-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LRzg4XATkj+SakTQcxZumPMMaSBkuRx4P5EGGZCUVH7fj3TOo3LsLkvktpHRnWFH IBAOaEA5mhdqwndYQQSqaA== 0000950134-97-002354.txt : 19970329 0000950134-97-002354.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950134-97-002354 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARTE HANKS COMMUNICATIONS INC CENTRAL INDEX KEY: 0000045919 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PUBLISHING [2741] IRS NUMBER: 741677284 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07120 FILM NUMBER: 97566691 BUSINESS ADDRESS: STREET 1: 200 CONCORD PLAZA DR STE 800 CITY: SAN ANTONIO STATE: TX ZIP: 78216 BUSINESS PHONE: 2108299000 FORMER COMPANY: FORMER CONFORMED NAME: HARTE HANKS NEWSPAPERS INC DATE OF NAME CHANGE: 19771010 10-K405 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO ------------ ------------ COMMISSION FILE NUMBER 1-7120 ---------------- HARTE-HANKS COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-1677284 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 200 CONCORD PLAZA DRIVE 78216 SAN ANTONIO, TEXAS (ZIP CODE) (Address of principal executive officers) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE -- 210-829-9000 ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED ------------------- ---------------------------- Common Stock New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None ---------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ---- ---- Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ---- Aggregate market value of the Company's voting stock held by non-affiliates on March 17, 1997, based on the $28.75 per share closing price for the Company's Common Stock on the New York Stock Exchange on such date: approximately $605,000,000. SHARES OUTSTANDING AT MARCH 17, 1997: Common Stock -- 37,217,807 shares DOCUMENTS INCORPORATED BY REFERENCE: The Company's Annual Report to Stockholders for the year ended December 31, 1996 (incorporated in Part II to the extent provided in Items 5, 6, 7 and 8 hereof). Definitive Proxy Statement for the Company's May 6, 1997 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (incorporated in Part III to the extent provided in Items 10, 11 and 12 hereof). ================================================================================ 2 Harte-Hanks Communications, Inc. Table of Contents Form 10-K Report December 31, 1996
Part I Page ---- Item 1. Business 3 Item 2. Properties 3 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 Part III Item 10. Directors and Executive Officers of the Registrant 18 Item 11. Executive Compensation 18 Item 12. Security Ownership of Certain Beneficial Owners and Management 18 Item 13. Certain Relationships and Related Transactions 18 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 19 Signatures 25
3 3 ITEM 1. BUSINESS AND ITEM 2. PROPERTIES INTRODUCTION Harte-Hanks is a diversified communications company with operations throughout the United States in four principal businesses -- direct marketing, shoppers, newspapers and television. The Company's shopper, newspaper and television businesses operate in local markets, while its direct marketing business operates nationally and internationally. The Company believes that marketing is undergoing a transition from traditional mass media to targeted marketing, or to one-to-one customer relationships. The transition is being driven by the increasing sophistication and efficiency of computer technology and a growing need among marketers to customize the product and service choices they offer to individuals. Direct marketing, which represents 50% of the Company's revenues, is leading the movement toward highly targeted and relationship marketing. The Company's shopper, newspaper and television businesses apply many of the same targeting principles as direct marketing. Harte-Hanks' strategy is based on five key elements: being a market leader in each of its businesses; increasing revenues through growing its base businesses, introducing new products, entering new markets and making acquisitions; using technology to create competitive advantage; employing people who can partner effectively with its clients; and creating shareholder value. Company revenues totaled $665.9 million in 1996. Harte-Hanks is the successor to a newspaper business begun in Texas in the early 1920s by Houston Harte and Bernard Hanks. In 1972, the Company went public and was listed on the New York Stock Exchange. The Company went private in a leveraged buyout initiated by management in 1984. In 1993, the Company again went public and listed its common stock on the NYSE. See Note M of Notes to Consolidated Financial Statements for certain financial information by business segment. DIRECT MARKETING GENERAL Harte-Hanks operates a national and international direct marketing business offering a broad range of specialized, coordinated and integrated services. The Company utilizes advanced technologies to enable its customers to identify, target and reach specific consumers or businesses. The Company believes that developments in computer technology and trends toward more sophisticated marketing analysis and measurement will continue to result in increased usage of direct marketing services. Harte- Hanks' direct marketing customers include many of America's largest retailers, banks, mutual funds companies, pharmaceutical companies, healthcare organizations, insurance companies and high technology firms, along with a growing number of international clients. In 1996, Harte-Hanks Direct Marketing had revenues of $330.3 million, which accounted for 50% of the Company's revenues. 4 4 In 1996, Harte-Hanks made several acquisitions, all in the direct marketing business segment. The largest of these was the merger of DiMark, Inc. ("DiMark") with a wholly owned subsidiary of Harte-Hanks. Each outstanding share of DiMark common stock was converted into .656 of a share of common stock of Harte-Hanks. As a result, Harte-Hanks issued approximately 6.1 million shares of its common stock to the shareholders of DiMark, and DiMark's outstanding stock options were converted into options to acquire approximately 1.5 million shares of Harte-Hanks common stock. The merger was accounted for on a pooling-of-interests basis. The remainder of the acquisitions made in 1996 are discussed below. Harte-Hanks Direct Marketing offers a complete range of specialized, coordinated and integrated direct marketing services from a single source. These services are organized into three broad sectors -- response management/teleservices, database marketing and marketing services. Response Management/Teleservices Harte-Hanks Response Management manages the inquiries clients receive from their marketing efforts, whether it be from 1-800 numbers, trade shows, fax programs or World Wide Web sites. These leads are qualified, tracked and distributed both to the appropriate sales channels as well as to client management for analysis and decision making. Many of these leads are processed and distributed over the Internet, accounting for more than 1.2 million transactions in 1996. In addition to qualifying and distributing sales leads, the Internet is being used to register attendees for seminars and training events and to manage open-ended electronic mail responses traditionally handled by phone. Using proprietary software, the Company also builds contact databases for its clients using the information gained from these response management activities. These databases help clients measure the return on their marketing communications and make more informed decisions about future marketing efforts. Two newly acquired companies in Los Angeles and Framingham, Massachusetts, enable Harte-Hanks to provide a consistent level of service to its response management customers nationwide. Another company, PRO Direct, acquired as part of the DiMark Inc. merger, has added significantly to the Company's outbound telemarketing capabilities. Altogether, the seven Harte-Hanks response management/teleservices operations maintain nearly 900 telemarketing workstations across the country. Approximately 60% of the Company's response management/teleservices business is inbound, with 40% outbound. The Company also offers response management services in Europe to its U.S. clients with international operations through a strategic alliance with a firm in Hasselt, Belgium, which Harte- Hanks has an option to acquire. In addition to the newly acquired operations, the Company provides response management services at its Austin and Boston facilities. The Austin operation serves primarily high technology customers, while the Boston operation primarily serves the mutual fund industry. 5 5 Database Marketing The Company builds customized marketing databases for specific clients and provides them with easy-to-use tools to target their best customers and prospects. Using proprietary name and address matching software, the Company standardizes large numbers of customer records from multiple sources, integrates them into a single database for each client and, if needed, appends demographic and lifestyle information. In most cases, these databases are delivered for use on clients' personal computers, networks or workstations, where the Company's P/CIS(R) software applications help clients predict the likely results of marketing promotions and track recipients' buying behavior. In addition to building a client's database and installing the software, Harte-Hanks Direct Marketing performs regular database updates and offers its stand-alone software module Trillium(R) for clients who want to integrate this capability into their data warehouses. Building on its longtime expertise in the banking industry, Harte-Hanks formed a mergers and acquisitions group in 1996 to help banks handle customer communications before, during and after mergers. It also introduced Market Advantage, a new line of products for credit unions and community banks. As a further extension of the client's marketing arm, Harte- Hanks introduced a marketing planning and analysis service in 1996. Specific capabilities include tracking and reporting, mailing analysis, modeling, database profiling, marketing applications consulting and program development. The Company also specializes in custom research for direct marketers, providing yet another analytical tool to help clients define their marketing objectives, develop effective programs, target the right prospect and measure results. Information gathered through research can be used to enrich the clients' marketing databases and assess customer satisfaction. In addition, the Company operates as a service bureau for clients who need it, preparing list selections, maximizing deliverability and reducing clients' mailing costs through sophisticated postal coding, hygiene and address updates through a non-exclusive National Change of Address license with the U.S. Postal Service. Database services are marketed to specific industries or markets with software modifications tailored to each industry or market. Having established the basic technological foundation, the Company is able to provide database services to new industries and markets by modifying its existing technology. The Company currently provides database services to the banking, retail, insurance, utilities, automotive and business-to-business markets. The Company also provides database services internationally, and database sales offices were opened in 1996 in Brazil and Australia, in addition to existing offices in London and Toronto. In early 1997, the Company expanded its overall production capacity, especially for European clients, by acquiring Information for Marketing, Limited, a London-based provider of database marketing services. 6 6 In November, 1996 the Company expanded its marketing services, response management/teleservices and database capabilities by acquiring Marketing Communications, Inc. based in Kansas City, which provides marketing services to the pharmaceutical industry and others. Marketing Services Harte-Hanks provides a variety of specialized services to help clients develop and execute targeted marketing communication programs. These include such upfront services as strategic development and creative services, along with back-end services such as print and graphics, personalization of communication pieces using laser and inkjet printers, targeted mail and fulfillment, and transportation logistics. The Company's mail tracking capability and longstanding relationships with the U.S. Postal Service help ensure that customer mailings reach their destinations on time. And, by controlling the final stage of the print distribution process through its transportation logistics operations, the Company facilitates the delivery of its clients' materials while holding costs to a minimum. These capabilities are provided in a specialized, coordinated and integrated approach through eight primary facilities nationwide. The release of a new product, MediaSelect, helps clients more effectively distribute their spending among various print media in specific geographic markets. Another 1996 new product, TOPS4, helps catalogers, printers and retailers save money in distributing fourth-class bound materials. Sales and Marketing Harte-Hanks' national direct marketing sales forces are headquartered in Cincinnati, Ohio, with additional offices maintained throughout the United States and in Toronto, London, Sao Paulo, Brazil and Melbourne, Australia. The overall sales focus is to position Harte-Hanks as a single-source solution for a client's targeted marketing needs. The sales forces emphasize cross-selling the range of direct marketing services and are supported by employees in each sector. The Company generally charges transaction-related fees each time it provides direct marketing services. For certain database projects, it charges a one-time, negotiated fee to build a database, plus an additional fee each time the database is updated. 7 7 Facilities Direct marketing services are provided at the following facilities: RESPONSE MANAGEMENT/TELESERVICES MARKETING SERVICES (CONTINUED) Austin, Texas Jacksonville, Florida Brockton, Massachusetts New York, New York Cherry Hill, New Jersey South Belmar, New Jersey Clearwater, Florida Westville, New Jersey Framingham, Massachusetts Los Angeles, California NATIONAL SALES HEADQUARTERS River Edge, New Jersey Cincinnati, Ohio DATABASE MARKETING INTERNATIONAL OFFICES Billerica, Massachusetts London, England Langhorne, Pennsylvania Melbourne, Australia Baltimore, Maryland Sao Paulo, Brazil Kansas City, Kansas Toronto, Canada River Edge, New Jersey MARKETING SERVICES Baltimore, Maryland Bloomfield, Connecticut Cincinnati, Ohio Dallas/Fort Worth, Texas Deerfield Beach, Florida Forty Fort, Pennsylvania Fullerton, California Competition Harte-Hanks' direct marketing business faces competition from other direct marketing companies in each sector, as well as from print and electronic media and other forms of advertising. Harte- Hanks believes that its state-of-the-art database and response management/teleservices capabilities, combined with its national production capability, industry focus and ability to offer a full range of integrated services, enable the Company to compete effectively. 8 8 SHOPPERS GENERAL Harte-Hanks is the largest publisher of advertising shoppers in North America based on weekly circulation and revenues, and the only national media company that focuses on shoppers as a core business. Shoppers are weekly advertising publications delivered free by third-class mail to all households in a particular geographic area. Shoppers offer advertisers a targeted, cost-effective local advertising system, with virtually 100% penetration in their area of distribution. Shoppers are particularly effective in large markets with high media fragmentation in which major metropolitan newspapers generally have low penetration. As of December 31, 1996, shoppers reached approximately 6.9 million households in four markets each week -- Southern California, Northern California, South Florida and Dallas/Fort Worth. The Company's Southern California shopper, PennySaver, accounted for 63% of these households. Harte-Hanks publishes 580 individual shopper editions each week distributed to zones of approximately 12,000 households each. This allows single-location, local advertisers to saturate a single geographic zone, while enabling multiple-location advertisers to saturate multiple zones. This unique delivery system gives large and small advertisers alike a cost-effective way to reach their target markets. The Company believes that its zoning capabilities and production technologies have enabled it to saturate and target geographic areas allowing its advertisers to effectively target their customers. The Company's strategy is to increase its share of local advertising in its existing circulation areas, and, over time, to increase circulation through internal expansion into contiguous areas and make selective acquisitions. In 1996, Harte- Hanks shoppers had revenues of $185.2 million, accounting for approximately 28% of the Company's revenues. During the period 1992 through 1994, 1.1 million households were added to the Company's shopper circulation through internal expansion, primarily in Southern California, South Florida and Northern California. In September 1996, Harte-Hanks added another 33,000 contiguous households to its Southern California circulation. The Company believes that expansions provide increased revenues and operating income as the publications in these new areas mature. Publications Harte-Hanks shoppers are published in Southern California, Northern California, South Florida and Dallas/Fort Worth. The Southern California operation accounted for 70% of all shopper revenues in 1996. 9 9 The following table sets forth certain information with respect to shopper publications:
