196)
Pension curtailment gain ............................... -- 2,150 --
---------- ---------- ----------
Total income from continuing operations before
income taxes ..................................... $ 122,811 $ 116,159 $ 75,119
========== ========== ==========
Depreciation
Direct Marketing ....................................... $ 18,804 $ 15,977 $ 12,673
Shoppers ............................................... 5,235 5,025 4,572
Corporate Activities ................................... 87 85 82
---------- ---------- ----------
Total depreciation ................................. $ 24,126 $ 21,087 $ 17,327
========== ========== ==========
Goodwill and intangible amortization
Direct Marketing ....................................... $ 6,593 $ 3,703 $ 2,659
Shoppers ............................................... 4,069 4,187 2,475
---------- ---------- ----------
Total goodwill and intangible amortization ......... $ 10,662 $ 7,890 $ 5,134
========== ========== ==========
Total assets
Direct Marketing ....................................... $ 512,066 $ 341,653 $ 272,847
Shoppers ............................................... 196,121 197,885 207,541
Corporate Activities ................................... 61,240 175,675 474,535
---------- ---------- ----------
Total assets ....................................... $ 769,427 $ 715,213 $ 954,923
========== ========== ==========
Capital expenditures
Direct Marketing ....................................... $ 24,450 $ 18,655 $ 22,434
Shoppers ............................................... 4,434 5,764 5,912
Corporate Activities ................................... 44 24 50
---------- ---------- ----------
Total capital expenditures ......................... $ 28,928 $ 24,443 $ 28,396
========== ========== ==========
</TABLE>
Information about the Company's operations in different geographic areas:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
In thousands 1999 1998 1997
- ------------ ---------- ---------- ----------
<S> <C> <C> <C>
Operating revenues(a)
United States .......................................... $ 800,700 $ 724,659 $ 620,272
Other countries ........................................ 29,052 23,887 18,077
---------- ---------- ----------
Total operating revenues ........................... $ 829,752 $ 748,546 $ 638,349
========== ========== ==========
Long-lived assets(b)
United States .......................................... $ 102,630 $ 89,905 $ 87,575
Other countries ........................................ 3,620 2,369 1,776
---------- ---------- ----------
Total long-lived assets ............................ $ 106,250 $ 92,274 $ 89,351
========== ========== ==========
</TABLE>
(a) Geographic revenues are based on the location of the customer.
(b) Long-lived assets are based on physical location.
29
<PAGE> 18
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
In thousands, except per share amounts 1999 1998 1997 1996 1995
- -------------------------------------- ---------- ---------- ---------- ---------- ----------
Statement of Operations Data
<S> <C> <C> <C> <C> <C>
Revenues ..................................... $ 829,752 $ 748,546 $ 638,349 $ 515,460 $ 453,302
Operating expenses
Payroll, production and distribution ..... 606,676 553,529 479,742 392,494 347,520
Selling, general and administrative ...... 70,060 64,082 59,054 43,632 41,619
Depreciation ............................. 24,126 21,087 17,327 13,779 11,135
Goodwill and intangible amortization ..... 10,662 7,890 5,134 3,658 3,244
Merger costs ............................. -- -- -- 12,136(a) --
---------- ---------- ---------- ---------- ----------
Total operating expenses .............. 711,524 646,588 561,257 465,699 403,518
---------- ---------- ---------- ---------- ----------
Operating income ................................. 118,228 101,958 77,092 49,761 49,784
Interest expense, net ............................ (5,313) (13,281) 1,777 6,629 7,221
Income from continuing operations(b) ............. 72,941 68,371(c) 44,271(d) 23,084(e) 24,301(f)
Income from continuing operations
after extraordinary items, net of taxes ...... 72,941 68,371 43,396(g) 23,084 24,301
Earnings from continuing operations per
common share--diluted ........................ 1.01 0.90(c) 0.57(d) 0.30(e) 0.32(f)
Earnings from continuing operations after extra-
ordinary items per common share--diluted ..... 1.01 0.90(c) 0.56(g) 0.30(e) 0.32(f)
Cash dividends per common share .................. 0.08 0.06 0.04 0.03 0.03
Weighted-average common and common
equivalent shares outstanding--diluted ....... 72,144 76,057 77,000 77,154 75,338
Segment Data
Revenues
Direct Marketing ......................... 559,262 493,898 425,489 330,255 268,257
Shoppers ................................. 270,490 254,648 212,860 185,205 185,045
---------- ---------- ---------- ---------- ----------
Total revenues ........................... $ 829,752 $ 748,546 $ 638,349 $ 515,460 $ 453,302
========== ========== ========== ========== ==========
Operating income
Direct Marketing ......................... $ 79,164 $ 69,648 $ 54,360 $ 44,794 $ 37,774
Shoppers ................................. 47,015 40,507 31,089 24,017 20,020
General corporate ........................ (7,951) (8,197) (8,357) (19,050) (8,010)
---------- ---------- ---------- ---------- ----------
Total operating income ................... $ 118,228 $ 101,958 $ 77,092 $ 49,761 $ 49,784
========== ========== ========== ========== ==========
Other Data
Operating cash flow(h) ....................... $ 153,016 $ 130,935 $ 99,553 $ 67,198(i) $ 64,163
Capital expenditures ......................... 28,928 24,443 28,396 23,885 17,441
Balance Sheet Data (at end of period)
Property, plant and equipment, net ........... $ 106,250 $ 92,274 $ 89,351 $ 72,195 $ 59,878
Goodwill and other intangibles, net .......... 409,791 290,831 250,363 142,053 99,528
Total assets ................................. 769,427 715,213 954,923 343,005 268,994
Total long term debt ......................... 5,000 -- -- 218,005 220,468
Total stockholders' equity ................... 577,618 577,091 566,237 252,692 201,856
</TABLE>
(a) Merger costs of $12.1 million related to DiMark merger.