December 31, 1996 ------------------------ Number of Market Publication Name Circulation Zones - ------------------- ------------------ ----------- --------- Southern California PennySaver 4,381,500 375 Northern California Potpourri 1,100,000 79 Miami/Ft. Lauderdale The Flyer 1,042,900 90 Dallas/Ft. Worth The Shopper's Guide 422,500 36 ---------- ---- Total 6,946,900 580
Shopper publications contain classified and display advertising and are delivered to consumers' homes by third-class saturation mail. The typical shopper publication contains over 40 pages and is 7 by 9-1/2 inches in size. Each edition, or zone, is targeted around a natural neighborhood marketing pattern. Shoppers also serve as a distribution vehicle for multiple ads from national and regional advertisers; "print and deliver" single-sheet inserts designed and printed by the Company; coupon books; preprinted inserts from major retail chains; and a four-color proprietary product, MARQUEE. Harte-Hanks shopper publications also offer audiotext voice mail in a pay-per-call format. The Company has acquired, developed and applied innovative technology and customized equipment in the publication of its shoppers, contributing to efficiency and growth. A proprietary pagination system, jointly developed by the Company and a software company, became fully operational for the shoppers in Southern California and South Florida in 1995. This software has made it possible for the hundreds of weekly zoned editions to be designed, built and output to plate-ready negatives in a paperless, digital environment. Automating the production process saves on labor, newsprint and overweight postage. This software also allows for better ad tracking, immediate checks on individual zone and ad status, and more on-time press starts with less manpower. In another technological innovation, Harte-Hanks has expanded the ways its advertisers can reach prospective customers by establishing World Wide Web sites for its Southern California, Northern California and South Florida shoppers. The websites offer electronic access to ads from that week's printed publications. Visitors to these sites can search the overall database for specific types of products or services. Sales and Marketing The Company maintains local sales offices throughout its geographic markets and employs more than 400 commissioned sales representatives who develop both targeted and saturation advertising programs for customers. The sales organization provides service to both national and local advertisers through its telemarketing departments and field sales representatives. Shopper customers vary from individuals with a single item for sale to local neighborhood advertisers to large multi-location advertisers. The core customers continue to be local service businesses and small 10 10 retailers. The Company is increasingly focusing its marketing efforts on larger national accounts by emphasizing its ability to deliver saturation advertising in defined zones in combination with advertising in the shopper publication. Additional focus is being placed on particular industries through the development of sales specialists. These sales specialists are being used to drive revenue growth in the automotive, real estate, employment and healthcare industries. The Company utilizes a proprietary sales and marketing system (SAMS) to enter customer orders directly from the field, instantly checking space availability, ad costs and other pertinent information. A paperless order entry system on a Unix platform, SAMS has built-in error-reducing safeguards, minimizing costly sales adjustments. In addition, SAMS facilitates placement of advertising in multiple zoned editions. The Company has expanded SAMS so that, in addition to allowing advertising information to be entered for immediate publication, it will build a relational customer database, enabling sales personnel to access customer history by designated variables, thereby identifying similar potential customers and assisting follow-up with existing customers. Facilities Harte-Hanks shoppers are produced at owned or leased facilities in the markets they serve. The Company has five production facilities -- two in Southern California and one in each of its other markets -- and 21 sales offices. Competition Harte-Hanks shoppers compete primarily with metropolitan daily newspapers, shared mail packages and other local advertising media. Shoppers also compete in varying degrees for advertisers and readers with magazines, radio, broadcast and cable television, directories, other shoppers and other communications media that operate in their markets. The Company believes that its production systems and technology, which enable it to publish separate editions in narrowly targeted zones, allow it to compete effectively, particularly in large markets with high media fragmentation. HARTE-HANKS NEWSPAPERS GENERAL Harte-Hanks publishes the only daily newspaper in Abilene, Corpus Christi, San Angelo and Wichita Falls, Texas and Anderson, South Carolina (the "five principal newspapers"). The Company also publishes one daily and seven non-daily newspapers in higher income suburban areas of Dallas. In all of its daily newspaper markets, the Company realizes additional revenue from niche publications and specialized services (such as special interest publications and direct mail programs) aimed at targeted consumer groups. Harte-Hanks' strategy in its newspaper business is to build upon its strong local franchises, to offer complementary products and services, and to expand its market areas and customer base. 11 11 The Company's five principal newspapers have achieved high levels of paid household penetration. For 1996, circulation penetration in the city zones for the five principal newspapers ranged from 46% to 66% on a daily basis and from 60% to 78% on Sunday, providing advertisers with broad coverage of these local markets. According to Standard Rate & Data Service's Circulation '96, the daily editions of the Company's newspapers in Abilene, San Angelo and Wichita Falls ranked among the top 35 in the United States based on household penetration in United States Census Bureau metropolitan statistical areas. In addition, these same newspapers' Sunday editions rank in the top 15 in the United States based on household penetration. Harte-Hanks community newspapers in suburban Dallas concentrate on local news and other items of interest to those affluent communities. Harte-Hanks newspapers are recognized for their editorial excellence and community leadership, with each newspaper edited locally to reflect the views and interests of the particular market it serves. In 1996, Harte-Hanks newspapers had revenues of $124.3 million, accounting for approximately 19% of the Company's revenues. Five Principal Newspapers The Company believes that the high penetration levels of its five principal newspapers are important to advertisers in their determination of where to allocate their marketing dollars, as advertisers increasingly require evidence that their messages are actually reaching consumers. The Company's five principal newspapers, together with their related niche publications, accounted for approximately 90% of Harte-Hanks newspaper revenues in 1996. The following table sets forth certain information with respect to the Company's five principal newspapers for 1996:
Average Average Paid Circulation Circulation (1) Penetration (2) ------------------ ----------------- Publication Daily Sunday Daily Sunday - ----------- ----- ------ ----- ------ Corpus Christi Caller-Times 68,161 90,312 46% 60% (Founded 1877) Abilene Reporter-News 41,572 50,967 56% 69% (Founded 1881) Anderson Independent-Mail 41,442 47,834 66% 76% (Founded 1899) Wichita Falls Times Record News 38,150 45,211 58% 69% (Founded 1907) San Angelo Standard-Times 32,749 38,813 64% 78% (Founded 1884)
(1) In 1996, approximately 89% of daily circulation was home-delivered, with the remaining 11% from single-copy sales. (2) Penetration is average paid circulation in the city zone divided by the number of households in the city zone. 12 12 The Corpus Christi Caller-Times is a morning newspaper serving Corpus Christi and seven surrounding counties in South Texas. In 1996, the Caller-Times was named Best Daily Newspaper under 100,000 circulation in five Southwestern states, marking the seventh time in eight years it has been awarded Best Daily Newspaper honors by the Press Club of Dallas. Average Sunday circulation of the Sunday edition of the Caller-Times increased from 87,745 in 1988 to 90,312 in 1996. The Corpus Christi metropolitan statistical area had an estimated population of 384,700 as of December 31, 1995. The local economy is based on tourism, military, shipping, oil and gas production, petrochemicals, refining, manufacturing, agriculture, higher education, regional health services and regional retail services. The Port of Corpus Christi is the nation's sixth largest in terms of shipping tonnage. The Abilene Reporter-News is a morning newspaper serving Abilene and a 15-county regional trade market in Central West Texas. The Abilene metropolitan statistical area had an estimated population of 122,200 as of December 31, 1995. The Reporter-News was a finalist in the Press Club of Dallas selections as Best Daily Newspaper in Texas for its circulation size in 1994 and 1995. The Sunday Reporter-News ranks second among Texas' Sunday newspapers in household penetration. The Abilene economy is built around the oil and gas industry, agriculture, light industry, military, regional health services and higher education. The Anderson Independent-Mail is a morning newspaper serving Anderson, South Carolina and its surrounding area. The Independent-Mail has a record of product improvement and circulation growth during the 1990's. The newspaper has won the National Headliner Award for outstanding reporting in its circulation class in the United States two of the last five years. The newspaper has placed among the Associated Press top 20 sports sections in the United States in its circulation class in each of the last eight years. Anderson County had an estimated population of 154,800 as of December 31, 1995 and is the retail and manufacturing center for a nine-county area covering the northeast corner of Georgia and the northwest corner of South Carolina. The market, located in the Interstate 85 business corridor between Atlanta, Georgia and Charlotte, North Carolina, includes major industries producing rubber products, textiles and automotive parts and supplies. Service industries focus on government, healthcare, recreation and retirement. The market is also home to Clemson University. The Wichita Falls Times Record News is a morning newspaper serving Wichita Falls, Texas and 16 surrounding counties in North Texas and Southern Oklahoma. The Times Record News is ranked second among all Texas daily newspapers in paid household penetration in its metropolitan statistical area and third for Sunday circulation. The Wichita Falls metropolitan statistical area had an estimated population of 132,100 as of December 31, 1995. Sheppard Air Force Base, one of the nation's largest training installations and home of NATO fighter pilot training, is a significant factor in the Wichita Falls economy. Wichita Falls is home to the 2,800-bed James V. Allred Unit of the Texas Department of Criminal Justice system. The city also has two major regional hospitals and ten assisted-living facilities and is home to Midwestern State University. 13 13 The San Angelo Standard-Times is a morning newspaper serving San Angelo, Texas and its surrounding area. The Standard-Times was the finalist for Best Daily newspaper honors in five Southwestern states in 1996 in competition sponsored by the Press Club of Dallas. The San Angelo metropolitan statistical area had an estimated population of 103,400 as of December 31, 1995. San Angelo has a diversified economic base consisting of petroleum, military, regional health services, agriculture, light industry and higher education. SITEL Corporation, a fast-growing telemarketing services company which located in San Angelo in 1995, has now exceeded the 1,000-employee mark and will be adding another 200-400 employees by mid-year 1997. The $16 million Texas Department of Information Resources Disaster Recovery Center at Angelo State University opened in late 1996. Ranchers Lamb of Texas, a consortium of local producers, banks and business interests, broke ground on a $3 million lamb processing plant that will have 30 jobs initially. Goodfellow Air Force Base, a significant factor in the San Angelo economy, has had many significant building projects over the years, including a new civil engineering complex and upgrading of all communications infrastructure to support further expansions of missions at the base. Harte-Hanks Community Newspapers The Company publishes one daily and seven non-daily newspapers in the higher income suburban communities of northern Dallas. Harte- Hanks Community Newspapers concentrate on local news and other items of interest to the communities they serve and allow advertisers to target consumers in these communities. The community newspapers compete with daily newspapers published in the metropolitan Dallas area, as well as zoned editions and other non- daily publications. The Company's non-daily newspapers are published either once or twice a week, and many of them are distributed free of charge. The following table sets forth certain information with respect to the Company's community newspapers for 1996:
Type of Average Location Publication Name Publication Circulation - -------- ---------------- ----------- ----------- Dallas Area Plano Star Courier Daily 12,467 Sunday 13,885 Mesquite News Non-daily 29,981 Lewisville Leader Non-daily 25,816 The Leader Non-daily 11,795 McKinney Messenger Non-daily 8,000 Frisco Life Non-daily 4,300 Allen American Non-daily 4,146 Coppell Gazette Non-daily 4,091
14 14 Niche Publications and Services In addition to its primary newspaper products, the Company publishes numerous niche advertising and special interest publications in all of its markets to achieve increased market coverage. The specialized publications include newsstand publications, total market coverage vehicles, guides covering specialized subjects such as television and real estate, editions zoned to particular geographic areas, weekly news products and military publications. The Company's newspapers continue to grow their local direct marketing services and have expanded this in 1996 with the installation of specialized printing equipment in each of the principal markets. The Company also offers audiotext voice mail services to readers and advertisers, and each newspaper now provides advertising and information services on the World Wide Web. Sales and Marketing The Company maintains local sales offices in each of its newspaper markets. Each office has commissioned sales representatives dedicated specifically to advertising or circulation sales. In 1995 the Company launched its Potential Based Marketing strategy which uses databases of information to support growth by examining the "potential" of its customers, products and services, markets and people. Harte-Hanks uses marketing techniques including programs whereby an advertiser purchases a package consisting of multiple advertisements over a specified period of time for a fixed budget amount. Harte-Hanks offers a combination of products and services as part of these advertising programs. The niche publications and services offer customers increased market coverage or the ability to target specific consumer groups. Facilities Harte-Hanks newspaper operations are housed in modern facilities that are owned by the Company in its five principal newspaper markets and leased facilities in suburban Dallas. The Company made substantial investments in prepress systems and equipment in 1996. These investments are expected to increase productivity and shorten manufacturing time, allowing for later news and advertising deadlines. Competition There are no other daily newspapers published in the markets where the Company publishes its five principal newspapers. The Company's community newspapers face increasing competition from the strong metropolitan daily newspaper in Dallas, including its local editions. Each of the Company's newspapers competes in varying degrees for advertisers and readers with newspapers, magazines, radio, broadcast and cable television, shoppers, directories, direct mail and other communications media that operate in its markets. 15 15 TELEVISION GENERAL The Company owns and operates KENS-TV, a CBS-affiliated VHF station in San Antonio, Texas, the 38th largest television market in the United States according to Nielsen Ratings Service. San Antonio is the business and retail center for South Texas and has a diversified economy based on tourism, military, healthcare and international trade. In 1996, Harte-Hanks Television had revenues of $26.1 million, which accounted for approximately 4% of the Company's revenues. The Company believes that its market leadership results from strong local news programming and highly visible community involvement and public affairs projects. KENS programs 29 hours of live, local news each week. The station introduced 7:00 a.m. and 4:30 p.m. newscasts to its daily lineup in 1996 and added a half-hour live, local sports show on Saturdays. KENS has been affiliated with CBS since the station's inception. For the 24th straight year, KENS' late night newscast finished 1996 as San Antonio's top rated newscast, growing its audience share more than 70% over the CBS weekday prime time averages. The station was one of only two CBS affiliates in the 33 major metered markets to win its late local news race. According to the November 1996 Nielsen Ratings Index, KENS broadcasts to a market of approximately 655,700 households, defined as the designated market area (the "DMA"). The San Antonio DMA is served by 10 television stations, including stations affiliated with the other two major national networks, a Fox affiliate, two stations affiliated with Spanish language networks, three independent stations and one public broadcasting station. Cable penetration in the City of San Antonio is approximately 66%. San Antonio historically has ranked higher in terms of total television advertising dollars spent than its market ranking. Because of its market ranking and ethnic diversity, San Antonio has experienced regional and national advertising growth and frequently enjoys test-market status. Harte-Hanks' strategy is to maintain its leadership position in order to continue to increase its television revenues and to capitalize on the station's reputation and leadership position by providing additional products and services for advertisers. The Company acquired an AM radio station in San Antonio, which began broadcasting as KENS-AM on October 15, 1993. KENS-AM's news and information format features simulcasts of KENS-TV's "Eyewitness News," along with call-in talk shows, issues-oriented programming and expanded advertiser information programs. Harte-Hanks expanded its radio commitment in 1995 by doubling KENS-AM's signal power. The Company also offers video production services in its full-service production facility. Video production services are provided for programming, commercial and industrial applications, and live satellite uplinking worldwide. 16 16 Sales and Marketing Local advertising spots are sold by KENS sales personnel. National advertising spots are sold by Katz Communications, an independent advertising sales agent with offices throughout the United States. Generally, advertising rates for national spot and local advertising are determined by the individual station, which receives all of the revenues (less agency commissions). Rates are influenced both by the demand for advertising time and the popularity of the station's programming. Most advertising during network programs is sold by the network, which pays its affiliated stations negotiated fees for broadcasting such programs. Advertising rates charged by a television station are based primarily on the size of the market and the station's ability to attract audiences as reflected in surveys made by national rating services. Rates are highest during the most desirable viewing hours. Normally a majority of local affiliate station revenues comes from locally programmed dayparts, particularly local newscasts. Sales of advertising for KENS-AM and production services are handled by a separate sales staff working with KENS' television sales staff. Facilities KENS owns a 50,000 square-foot facility constructed in 1982. The facility includes two video production studios with separate technical control rooms, a graphics facility and a satellite uplink facility. The offices and studio of KENS-AM radio are also located at this facility. Competition KENS competes with other advertising media such as newspapers and magazines, and, within its coverage areas, television and radio stations serving the same or nearby areas. KENS also competes with the local cable television system, which has 66% penetration in the City of San Antonio, according to a report published by Nielsen Ratings in November 1996. Regulation of Television and Radio The FCC regulates television and radio stations under the Communications Act of 1934, as amended (the "Communications Act"), which together with FCC rules and policies thereunder governs the issuance, renewal and assignment of licenses; technical operation; and, to a limited extent, program, employment and commercial practices. The recently enacted Telecommunications Act of 1996 ("Telecommunications Act") effected significant changes in the Communications Act. Under the Telecommunications Act, television and radio broadcast station licenses are issued for a maximum term of eight years and are renewable upon application for additional eight-year terms. The KENS-TV broadcast station license was renewed in September 1993 for a term expiring August 1, 1998. The license of the AM radio station will expire August 1, 1997. Renewal applications are granted without hearing if the licensee's qualifications are not materially challenged by either a third party or the FCC. Despite the relatively short term license period, the broadcast industry has been 17 17 characterized by stability. Harte-Hanks has operated television broadcast stations since 1962, and to date its renewal applications have been granted without hearing. EMPLOYEES As of December 31, 1996, Harte-Hanks employed 6,015 full-time employees and 1,495 part-time employees, as follows: direct marketing -- 3,229 full-time and 1,089 part-time employees; shoppers-- 1,388 full-time and 187 part-time employees; newspapers -- 1,260 full-time and 197 part-time employees; television -- 135 full-time and 22 part-time employees; and corporate office -- 26 full-time employees. None of the work force is represented by labor unions. The Company considers its relations with its employees to be good. FACILITIES Harte-Hanks' executive offices are located in San Antonio, Texas and occupy approximately 17,000 square feet in leased premises. The Company's business is conducted in facilities nationwide containing aggregate space of approximately 3.2 million square feet. Approximately 2.3 million square feet are held under leases, which expire at dates through 2010. The balance of the properties, which are used primarily in the Company's newspaper, television and Southern California shopper operations, are owned by the Company. ITEM 3. LEGAL PROCEEDINGS The Company from time to time becomes involved in various claims and lawsuits incidental to its businesses, including defamation actions. In the opinion of management, after consultation with counsel, any ultimate liability arising out of currently pending claims and lawsuits will not have a material effect on the financial condition or operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1996 at page 32. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1996 at page 30. 18 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1996 at pages 13 through 18. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following information is set forth in the Company's Annual Report to Stockholders for the year ended December 31, 1996, which is incorporated herein by reference: All Consolidated Financial Statements (pages 19 through 22); all Notes to Consolidated Financial Statements (pages 23 through 29); and the Independent Auditors' Report (page 31). With the exception of the information herein expressly incorporated by reference, the Company's Annual Report to Stockholders for the year ended December 31, 1996 is not deemed filed as part of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. MANAGEMENT Incorporated herein by reference from the information in the Company's definitive proxy statement dated March 28, 1997 for the May 6, 1997 Annual Meeting of Stockholders under the caption "Management -- Directors and Executive Officers on pages 4 and 5. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the information in the Company's definitive proxy statement dated March 28, 1997 for the May 6, 1997 Annual Meeting of the Stockholders under the caption, "Executive Compensation and Other Information" on pages 6 through 9. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the information in the Company's definitive proxy statement dated March 28, 1997 for the May 6, 1997 Annual Meeting of Stockholders under the caption "Security Ownership of Management and Principal Stockholders" on pages 3 and 4. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 19 19 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following consolidated financial statements are incorporated by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1996 attached hereto: Consolidated Balance Sheets, December 31, 1996 and 1995 Consolidated Statements of Operations, Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows, Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity, Years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Independent Auditors' Report (a) (2) The following accountants' report and financial schedule for years ending December 31, 1996, 1995 and 1994 are submitted herewith: Independent Auditors' Report 10-K Schedule Schedule VIII -- Valuation and Qualifying Accounts All other schedules are omitted as the required information is inapplicable. 20 20 (a) (3) EXHIBITS
Exhibit No. Description of Exhibit Page No. - ------- -------------------------------------------------------------- --------- 2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 2(b) Agreement and Plan of Merger dated as of February 4, 1996 among Harte-Hanks Communications, Inc., HHD Acquisition Corp. and DiMark, Inc. (filed as Appendix A to the Company's Registration Statement No. 333-2047 and incorporated by reference herein). 3(a) Amended and Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 3(b) Amended and Restated Bylaws (filed as Exhibit 3(b) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 3(c) Amendment dated April 30, 1996 to Amended and Restated Certificate of Incorporation (filed as Exhibit 3(c) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). 3(d) Amended and Restated Certificate of Incorporation as amended through April 30, 1996 (filed as Exhibit 3(d) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). 4(a) Long term debt instruments are not being filed pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K. Copies of such instruments will be furnished to the Commission upon request. 10(a) 1984 Stock Option Plan (filed as Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1984 and incorporated herein by reference).
21 21 (a) (3) EXHIBITS (continued)
Exhibit No. Description of Exhibit Page No. - ------- ------------------------------------------------------------ --------- 10(b) Registration Rights Agreement dated as of September 11, 1984 among HHC Holding Inc. and its stockholders (filed as Exhibit 10 b) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 10(c) HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit 10(1) to the Company's Form 10-K for the year ended December 31, 1991 and incorporated by reference herein). 10(d) Amendment to HHC Holding Inc 1991 Stock Option Plan (filed as Exhibit 10(1) to the Company's Form 10-K for the year ended December 31, 1992 and incorporated by reference herein). 10(e) Third Amended and Restated Loan Agreement dated May 19, 1993 among the Company, The Toronto-Dominion Bank, NationsBank of Texas, N.A., Fleet Bank (formerly National Westminster Bank USA), Corestates Bank, N.A., The Bank of Nova Scotia, CIBC, Inc. and National Bank of Canada; and Toronto-Dominion (Texas), Inc., as agent (filed as Exhibit 10(1) to the Company's 10-Q for the quarter ended June 30, 1993 and incorporated by reference herein). 10(f) Note Purchase Agreement by and between HHC Holding Inc. and The Goldman Sachs Group, L.P. (filed as Exhibit 10(f) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(g) Severance Agreement between Harte-Hanks Communications, Inc. and Larry Franklin, dated as of July 23, 1993 (filed as Exhibit 10(f) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(h) Form of Severance Agreement between Harte-Hanks Communications, Inc. and certain Executive Officers of the Company, dated as of July 23, 1993 (filed as Exhibit 10(h) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein).