(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.
30
<PAGE> 19
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
San Antonio, Texas
January 26, 2000
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 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
High Low High Low
-------- ------- -------- --------
<S> <C> <C> <C> <C>
First Quarter 29 1/4 24 1/8 23 7/8 17 3/8
Second Quarter 28 22 5/8 25 13/16 20 15/16
Third Quarter 27 7/16 21 3/4 26 21 9/16
Fourth Quarter 23 15/16 19 9/16 28 1/2 18 5/16
</TABLE>
In 1999, quarterly dividends were paid at the rate of 2 cents per share. In
1998, quarterly dividends were paid at the rate of 1.5 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 2,750 holders of record.
Transfer Agent and Registrar
BankBoston
c/o EquiServe, N.A.
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 2, 2000, 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
31
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF HARTE-HANKS, INC.
As of February 1, 2000
<TABLE>
<CAPTION>
Jurisdiction of
Name of Entity Organization % Owned
- -------------- --------------- -------
<S> <C> <C>
DiMark, Inc. New Jersey 100%
DiMark Marketing, Inc. Pennsylvania 100%(1)
Direct Marketing Associates Computer Services, Inc. (shell corporation) Maryland 100%(9)
Direct Market Concepts, Inc. Florida 100%
DMK, Inc. Delaware 100%(2)
The Flyer Publishing Corporation Florida 100%
Harte-Hanks Data Services LLC Maryland 100%
Harte-Hanks Data Technologies LLC Delaware 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 Direct Marketing/Kansas City, Inc. Missouri 100%
Harte-Hanks do Brazil Consultoria e Servicos Ltda Brazil 100%(3)
Harte-Hanks Limited England 100%(3)
Harte-Hanks Market Intelligence, Inc. California 100%
Harte-Hanks Market Intelligence Espana LLC Colorado 100%
Harte-Hanks Market Intelligence Europe B.V. Netherlands 100%
Harte-Hanks Market Intelligence GmbH Germany 100%(4)
Harte-Hanks Market Intelligence Limited Ireland 100%(4)
Harte-Hanks Market Intelligence Limited UK 100%(4)
Harte-Hanks Market Intelligence SAS France 100%(4)
Harte-Hanks Market Research, Inc. New Jersey 100%
Harte-Hanks Partnership, Ltd. Texas 100%(5)
Harte-Hanks Pty. Limited Australia 100%(3)
Harte-Hanks Response Management/Austin L.P. Delaware 100%(6)
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%(7)
Mars Graphic Services, Inc. New Jersey 100%(8)
NSO, Inc. Ohio 100%
Printing Management Systems, 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 LLC
(4) Owned by Harte-Hanks Market Intelligence Europe B.V.
(5) 99.5% Owned by Harte-Hanks Delaware, Inc.
.5% Owned by Harte-Hanks , Inc.
(6) 99% Owned by Harte-Hanks Stock Plan, Inc.
1% Owned by Harte-Hanks Response Management Call Centers, Inc.
(7) Owned by Harte-Hanks Limited
(8) Owned by DiMark, Inc.
(9) Owned by Harte-Hanks Direct Marketing/Baltimore, 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.
333-63105, 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 26, 2000 relating to
the consolidated balance sheets of Harte-Hanks, Inc. and subsidiaries as of
December 31, 1999 and 1998, 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, 1999, which report appears in the 1999
annual report to shareholders which is incorporated by reference in the December
31, 1999 annual report on Form 10-K of Harte-Hanks, Inc. and (ii) our report
dated January 26, 2000, relating to the related financial statement schedule as
of and for each of the years in the three-year period ended December 31, 1999,
which report appears in the December 31, 1999 annual report on Form 10-K of the
Company.
/s/ KPMG LLP
San Antonio, Texas
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 35,196
<SECURITIES> 0
<RECEIVABLES> 157,781
<ALLOWANCES> 3,751
<INVENTORY> 7,099
<CURRENT-ASSETS> 220,133
<PP&E> 219,626
<DEPRECIATION> 113,376
<TOTAL-ASSETS> 769,427
<CURRENT-LIABILITIES> 154,017
<BONDS> 0
0
0
<COMMON> 76,392
<OTHER-SE> 501,226
<TOTAL-LIABILITY-AND-EQUITY> 769,427
<SALES> 829,752
<TOTAL-REVENUES> 829,752
<CGS> 606,676
<TOTAL-COSTS> 676,736
<OTHER-EXPENSES> (4,932)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 349
<INCOME-PRETAX> 122,811
<INCOME-TAX> 49,870
<INCOME-CONTINUING> 72,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,941
<EPS-BASIC> 1.04
<EPS-DILUTED> 1.01
</TABLE>