22 22 (a) (3) EXHIBITS (continued)
Exhibit No. Description of Exhibit Page No. - ------- ------------------------------------------------------------- --------- 10(i) Amendment No. 2 to HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit 10(1) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(j) Harte-Hanks Communications, Inc. Pension Restoration Plan (filed as Exhibit 10(j) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(k) First Amendment, dated as of November 3, 1993 to Third Amended and Restated Loan Agreement dated May 19, 1993 among the Company, The Toronto-Dominion Bank, NationsBank of Texas, N.A., Fleet Bank (formerly National Westminster Bank USA), The First National Bank of Boston, Bank of Hawaii, Corestates Bank, N.A., The Bank of Nova Scotia, CIBC, Inc., and National Bank of Canada; and Toronto-Dominion (Texas), Inc., as agent (filed as Exhibit 10(1) to the Company's Form 10-Q for the quarter ended September 30, 1993 and incorporated by reference herein). 10(l) Amendment No. 1, dated as of November 10, 1993 to Note Purchase Agreement by and between Harte-Hanks Communications, Inc. and GS Capital Partners, L.P., Stone Street Fund 1992, L.P. and Bridge Street Fund 1992, L.P. (filed as Exhibit 10(1) to the Company's Form 10-Q for the quarter ended September 30, 1993 and incorporated by reference herein). 10(m) Harte-Hanks Communications, Inc. Incentive Bonus Plan (filed as Exhibit 10(m) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 10(n) Second Amendment to Third Amended and Restated Loan Agreement dated as of February 2, 1995 among the Company, NationsBank of Texas, N.A., Fleet Bank (formerly National Westminster Bank USA), The Bank of Nova Scotia, The First National Bank of Boston, Bank of Hawaii, The Bank of Tokyo-Mitsubishi, Ltd., Dallas Agency, Corestates Bank, N.A. and CIBC, Inc. and Toronto-Dominion (Texas), Inc. in its Individual Capacity and as Agent (filed as Exhibit 10(n) to the Company's Form 10-Q for the quarter ended March 31, 1995 and incorporated by reference herein).
23 23 (a) (3) EXHIBITS (continued)
Exhibit No. Description of Exhibit Page No. - ------- ------------------------------------------------------------------ --------- 10(o) Amendment No. 3 to Harte-Hanks Communications (formerly HHC Holding Inc.) 1991 Stock Option Plan (filed as Exhibit 10(o) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). 10(p) Harte-Hanks Communications, Inc. 1996 Incentive Compensation Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). *11 Statement Regarding Computation of Net Income (Loss) Per Common Share. 28 *13 Annual Report to Securityholders (only those portions incorporated by reference into the Form 10-K are filed herewith). 29 *21 Subsidiaries of the Company. 49 *23 Consent of KPMG Peat Marwick. 50 24 Power of Attorney (included on the signature page of the Registration Statement on Form S-2 filed with the Commission on September 23, 1993). *27 Financial Data Schedule. 51
- ------------------ *Filed herewith 24 24 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) 14(b) Reports on Form 8-K No reports on Form 8-K have been filed during the fourth quarter of 1996. 14(c) Exhibits -- The response to this portion of item 14 is submitted as a separate section of this report on pages 28 to 51. 14(d) Financial Statement Schedule -- The response to this portion of Item 14 is submitted as a separate section of this report on page 27. The agreements set forth above describe the contents of certain exhibits thereunto which are not included. However, such exhibits will be furnished to the Commission upon request. 25 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Harte-Hanks Communications, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARTE-HANKS COMMUNICATIONS, INC. By: /s/ Larry Franklin ----------------------------------- Larry Franklin President & Chief Executive Officer Date: March 24, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated. /s/ Houston H. Harte /s/ Dr. Peter T. Flawn - --------------------------------- --------------------------------- Houston H. Harte, Chairman Dr. Peter T. Flawn, Director /s/ Larry Franklin /s/ Christopher M. Harte - --------------------------------- --------------------------------- Larry Franklin, Director Christopher M. Harte, Director /s/ Edward H. Harte /s/ James L. Johnson - --------------------------------- --------------------------------- Edward H. Harte, Director James L. Johnson, Director /s/ Richard M. Hochhauser /s/ David L. Copeland - --------------------------------- --------------------------------- Richard M. Hochhauser, Director David L. Copeland, Director 26 26 INDEPENDENT AUDITORS' REPORT 10-K SCHEDULES The Board of Directors and Stockholders Harte-Hanks Communications, Inc.: Under date of January 24, 1997, we reported on the consolidated balance sheets of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of operations, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1996, as contained in the 1996 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP San Antonio, Texas January 24, 1997 27 27 Harte-Hanks Communications, Inc. and Subsidiaries Financial Statement Schedules Schedule VIII Valuation and Qualifying Accounts (in thousands)
Additions Balance at Charged to Balance Beginning Costs and at End Description of Year Expenses Deductions of Year - ---------------------------------------- --------- --------- ---------- --------- Allowance for doubtful accounts: Year ended December 31, 1996 ...... $ 2,584 $ 2,748 $ 3,337 $ 1,995 ========= ========= ========= ========= Year ended December 31, 1995 ...... $ 3,155 $ 3,416 $ 3,987 $ 2,584 ========= ========= ========= ========= Year ended December 31, 1994 ...... $ 2,283 $ 4,863 $ 3,991 $ 3,155 ========= ========= ========= =========
28 EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No. - ------- -------------------------------------------------------------- --------- 2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 2(b) Agreement and Plan of Merger dated as of February 4, 1996 among Harte-Hanks Communications, Inc., HHD Acquisition Corp. and DiMark, Inc. (filed as Appendix A to the Company's Registration Statement No. 333-2047 and incorporated by reference herein). 3(a) Amended and Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 3(b) Amended and Restated Bylaws (filed as Exhibit 3(b) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 3(c) Amendment dated April 30, 1996 to Amended and Restated Certificate of Incorporation (filed as Exhibit 3(c) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). 3(d) Amended and Restated Certificate of Incorporation as amended through April 30, 1996 (filed as Exhibit 3(d) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). 4(a) Long term debt instruments are not being filed pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K. Copies of such instruments will be furnished to the Commission upon request. 10(a) 1984 Stock Option Plan (filed as Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1984 and incorporated herein by reference).
29
Exhibit No. Description of Exhibit Page No. - ------- ------------------------------------------------------------- --------- 10(b) Registration Rights Agreement dated as of September 11, 1984 among HHC Holding Inc. and its stockholders (filed as Exhibit 10 b) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 10(c) HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit 10(1) to the Company's Form 10-K for the year ended December 31, 1991 and incorporated by reference herein). 10(d) Amendment to HHC Holding Inc 1991 Stock Option Plan (filed as Exhibit 10(1) to the Company's Form 10-K for the year ended December 31, 1992 and incorporated by reference herein). 10(e) Third Amended and Restated Loan Agreement dated May 19, 1993 among the Company, The Toronto-Dominion Bank, NationsBank of Texas, N.A., Fleet Bank (formerly National Westminster Bank USA), Corestates Bank, N.A., The Bank of Nova Scotia, CIBC, Inc. and National Bank of Canada; and Toronto-Dominion (Texas), Inc., as agent (filed as Exhibit 10(1) to the Company's 10-Q for the quarter ended June 30, 1993 and incorporated by reference herein). 10(f) Note Purchase Agreement by and between HHC Holding Inc. and The Goldman Sachs Group, L.P. (filed as Exhibit 10(f) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(g) Severance Agreement between Harte-Hanks Communications, Inc. and Larry Franklin, dated as of July 23, 1993 (filed as Exhibit 10(f) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(h) Form of Severance Agreement between Harte-Hanks Communications, Inc. and certain Executive Officers of the Company, dated as of July 23, 1993 (filed as Exhibit 10(h) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein).
30
Exhibit No. Description of Exhibit Page No. - ------- ------------------------------------------------------------- --------- 10(i) Amendment No. 2 to HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit 10(1) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(j) Harte-Hanks Communications, Inc. Pension Restoration Plan (filed as Exhibit 10(j) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(k) First Amendment, dated as of November 3, 1993 to Third Amended and Restated Loan Agreement dated May 19, 1993 among the Company, The Toronto-Dominion Bank, NationsBank of Texas, N.A., Fleet Bank (formerly National Westminster Bank USA), The First National Bank of Boston, Bank of Hawaii, Corestates Bank, N.A., The Bank of Nova Scotia, CIBC, Inc., and National Bank of Canada; and Toronto-Dominion (Texas), Inc., as agent (filed as Exhibit 10(1) to the Company's Form 10-Q for the quarter ended September 30, 1993 and incorporated by reference herein). 10(l) Amendment No. 1, dated as of November 10, 1993 to Note Purchase Agreement by and between Harte-Hanks Communications, Inc. and GS Capital Partners, L.P., Stone Street Fund 1992, L.P. and Bridge Street Fund 1992, L.P. (filed as Exhibit 10(1) to the Company's Form 10-Q for the quarter ended September 30, 1993 and incorporated by reference herein). 10(m) Harte-Hanks Communications, Inc. Incentive Bonus Plan (filed as Exhibit 10(m) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 10(n) Second Amendment to Third Amended and Restated Loan Agreement dated as of February 2, 1995 among the Company, NationsBank of Texas, N.A., Fleet Bank (formerly National Westminster Bank USA), The Bank of Nova Scotia, The First National Bank of Boston, Bank of Hawaii, The Bank of Tokyo-Mitsubishi, Ltd., Dallas Agency, Corestates Bank, N.A. and CIBC, Inc. and Toronto-Dominion (Texas), Inc. in its Individual Capacity and as Agent (filed as Exhibit 10(n) to the Company's Form 10-Q for the quarter ended March 31, 1995 and incorporated by reference herein).
31
Exhibit No. Description of Exhibit Page No. - ------- ------------------------------------------------------------------ --------- 10(o) Amendment No. 3 to Harte-Hanks Communications (formerly HHC Holding Inc.) 1991 Stock Option Plan (filed as Exhibit 10(o) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). 10(p) Harte-Hanks Communications, Inc. 1996 Incentive Compensation Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). *11 Statement Regarding Computation of Net Income (Loss) Per Common Share. 28 *13 Annual Report to Securityholders (only those portions incorporated by reference into the Form 10-K are filed herewith). 29 *21 Subsidiaries of the Company. 49 *23 Consent of KPMG Peat Marwick. 50 24 Power of Attorney (included on the signature page of the Registration Statement on Form S-2 filed with the Commission on September 23, 1993). *27 Financial Data Schedule. 51
- ------------------ *Filed herewith EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11 Harte-Hanks Communications, Inc. and Subsidiaries Earnings Per Share Computations (in thousands, except per share data) PRIMARY
Year Ended December 31, --------------------------- 1996 1995 1994 ------- ------- ------- Net income ........................ $40,621 $39,985 $28,885 ======= ======= ======= Shares used in net earnings per share computations...... ........ 38,577 36,805 $34,950 ======= ======= ======= Earnings per share ................ $ 1.05 $ 1.09 $ .83 ======= ======= =======
COMPUTATION OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
Year Ended December 31, --------------------------- 1996 1995 1994 ------- ------- ------- Average outstanding common shares .... 36,414 34,978 33,385 Average common equivalent shares -- dilutive effect of option shares ... 2,163 1,827 1,565 ------- ------- ------- Shares used in net earnings per share computations ............. 38,577 36,805 34,950 ======= ======= =======
FULLY DILUTED
Year Ended December 31, ------------------------------ 1996 1995 1994 -------- -------- -------- Net income ........................... $ 40,621 $ 39,985 $ 28,885 ======== ======== ======== Adjusted net income for interest on convertible note ................ $ 40,621 $ 40,298 $ 29,635 ======== ======== ======== Shares used in net earnings per share computations ............. 38,654 37,747 $ 37,144 ======== ======== ======== Earnings per share ................... $ 1.05 $ 1.07 $ .80 ======== ======== ========
COMPUTATION OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
Year Ended December 31, --------------------------- 1996 1995 1994 ------- ------- ------- Average outstanding common shares .... 36,414 34,978 33,385 Average common equivalent shares -- dilutive effect of option shares ... 2,240 1,905 1,616 Dilutive effect of convertible note .. -- 864 2,143 ------- ------- ------- Shares used in net earnings per share computations ............. 38,654 37,747 37,144 ======= ======= =======
28 EX-13 3 ANNUAL REPORT TO SECURITY HOLDERS 1 EXHIBIT 13 FINANCIAL CONTENTS Management's Discussion and Analysis...........................13 Consolidated Balance Sheets....................................19 Consolidated Statements of Operations..........................20 Consolidated Statements of Cash Flows..........................21 Consolidated Statements of Stockholders' Equity................22 Notes to Consolidated Financial Statements.....................23 Five-Year Financial Summary....................................30 Independent Auditors' Report...................................31 Directors, Officers and Corporate Information..................32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's overall performance reflects commitment to its growth strategy of being a market leader, introducing new products and entering new markets, investing in technology and people, and increasing shareholder value. As a result of this strategy, Harte-Hanks has grown revenues 40.6% since December 31, 1993, excluding the results of the operations sold during that time. On the same basis, operating income increased 70.6%. Harte-Hanks has grown internally by adding new customers and products, cross-selling existing products, entering new markets and expanding its international presence. Several acquisitions have enhanced the Company's growth during the last three years. Harte-Hanks, together with DiMark, Inc. (discussed below), has funded $69.0 million in acquisitions during the period 1994 through 1996. All of these acquisitions were made in the Company's direct marketing segment, which now comprises 50% of the Company's revenues. In addition to the purchase acquisitions mentioned above, DiMark, Inc. ("DiMark") merged with a wholly-owned subsidiary of the Company on April 30, 1996 as discussed under "Acquisitions" on page 17. The merger was accounted for on a pooling-of-interests basis, and all historical information has been restated as if the pooling occurred at the beginning of the periods presented. DiMark provides a full range of outsource marketing, database services and teleservices to clients in the insurance, healthcare, pharmaceutical, financial services and telecommunications industries, as well as direct response printing services. The Company has significantly reduced its total borrowings by $105 million from $323 million at December 31, 1993 to $218 million at December 31, 1996 with cash flow generated from operations, net proceeds from the March 1995 sale of the Boston community newspapers and the May 1995 conversion of its $20 million 61/4% Convertible Notes due 2002. This debt reduction occurred while the Company funded $137.6 million in capital expenditures and acquisitions during the same period. Harte-Hanks derives the majority of its revenues from the sale of advertising and direct marketing services. In addition, the Company's newspapers generate revenues from paid circulation. The Company's newspapers, shoppers and television station operate in local markets and are affected by the strength of the local economies. As a national business, direct marketing is affected to a greater extent by general national economic trends. The Company's principal expense items are payroll, postage and paper. Paper prices increased in 1994 and 1995, and the Company experienced the effects of those increases in 1996. Paper prices began decreasing in 1996, and the Company began to benefit from the lower prices at the end of 1996 and will continue to benefit into 1997. Postal rates, which typically increase every three to four years, 29 2 increased 14% in January 1995. In 1996, the Company experienced postal savings in its shopper operations and increased costs in its direct marketing operations due to a mid-year postal reclassification rate case. Savings are expected in the first half of 1997 in its shopper operations as a result of the 1996 postal reclassification. =============================================================================== RESULTS OF OPERATIONS Operating results were as follows:
- --------------------------------------------------------------------------------------------- In thousands, except per share amounts 1996 (a) % Change 1995 (b) % Change 1994 - --------------------------------------------------------------------------------------------- Revenues $665,873 10.3 $603,511 4.1 $579,602 Operating expenses 565,742 8.9 519,575 2.5 507,039 -------- -------- -------- Operating income $100,131 19.3 $ 83,936 15.7 $ 72,563 ======== ======== ======== Net income $ 49,382 34.0 $ 36,862 27.6 $ 28,885 ======== ======== ======== Earnings per share-- fully diluted $ 1.28 30.6 $ .98 22.5 $ .80 ======== ======== ========
(a) Excludes 1996 one-time merger costs (discussed under "Acquisitions"). Including these costs, net income was $40.6 million, or $1.05 per share. (b) Excludes 1995 gains on divestitures (discussed under "Gains on Divestitures"). Including these gains, net income was $40.0 million, or $1.07 per share. Consolidated revenues grew 10.3% in 1996 to $665.9 million, and 1996 operating income grew 19.3% to $100.1 million when compared to 1995, excluding the one-time merger costs. The Company's overall growth resulted from acquisitions, increased business with both new and existing customers, new products and services, as well as advertising and circulation rate increases. Overall operating expenses increased as a result of the overall revenue growth and higher paper prices experienced in 1996. Overall growth in the Company's 1995 revenues and operating income resulted from increased business with both new and existing customers, new products and services, as well as advertising and circulation rate increases. Excluding the results of the Boston community newspapers sold on March 31, 1995 (See "Gains on Divestitures"), 1995 consolidated revenues grew 8.4% and operating income grew 17.9%. Operating expenses, excluding the results of the Boston newspapers, rose correspondingly with the growth in overall business as well as from higher paper prices and postal rates experienced throughout the year. =============================================================================== DIRECT MARKETING Direct marketing operating results were as follows:
- ------------------------------------------------------------------------------- In thousands 1996 % Change 1995 % Change 1994 - ------------------------------------------------------------------------------- Revenues $330,255 23.1 $268,257 14.8 $233,751 Operating expenses 285,461 23.9 230,483 12.0 205,841 -------- -------- -------- Operating income $ 44,794 18.6 $ 37,774 35.3 $ 27,910 ======== ======== ========
Direct marketing revenues increased $62.0 million, or 23.1%, in 1996 when compared to 1995. The database marketing and response management/teleservices sectors experienced significant revenue growth. Database marketing revenues increased due to database construction and updates as well as higher sales of software products. Response management/teleservices revenues increased because of increased business with existing customers, the addition of new customers, particularly in the high technology industry, and acquisitions in January, May and August 1996. These included DiMark's January acquisition of PRO Direct Response Corp., a telemarketing company with a strong customer base in the financial services industry; the May acquisition of Inquiry Handling Service, a Los Angeles based 30 3 response management company that serves the high technology and electronics industries and the August acquisition of Lead Management Group, a Boston based response management, telemarketing and fulfillment company that serves the high technology industry. In addition to the response management/teleservices acquisitions, DiMark acquired H & R Communications, Inc. in September 1995, which provides marketing services primarily to the pharmaceutical industry. In November 1996, the Company also acquired Marketing Communications, Inc., a database marketing company that serves the pharmaceutical industry. Overall, revenue growth resulted from acquisitions and increased business with both new and existing customers, particularly in services provided to the retail, high technology, financial services, healthcare, pharmaceutical and insurance industries. Operating expenses increased $55.0 million, or 23.9%, in 1996 when compared to 1995. Payroll costs increased $31.1 million due to expanded hiring to support revenue growth. Also contributing to the increased operating expenses were additional production costs of $16.2 million due to increased volumes. Depreciation expense increased $2.4 million due to higher levels of capital investment to support growth. Operating expenses were also impacted by the acquisitions noted above. Direct marketing's 1995 revenue growth of $34.5 million, or 14.8%, occurred primarily in the database marketing and response management/teleservices sectors along with growth in marketing services to customers in the financial services, high technology, retail, healthcare and insurance industries. The addition of new customers, increased business with existing customers through new products and services, and cross-selling of services contributed to 1995's growth. Although the majority of direct marketing's revenue growth came from existing operations, a portion of the increase was attributable to the October 1994 acquisition of Select Marketing, Inc., an Austin, Texas response management company that serves the high technology industry, and the January 1995 acquisition of Steinert & Associates, a New York City advertising and marketing communications firm. The revenue increase was partially offset by the absence of a local hand distribution advertising business sold in July 1995. Operating expenses rose $24.6 million, or 12.0%, during 1995 due primarily to revenue growth. Payroll costs were up $12.2 million, or 14.9%, as a result of increased hiring. In addition, production and distribution costs increased $7.1 million, or 7.3%, due to increased production levels. Also contributing to higher operating expenses were $3.4 million of additional general and administrative costs and increased depreciation expense of $1.6 million, supporting direct marketing's growth. Facility expansion and upgraded technology to support current and anticipated growth also contributed to increased expenses. The acquisitions noted above were another contributing factor. Slightly offsetting these cost increases were decreased costs related to the July 1995 divestiture. =============================================================================== SHOPPERS Shopper operating results were as follows:
- ------------------------------------------------------------------------------- In thousands 1996 % Change 1995 % Change 1994 - ------------------------------------------------------------------------------- Revenues $185,205 0.1 $185,045 4.9 $176,461 Operating expenses 161,188 (2.3) 165,025 4.0 158,718 -------- -------- -------- Operating income $ 24,017 20.0 $ 20,020 12.8 $ 17,743 ======== ======== ========
Shopper revenues increased $0.2 million, or 0.1%, in 1996 when compared to 1995. The increase was due primarily to higher in-book advertising revenues resulting from higher display advertising volumes. Display advertising growth came from the Company's core business accounts as well as increased in-column display advertisements made possible by pagination technology implemented in 1995. These increases were offset by lower insert revenues as a result of reduced volumes and revenue declines from reductions of marginal circulation in Dallas. At December 31, 1996, total weekly shopper circulation was 6.9 million. Shopper operating expenses decreased $3.8 million, or 2.3%, in 1996 when compared to 1995. Postage expense decreased $4.8 million due to lower rates as a result of postal 31 4 reclassification and less overweight postage associated with the lower insert volumes. Insurance costs and outsourced printing costs were also lower when compared to 1995. Reduced circulation in the Dallas market also contributed to the decreased expense. These decreases were offset by paper cost increases of $2.1 million attributable to higher paper prices experienced through the first three quarters of 1996. Shopper revenues grew $8.6 million, or 4.9%, in 1995 when compared to 1994. Excluding revenues from the Company's small Tucson shopper that was sold in February 1994, revenues increased $9.5 million, or 5.4%. Revenue growth was primarily attributable to increased advertising rates in existing circulation zones, and, to a lesser degree, increased newsstand product volumes produced in portions of the Company's markets. Excluding operating expenses from the divested Tucson shopper, 1995 operating costs increased $7.1 million, or 4.5%. Postage costs rose $4.5 million, due primarily to a 14% postage rate increase in January 1995. In addition, higher paper and color printing costs contributed to higher operating expenses. Paper costs increased $2.6 million due to price increases partially offset by reduced volumes from new pagination technology used by the Company's Southern California and South Florida shoppers. Pagination technology permits a more efficient publication design, reducing the overall number of pages. Color printing costs increased $1.5 million due to higher rates and increased color volumes. Partially offsetting the increased operating costs was a reduction in payroll costs of $1.7 million due to reduced headcount, primarily from investments in technology and changes in commission plans. =============================================================================== NEWSPAPERS Newspaper operating results were as follows:
- ------------------------------------------------------------------------------- In thousands 1996 % Change 1995 % Change 1994 - ------------------------------------------------------------------------------- Revenues $124,313 (0.6) $125,077 (11.1) $140,761 Operating expenses 94,754 (3.1) 97,796 (14.5) 114,398 -------- -------- -------- Operating income $ 29,559 8.4 $ 27,281 3.5 $ 26,363 ======== ======== ========
Newspaper revenues decreased $0.8 million, or 0.6%, in 1996 when compared to 1995. Excluding the results of the Boston newspapers sold in March 1995, revenues in 1996 increased $6.6 million, or 5.6%, from 1995. Newspaper advertising revenues were up $3.1 million overall, or 3.9%. That increase included increases in classified and retail advertising revenues. Classified advertising revenues were up $1.7 million, or 5.8%, due to higher rates and volumes. In addition, retail advertising revenues increased $1.3 million, or 3.8%, also as a result of rate increases. Circulation revenues increased $1.3 million, or 4.5%, due to home delivery rate increases in all markets and a Sunday single-copy rate increase at the Corpus Christi paper in late 1995. Niche product revenues grew $1.9 million due principally to the continued growth of existing direct mail programs as well as the launch of new programs in 1996. Initiatives in community publications, total market coverage products, Internet and audiotext services also added to revenue growth. Newspaper operating expenses decreased $3.0 million, or 3.1%, in 1996 when compared to 1995. This decrease was caused by the sale of the Company's Boston newspapers. Excluding the results of these papers, 1996 operating expenses increased $4.6 million, or 5.0%, in 1996 when compared to 1995. Newsprint expense increased $2.5 million, or 14.9%, as a result of higher average newsprint prices experienced through the first three quarters of 1996. Postage costs were up $0.4 million due to increased direct mail activity. General and administrative costs increased $0.6 million, or 4.6%. Excluding the results of the Boston newspapers, 1995 revenues increased $6.8 million, or 6.1%, as compared to 1994. Classified advertising revenues grew 8.4% as a result of increases both in volumes and rates. Help wanted and automotive categories fueled the classified revenue growth. Retail advertising revenues were flat. Insert revenues increased 5.5% as a result of higher volumes. In addition, niche product revenues grew primarily due to a South Texas direct mail initiative into the Rio 32 5 Grande Valley begun in 1994 and, to a lesser extent, audiotext services which represented a new revenue stream for the newspapers in 1994. Circulation revenues increased 9.8% in 1995, reflecting home-delivery price increases implemented in the fall of 1994 and, to a lesser degree, home-delivery price increases in the fall of 1995. Excluding the divested Boston newspapers, operating expenses increased $4.4 million, or 5.2%, over comparable 1994 levels. Newsprint costs increased $3.1 million, or 22.8%, as a result of higher average newsprint prices offset slightly by reduced volumes. The reduction in volumes was attributable to reduced commercial printing volumes as well as to newsprint savings from a new press installed in July 1994 at the Corpus Christi Caller-Times and various operating initiatives to control newsprint consumption. In addition, costs associated with the direct mail program rose due to increased volumes as well as higher postage costs resulting from the January 1995 postal rate increase. =============================================================================== TELEVISION Television operating results were as follows:
- ------------------------------------------------------------------------------- In thousands 1996 % Change 1995 % Change 1994 - ------------------------------------------------------------------------------- Revenues $ 26,100 3.9 $ 25,132 (12.2) $ 28,629 Operating expenses 17,003 (4.2) 17,753 (9.8) 19,683 -------- -------- -------- Operating income $ 9,097 23.3 $ 7,379 (17.5) $ 8,946 ======== ======== ========
Revenues for the television segment increased $1.0 million, or 3.9%, in 1996 when compared to 1995. This increase was primarily due to higher network compensation revenue from a renegotiated network affiliation agreement. Also contributing to the revenue increase were higher political and radio advertising revenues. These increases were partially offset by decreased revenues from graphics services, which were discontinued in 1996. Operating expenses decreased $0.8 million, or 4.2%, in 1996 when compared to 1995. The decrease was due primarily to film cost savings as well as reduced costs related to the elimination of graphics services. Television revenues decreased $3.5 million, or 12.2%, in 1995 when compared to 1994. Contributing to these results were lower national advertising revenues and the effects of weak CBS network performance. In addition, the first quarter of 1994 benefited from CBS coverage of the National Football League playoffs and winter Olympics, while the full year 1994 benefited from political advertising. Television revenues were also affected by the absence of a direct mail publication in 1995. Slightly offsetting the decreases were increased network revenues resulting from a renegotiated network affiliation agreement. Operating expenses decreased $1.9 million, or 9.8%, when compared to 1994. The decrease was attributable to lower payroll and direct mail publication production costs. Also contributing to the decrease were lower film costs. =============================================================================== ACQUISITIONS As described in Note B to the Notes to Consolidated Financial Statements included herein, on April 30, 1996, DiMark was merged with a wholly-owned subsidiary of the Company, and each outstanding share of DiMark common stock was converted into .656 of a share of common stock of Harte-Hanks. As a result, Harte-Hanks issued approximately 6.1 million shares of its common stock to the shareholders of DiMark, and DiMark's outstanding stock options were converted into options to acquire approximately 1.5 million shares of Harte-Hanks common stock. The merger was accounted for on a pooling-of-interests basis, and all historical information has been restated as if the pooling occurred at the beginning of the periods presented. One-time merger expenses of $12.1 million ($8.7 million after tax) were recognized in the second quarter of 1996. INTEREST EXPENSE/INTEREST INCOME Interest expense decreased $3.4 million in 1996 when compared to 1995 due to lower effective interest rates and debt levels. Interest expense decreased $0.7 million in 1995 33 6 as compared to 1994 due primarily to lower debt levels partially offset by higher interest rates experienced during 1995. In May 1995, the Company's 61/4% Convertible Notes due 2002 in the principal amount of $20 million were converted into 2,142,857 shares of common stock, resulting in annual interest savings of $1.3 million. Interest income increased $0.7 million in 1996 when compared to 1995 due to interest income related to an income tax refund from a favorable tax settlement. GAINS ON DIVESTITURES In March 1995 and July 1995, respectively, the Company sold its suburban Boston community newspapers and a small local hand distribution advertising business. As a result of these transactions, the Company recognized gains on divestitures of $3.1 million, or 8 cents per share, net of $10.6 million of income taxes. See Note K of Notes to Consolidated Financial Statements. INCOME TAXES Excluding the income taxes related to the 1996 merger costs and the 1995 gains on divestitures, income tax expense increased $8.1 million in 1996 and $4.7 million in 1995 due to higher income levels. The effective income tax rate (excluding the unusual items) was 43.6%, 44.8% and 46.7% in 1996, 1995 and 1994, respectively. CAPITAL INVESTMENTS Net cash used in investing activities for 1996 included $32.7 million for acquisitions and $27.4 million for capital expenditures. In addition to the cash outlay for acquisitions, the Company incurred $18.8 million in notes payable in connection with its November 1996 acquisition, which was repaid in early January 1997 with borrowings under the Company's revolving credit commitment. The acquisition investments were made in the direct marketing segment discussed under "Direct Marketing." The capital expenditures consisted primarily of additional computer capacity for the direct marketing business to support the growth in its database marketing sector. The Company also invested in facility expansions in its database and response management businesses as well as the opening of sales offices in Brazil and Australia. Other investments included pagination technology in the newspaper business and upgraded prepress technology in the shopper business. The investment activities in 1995 included $31.7 million for capital expenditures and acquisitions. In the direct marketing business, the capital expenditures consisted of new computer systems to increase capacity to support its growing customer base. The Company also invested in laser printing equipment as well as the expansion of several facilities. Other expenditures included investments in pagination technology and order entry systems at the South Florida shopper and classified advertising systems and distribution center expansions in the newspaper business. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $72.5 million in 1996. Net cash outflows for investing activities were $61.1 million. Investing activities consisted primarily of acquisitions and capital expenditures. Cash provided by operating activities for 1995 and 1994 was $48.4 million and $54.4 million, respectively. Net cash inflows from investing activities were $9.8 million in 1995. Included in 1995 investing activities was $43.4 million in proceeds from the sale of property, plant and equipment and divested assets. Proceeds from divestitures were used to reduce borrowings under the Company's credit facility. Net cash outflows for investing activities in 1994 were $28.6 million, consisting principally of equipment purchases and acquisitions. Capital resources are also available for and provided through the Company's unsecured credit facility. On February 2, 1995, the Company replaced its existing credit agreement with a $320 million variable rate revolving loan commitment that decreases by $70.4 million in 1998, $76.8 million in 1999, $83.2 million in 2000 and $89.6 million in 2001. Management believes that its credit facility, together with cash provided by operating activities, will be sufficient to fund operations, anticipated capital expenditures and debt service requirements for the foreseeable future. As of December 31, 1996, the Company had $125.0 million of unused borrowing capacity under its credit facility, of which $3.0 million was reserved to serve as backup for other short-term borrowings. 34 7 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------- December 31, In thousands, except per share and share amounts 1996 1995 - -------------------------------------------------------------------------------------- ASSETS Current assets Cash ................................................... $ 12,017 $ 18,102 Accounts receivable (less allowance for doubtful accounts of $1,995 in 1996 and $2,584 in 1995) .... 107,559 80,056 Inventory .............................................. 13,720 24,307 Prepaid expense ........................................ 9,445 5,330 Current deferred income tax benefit .................... 6,204 7,181 Other current assets ................................... 4,202 3,477 --------- --------- Total current assets ............................... 153,147 138,453 --------- --------- Property, plant and equipment Land ................................................... 8,392 8,392 Buildings and improvements ............................. 44,990 42,470 Equipment and furniture ................................ 179,908 159,192 --------- --------- 233,290 210,054 Less accumulated depreciation .......................... 121,827 109,064 --------- --------- 111,463 100,990 Construction and equipment installations in progress ... 1,445 1,174 --------- --------- Net property, plant and equipment .................. 112,908 102,164 --------- --------- Intangible and other assets Goodwill (less accumulated amortization of $109,009 in 1996 and $99,982 in 1995) ........... 319,289 283,149 Other assets ........................................... 6,939 5,513 --------- --------- Total intangible and other assets .................. 326,228 288,662 --------- --------- Total assets ....................................... $ 592,283 $ 529,279 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ....................................... $ 40,573 $ 35,768 Accrued payroll and related expenses ................... 23,116 20,677 Customer deposits and unearned revenue ................. 19,809 16,174 Income taxes payable ................................... 2,748 1,593 Other current liabilities .............................. 11,481 9,015 --------- --------- Total current liabilities .......................... 97,727 83,227 Long term debt .............................................. 218,005 220,468 Other long term liabilities (including deferred income taxes of $10,749 in 1996 and $11,133 in 1995) ... 23,859 23,728 --------- --------- Total liabilities .................................. 339,591 327,423 --------- --------- Stockholders' equity Common stock, $1 par value, authorized 125,000,000 shares. Issued and outstanding 1996: 36,801,701 shares; 1995: 36,044,265 shares ......... 36,802 36,044 Additional paid-in capital ............................. 186,677 174,870 Retained earnings (accumulated deficit) ................ 29,213 (9,058) --------- --------- Total stockholders' equity ......................... 252,692 201,856 --------- --------- Total liabilities and stockholders' equity ......... $ 592,283 $ 529,279 ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 8 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------- Year Ended December 31, In thousands, except per share amounts 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Revenues ................................................... $ 665,873 $ 603,511 $ 579,602 --------- --------- --------- Operating expenses Payroll ............................................... 237,260 209,464 210,734 Production and distribution ........................... 240,033 225,909 213,740 Advertising, selling, general and administrative ...... 59,655 58,223 58,096 Depreciation .......................................... 18,750 16,211 14,623 Goodwill amortization ................................. 10,044 9,768 9,846 Merger costs .......................................... 12,136 -- -- --------- --------- --------- 577,878 519,575 507,039 --------- --------- --------- Operating income ........................................... 87,995 83,936 72,563 --------- --------- --------- Other expenses (income) Interest expense ...................................... 13,484 16,868 17,605 Interest income ....................................... (1,359) (641) (412) Gains on divestitures ................................. -- (13,747) -- Other, net ............................................ 513 873 1,142 --------- --------- --------- 12,638 3,353 18,335 --------- --------- --------- Income before income taxes ................................. 75,357 80,583 54,228 Income tax expense ......................................... 34,736 40,598 25,343 --------- --------- --------- Net income ................................................. $ 40,621 $ 39,985 $ 28,885 ========= ========= ========= Earnings per common share -- primary Net income ............................................ $ 1.05 $ 1.09 $ .83 --------- --------- --------- Weighted average common and common equivalent shares outstanding .................. 38,577 36,805 34,950 ========= ========= ========= Earnings per common share -- fully diluted Net income ............................................ $ 1.05 $ 1.07 $ .80 ========= ========= ========= Weighted average common and common equivalent shares outstanding ......................... 38,654 37,747 37,144 ========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36 9 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------- Year Ended December 31, In thousands 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income ......................................................... $ 40,621 $ 39,985 $ 28,885 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ................................................ 18,750 16,211 14,623 Goodwill amortization ....................................... 10,044 9,768 9,846 Amortization of option related compensation ................. 971 1,786 1,605 Film amortization ........................................... 1,347 2,188 2,746 Deferred income taxes ....................................... 592 (276) (2,153) Other, net .................................................. 1,103 309 801 Gains on divestitures ....................................... -- (13,747) -- Changes in operating assets and liabilities, net of effects from acquisitions and divestitures: Increase in accounts receivable, net ........................ (18,657) (2,600) (10,686) Decrease (increase) in inventory ............................ 11,920 (9,300) (6,658) Increase in prepaid expenses and other current assets ....... (3,425) (931) (731) Increase in accounts payable ................................ 1,426 2,961 5,976 Increase (decrease) in other accrued expenses and other liabilities .................................... 8,366 (498) 9,612 Other, net .................................................. (573) 2,593 544 --------- --------- --------- Net cash provided by operating activities .......................... 72,485 48,449 54,410 --------- --------- --------- Cash Flows from Investing Activities Acquisitions ....................................................... (32,749) (9,661) (7,800) Purchases of property, plant and equipment ......................... (27,414) (22,110) (19,051) Proceeds from the sale of property, plant and equipment and divested assets ............................................ 678 43,408 412 Payments on film contracts ......................................... (1,572) (1,817) (2,122) --------- --------- --------- Net cash provided by (used in) investing activities ................ (61,057) 9,820 (28,561) --------- --------- --------- Cash Flows from Financing Activities Long term borrowings ............................................... 244,573 895,463 657,695 Payments on debt, including current maturities and financing costs ................................. (267,224) (949,289) (686,074) Issuance of common stock ........................................... 7,488 5,598 2,221 Dividends paid ..................................................... (2,350) (1,968) -- --------- --------- --------- Net cash used in financing activities .............................. (17,513) (50,196) (26,158) --------- --------- --------- Net increase (decrease) in cash ........................................ (6,085) 8,073 (309) Cash at beginning of period ............................................ 18,102 11,533 11,842 Pooling adjustment to beginning of year balance to conform fiscal years .................................... -- (1,504) -- --------- --------- --------- Cash at end of period .................................................. $ 12,017 $ 18,102 $ 11,533 ========= ========= ========= Supplemental cash flow information: Non-cash investing activities: Acquisitions .................................................. $ 18,765 $ -- $ -- ========= ========= =========
See Notes to Consolidated Financial Statements 37 10 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------- Retained Additional Earnings Minimum Total Paid-In (Accumulated Pension Liability Stockholders' In thousands Common Stock Capital Deficit) Adjustment Equity - --------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1994 .................. $ 24,181 $ 157,664 $ (73,820) $ -- $ 108,025 Common stock issued-- employee benefit plans ............................. 33 502 -- -- 535 Exercise of stock options ................... 180 1,504 -- -- 1,684 Tax benefit on options exercised ............ -- 561 -- -- 561 Adjustment for minimum pension liability, net of income taxes of $1.3 million ....... -- -- -- (1,945) (1,945) Issuance of warrants ........................ -- 100 -- -- 100 Net income .................................. -- -- 28,885 -- 28,885 ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1994 ................ 24,394 160,331 (44,935) (1,945) 137,845 Common stock issued-- employee benefit plans ............................. 94 1,836 -- -- 1,930 Exercise of stock options ................... 133 2,227 -- -- 2,360 Tax benefit on options exercised ............ -- 743 -- -- 743 Conversion of 61/4% convertible notes ....... 1,429 18,525 -- -- 19,954 Dividends paid ($.067 per share) ............ -- -- (1,968) -- (1,968) Stock issued in connection with acquisition . -- 1,310 -- -- 1,310 Net income .................................. -- -- 39,985 -- 39,985 Pooling adjustment to beginning of year balance to conform fiscal year ............ -- (108) (2,140) -- (2,248) Reduction of minimum pension liability ...... -- -- -- 1,945 1,945 Three-for-two stock split ................... 9,994 (9,994) -- -- -- ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1995 ................ 36,044 174,870 (9,058) -- 201,856 Common stock issued-- employee benefit plans ............................. 104 2,545 -- -- 2,649 Exercise of stock options ................... 596 5,295 -- -- 5,891 Dividends paid ($.071 per share) ............ -- -- (2,350) -- (2,350) Tax benefits on options exercised ........... -- 2,766 -- -- 2,766 Net income .................................. -- -- 40,621 -- 40,621 Stock issued in connection with acquisition earnout ....................... 58 1,201 -- -- 1,259 ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1996 ................ $ 36,802 $ 186,677 $ 29,213 $ -- $ 252,692 ============ ============ ============ ============ ============
38 11 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The accompanying Consolidated Financial Statements present the financial position of Harte-Hanks Communications, Inc. and subsidiaries (the "Company"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified for comparative purposes. TELEVISION REVENUES Television revenues are presented net of advertising agency commissions. INVENTORY Inventory, consisting primarily of newsprint and operating supplies, is stated at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated on the basis of cost. Depreciation of buildings and equipment is computed generally on the straight-line method at rates calculated to amortize the cost of the assets over their useful lives. The general ranges of estimated useful lives are: Buildings and improvements...............10 to 40 years Equipment and furniture...................4 to 20 years
GOODWILL Goodwill is stated on the basis of cost, adjusted as discussed below, and is amortized on a straight-line basis over 40-year periods. For each of its investments, the Company assesses the recoverability of its goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows over the remaining amortization period. If projected undiscounted future cash flows indicate that unamortized goodwill and the net book value of long-lived assets will not be recovered, net goodwill is adjusted to an amount consistent with projected discounted future cash flows. Cash flow projections are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. FILM CONTRACTS Film contract rights represent agreements with film syndicators for television program material. The capitalized costs of film rights are recorded when the licensed period begins and the film rights are available for use. The cost is amortized over the expected number of telecasts. The portions of the cost to be amortized within one year and after one year are reflected in the consolidated balance sheets as current and non-current other assets, respectively. The payments under these contracts due within one year and after one year are classified as current and non-current liabilities. INCOME TAXES Income taxes are calculated using the asset and liability method required by Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred income taxes are recognized for the tax consequences resulting from "temporary differences" by applying enacted statutory tax rates applicable to future years. These "temporary differences" are associated with differences between the financial and the tax basis of existing assets and liabilities. Under SFAS No. 109, a statutory change in tax rates will be recognized immediately in deferred taxes and income. EARNINGS PER SHARE Primary earnings per common share are based upon the weighted average number of common shares outstanding and dilutive common stock equivalents from the assumed exercise of stock options using the treasury stock method. Fully diluted earnings per common share are based upon the weighted average number of common shares outstanding, dilutive common stock equivalents from the assumed exercise of stock options and assumed conversion of the 61/4% Convertible Notes due 2002 until May 1995, at which time the Company issued shares of its common stock upon conversion of the notes. STOCK SPLIT In December 1995, the Company effected a three-for-two stock split in the form of a stock dividend. All share, per share and average share information in the Consolidated Financial Statements and the Notes thereto have been restated to reflect the stock split. NOTE B -- ACQUISITIONS POOLING-OF-INTERESTS Effective April 30, 1996, DiMark, Inc. ("DiMark") was merged with a wholly-owned subsidiary of the Company, and each outstanding share of DiMark common stock was converted into the right to acquire .656 of a share of Harte-Hanks common stock. As a result, Harte-Hanks issued approximately 6.1 million shares of Harte-Hanks common stock to the shareholders of DiMark, and DiMark's outstanding stock options were converted into options to acquire approximately 1.5 million shares of Harte-Hanks common stock. The merger was accounted for on a pooling-of-interests basis. Accordingly, the Company's financial statements have been restated to include the results of DiMark for all periods presented. The combined financial results include reclassifications to conform 39 12 financial statement preparation. Merger expenses related to the transaction were $12.1 million ($8.7 million, net of income taxes). Prior to the combination, Harte-Hanks' fiscal year ended on December 31 and DiMark's fiscal year ended February 28. In recording the business combination, DiMark's financial statements for the 12 months ended December 31, 1996 and 1995 were combined with the Company's consolidated financial statements for the same periods. DiMark's financial statements for the fiscal year ended February 28, 1995 were combined with the Company's consolidated financial statements for the year ended December 31, 1994. Net income, the issuance of common stock, and the net increase in cash and cash equivalents were adjusted to eliminate the effect of including DiMark's results of operations, financial position, and cash flows for the two months ended January and February, 1995 in the years ended December 31, 1995 and December 31, 1994. Combined and separate results of the Company and DiMark during the reporting periods preceding the merger were as follows:
- ------------------------------------------------------------------------------- Three Months Ended Year Ended In thousands March 31, 1996 December 31, 1995 - ------------------------------------------------------------------------------- Revenues Harte-Hanks .......... $ 124,899 $ 532,852 DiMark ............... 27,377 77,583 Adjustments .......... (1,665) (6,924) ----------- ----------- Combined ............. $ 150,611 $ 603,511 =========== =========== Net income Harte-Hanks .......... $ 6,385 $ 33,985 DiMark ............... 1,932 6,000 ----------- ----------- Combined ............. $ 8,317 $ 39,985 =========== ===========
Adjustments consist of elimination of DiMark's postage costs from revenues and cost of sales to conform to Harte-Hanks' accounting classification. PURCHASES In January 1996, PRO Direct Response Corp., a telemarketing company that serves the financial services industry, was acquired by DiMark. In May 1996, the Company acquired Inquiry Handling Service, a Los Angeles-based response management company that serves the high technology and electronics industries. In August 1996, the Company acquired Lead Management Group, a Boston-based response management, telemarketing and fulfillment company that serves the high technology industry. In November 1996, the Company acquired Marketing Communications, Inc., a Kansas City-based integrated database marketing company that serves the pharmaceutical industry. The total cash outlay in 1996 for these acquisitions was $32.7 million. In addition, the Company incurred $18.8 million in notes payable for its November 1996 acquisition, which was repaid in January 1997 with borrowings under its revolving credit commitment. The operating results of the acquired companies have been included in the accompanying Consolidated Financial Statements from the date of acquisition. NOTE C -- LONG TERM DEBT Long term debt consists of the following:
- ------------------------------------------------------------------------------- December 31, In thousands 1996 1995 - ------------------------------------------------------------------------------- Revolving loan commitment, various interest rates (effective rate of 6.0% at December 31, 1996), due in mandatory reductions beginning June 30, 1998 through December 31, 2001 ......................... $ 195,000 $ 214,000 Bank lines, various interest rates (effective rate of 7.8% at December 31, 1996) ........................ 3,000 4,700 Acquisition notes payable (interest rate of 5.5%) ............................. 18,765 -- Miscellaneous notes payable, interest rates ranging from 7.3% to 8%, due on various dates through 1998 ............. 1,340 2,664 --------- --------- 218,105 221,364 Less current maturities ...................... 100 896 --------- --------- $ 218,005 $ 220,468 ========= =========
CREDIT FACILITY The Company's credit facility is a $320 million revolving commitment that decreases by $70.4 million in 1998, $76.8 million in 1999, $83.2 million in 2000 and $89.6 million in 2001. The Company pays a commitment fee of .1875% on the unused portion of the commitment. As of December 31, 1996, the Company had $125 million of unused borrowing capacity under its credit facility, of which $3 million was reserved to serve as backup for short term borrowings. BANK LINES The Company has three separate short term borrowing arrangements. Under these arrangements, the Company can borrow up to a maximum of $170 million. These short term borrowings are classified as long term debt since the Company intends to maintain unused and available credit under its credit facility in an amount equal to its outstanding short term borrowings. 40 13 ACQUISITION NOTES PAYABLE In November 1996, the Company issued notes payable of $18.8 million in connection with an acquisition. These notes were repaid in January 1997 with borrowings under the Company's revolving credit commitment. OTHER DEBT INFORMATION As of December 31, 1996, the minimum annual maturities of long term debt (excluding the borrowings under the Company's credit facility) for each of the following years ending December 31 are as follows:
- ------------------------------------------------------------------------------- In thousands - ------------------------------------------------------------------------------- 1997........................................... $ 100 1998........................................... 1,240
Cash payments for interest were $13.5 million, $16.8 million and $17.8 million for the years ended December 31, 1996, 1995 and 1994, respectively. The Company's credit facility contains certain restrictive covenants, including limitations on additional indebtedness and payment of dividends, and requires the Company to maintain certain financial ratios. NOTE D -- INCOME TAXES The components of income tax expense are as follows:
- ------------------------------------------------------------------------------- Year Ended December 31, In thousands 1996 1995 1994 - ------------------------------------------------------------------------------- Current Federal ................. $ 29,090 $ 35,197 $ 23,474 State and local ......... 5,054 5,677 4,022 -------- -------- -------- Total current ......... $ 34,144 $ 40,874 $ 27,496 ======== ======== ======== Deferred Federal ................. $ 196 $ (1,895) $ (2,262) State and local ......... 396 1,619 109 -------- -------- -------- Total deferred ........ $ 592 $ (276) $ (2,153) ======== ======== ========
Included in income tax expense for 1996 is a tax benefit of $3.4 million related to merger costs. Included in income tax expense for 1995 is $10.6 million related to the gains on divestitures. The differences between total income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows:
- ------------------------------------------------------------------------------------------------------------------- Year Ended December 31, In thousands 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Computed expected income tax expense ............................... $ 26,376 35% $ 28,236 35% $ 18,894 35% Effect of goodwill amortization .......................... 3,204 4% 3,319 4% 3,348 6% Net effect of state income taxes .......................... 3,637 5% 4,671 6% 2,740 5% Effect of goodwill related to divestiture ........................ -- -- 4,307 5% -- -- Change in the beginning of the year balance of the valuation allowance ............................. (95) -- 119 -- (30) -- Merger costs ............................. 1,498 2% -- -- -- -- Other, net ............................... 116 -- (54) -- 391 1% -------- -------- -------- -------- -------- -------- Income tax expense for the period ........................ $ 34,736 46% $ 40,598 50% $ 25,343 47% ======== ======== ======== ======== ======== ========
Excluding the effects of the merger costs, the effective income tax rate for 1996 was 43.6%. Excluding the effects of the gains on divestitures, the effective income tax rate for 1995 was 44.8%. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
- ------------------------------------------------------------------------------- December 31, In thousands 1996 1995 - ------------------------------------------------------------------------------- Deferred tax assets: State net operating losses ....................... $ 67 $ 85 Accrued benefit costs, primarily pension and vacation pay ....................... 5,297 4,872 Accrued casualty and health insurance expense .............................. 2,658 2,830 Merger costs ..................................... 1,671 -- Accounts receivable, net ......................... 782 896 State income tax ................................. 331 727 Other, net ....................................... 427 689 -------- -------- Total gross deferred tax assets................. 11,233 10,099 Less valuation allowance ....................... (67) (60) -------- -------- Net deferred tax assets ........................ 11,166 10,039 -------- -------- Deferred tax liabilities: Property, plant and equipment .................... (14,799) (13,742) Goodwill ......................................... (912) (235) Other, net ....................................... -- (14) -------- -------- Total gross deferred tax liabilities.............. (15,711) (13,991) -------- -------- Net deferred tax liability ....................... $ (4,545) $ (3,952) ======== ========
The valuation allowance for deferred tax assets as of January 1, 1995 was $1.6 million. The valuation allowance at December 31, 1996 and 1995 relate to state net operating losses, which are not expected to be realized. 41 14 The net deferred tax liability is recorded both as a current deferred income tax benefit and as other long term liabilities based upon the classification of the related temporary difference. Cash payments for income taxes were $30.0 million, $40.4 million and $24.5 million in 1996, 1995 and 1994, respectively. NOTE E -- EMPLOYEE BENEFIT PLANS The Company maintains a defined benefit pension plan for which most of its employees are eligible. Benefits are based on years of service and the employee's compensation for the five highest consecutive years of salary during the last ten years of service. Benefits vest to the participants upon completion of five years of service or upon reaching age 65, whichever is earlier. Harte-Hanks' policy is to accrue as expense an amount computed by its actuary and to fund at least the minimum amount required by ERISA. In 1994, the Company adopted a non-qualified, supplemental pension plan covering certain employees, which provides for incremental pension payments so that total pension payments equal amounts that would have been payable from the Company's principal pension plan if it were not for limitations imposed by income tax regulation. Net pension cost for all plans included the following components:
- ------------------------------------------------------------------------------- Year Ended December 31, In thousands 1996 1995 1994 - ------------------------------------------------------------------------------- Service cost - benefits earned during the period ................... $ 3,937 $ 3,282 $ 3,572 Interest cost on projected benefit obligation .................. 5,134 4,801 4,608 Actual return on plan assets ........... (8,089) (10,786) 1,493 Net deferrals and amortization ......... 2,532 6,171 (5,872) -------- -------- -------- Net periodic pension cost .............. $ 3,514 $ 3,468 $ 3,801 ======== ======== ========
In determining the 1996, 1995 and 1994 actuarial present value of benefit obligations, discount rates of 73/4%, 71/4% and 8% were used, respectively. The assumed annual rate of increase in future compensation levels was 4%, and the expected long term rate of return on plan assets was 10%. The status of Harte-Hanks' employee retirement plans at year-end was as follows:
- -------------------------------------------------------------------------------------------------------- Year Ended December 31, In thousands 1996 1995 - -------------------------------------------------------------------------------------------------------- Qualified Non-Qualified Qualified Non-Qualified Plan Plan Plan Plan -------- -------- -------- -------- Actuarial present value of benefit obligations: Vested .............................................. $ 49,581 $ -- $ 49,673 $ -- Non-vested .......................................... 4,790 1,033 4,945 871 -------- -------- -------- -------- Total accumulated benefit obligations ............................... 54,371 1,033 54,618 871 Additional obligation related to projected salary increases .................................... 16,123 1,295 16,260 977 -------- -------- -------- -------- Projected benefit obligations for service rendered to date .................................... 70,494 2,328 70,878 1,848 Fair value of plan assets, primarily listed stocks and government securities ............................... (65,316) -- (56,763) -- -------- -------- -------- -------- Projected benefit obligation in excess of plan assets ............................ 5,178 2,328 14,115 1,848 Unrecognized net loss from past experience different from that assumed ................................... (2,173) (209) (10,211) (238) Unrecognized prior service costs ....................................... (47) (1,126) (52) (1,000) Unrecognized net assets at January 1, 1987 being recognized over average expected remaining service period of employees ........................................ 828 -- 950 -- Adjustment to recognize minimum liability ................................... -- 40 -- 261 -------- -------- -------- -------- Recorded pension liability ............................ $ 3,786 $ 1,033 $ 4,802 $ 871 ======== ======== ======== ========
The Company also sponsors a 401(k) plan to provide employees with additional income upon retirement. The Company matches a portion of employees' voluntary before-tax contributions. Employees are fully vested in their own contributions and vest in the Company's matching contributions upon three years of service. The 1994 Employee Stock Purchase Plan provides for a total of 450,000 shares to be sold to participating employees at 85% of the fair market value at specified quarterly investment dates. Shares available for sale totaled 130,717 at December 31, 1996. 42 15 NOTE F -- STOCKHOLDERS' EQUITY In January 1997, the Company announced a stock repurchase program of up to 1.8 million shares of its common stock. As of February 28, 1997, the Company had repurchased 500,000 shares for $13.5 million. In April 1996, the Company amended its Certificate of Incorporation to increase its total authorized capitalization to 125,000,000 shares of common stock. On December 15, 1995, the Company effected a three-for-two stock split in the form of a stock dividend, payable to shareholders of record on December 1, 1995. A total of 9,994,490 shares of common stock were issued in connection with the split. The shares issued were reclassified from the Company's additional paid-in-capital account to the Company's common stock account. All share and per share amounts have been restated to retroactively reflect the stock split. On May 26, 1995, the Company issued 2,142,857 shares of common stock upon conversion of the $20 million principal amount of the Company's 61/4% Convertible Notes. Accordingly, the Company transferred $20 million, less $0.1 million of unamortized issue costs, to stockholders' equity. NOTE G -- STOCK OPTION PLANS 1984 PLAN In 1984, the Company adopted a Stock Option Plan ("1984 Plan") pursuant to which it issued to officers and key employees options to purchase shares of common stock at prices equal to the market price on the grant date. Market price was determined by the Board of Directors for purposes of granting stock options and making repurchase offers. Options granted under the 1984 Plan become exercisable five years after date of grant. At December 31, 1996, 1995 and 1994, options to purchase 469,800 shares, 657,900 shares and 810,300 shares, respectively, were outstanding under the 1984 Plan, with exercise prices ranging from $3.33 to $6.67 per share. No additional options will be granted under the 1984 Plan. 1991 PLAN The Company adopted the 1991 Stock Option Plan ("1991 Plan") pursuant to which it may issue to officers and key employees options to purchase up to 4,000,000 shares of common stock. Options have been granted at prices equal to the market price on the grant date ("market price options") and at prices below market price ("performance options"). As of December 31, 1996, 1995 and 1994, market price options to purchase 2,162,000 shares, 1,678,275 shares and 1,394,400 shares, respectively, were outstanding with exercise prices ranging from $6.67 to $26.375 per share. Market price options become exercisable after the fifth anniversary of their date of grant. The weighted-average exercise price for outstanding options and exercisable options at December 31, 1996 was $13.04 and $8.10, respectively. The weighted-average remaining life for outstanding options was 8.02 years. At December 31, 1996, 1995 and 1994, performance options to purchase 497,125 shares, 557,775 shares and 544,050 shares, respectively, were outstanding with exercise prices ranging from $0.67 to $2.00 per share. The performance options become exercisable in whole or in part after three years, and the extent to which they become exercisable at that time depends upon the extent to which the Company achieves certain goals established at the time the options are granted. That portion of the performance options which does not become exercisable at an earlier date becomes exercisable after the ninth anniversary of the date of grant. Compensation expense of $1.0 million, $1.8 million and $1.6 million was recognized for the performance options for the years ended December 31, 1996, 1995 and 1994, respectively. The weighted-average exercise price for outstanding options and exercisable options at December 31, 1996 was $0.76 and $0.67, respectively. The weighted-average remaining life for outstanding options was 7.09 years. DIMARK MERGER In connection with the DiMark merger, DiMark's outstanding stock options were converted into options to acquire approximately 1.5 million shares of Harte-Hanks common stock. As of December 31, 1996, 1995 and 1994, DiMark options to purchase 1,267,342 shares, 1,566,014 shares and 1,272,075 shares, respectively, were outstanding with exercise prices ranging from $2.61 to $22.49 per share. As of December 31, 1996 all outstanding DiMark options were exercisable. The weighted-average exercise price at December 31, 1996 was $11.02, and the weighted-average remaining life was 2.47 years. The following summarizes stock option plans activity:
- ------------------------------------------------------------------------------- Number Weighted Average of Shares Option Price - ------------------------------------------------------------------------------- Options outstanding at January 1, 1994 .......... 4,065,925 $ 5.97 Granted ........................ 359,544 10.96 Exercised ...................... (325,486) 3.66 Cancelled ...................... (79,158) 6.66 --------- Options outstanding at December 31, 1994 ...... 4,020,825 6.41 Granted ........................ 883,482 14.09 Exercised ...................... (341,112) 5.24 Cancelled ...................... (122,058) 8.27 Pooling adjustment to conform fiscal year ......... 18,827 8.83 --------- Options outstanding at December 31, 1995 ........ 4,459,964 8.17 Granted ........................ 735,750 21.75 Exercised ...................... (597,054) 7.93 Cancelled ...................... (202,393) 11.22 --------- OPTIONS OUTSTANDING AT DECEMBER 31, 1996 ........... 4,396,267 10.32 ========= EXERCISABLE AT DECEMBER 31, 1996 ........... 2,252,667 8.24 =========
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation." Accordingly, no compensation expense has been recognized for options granted where the exercise price is equal to the market price of the underlying stock at the date of grant. The Company does recognize compensation expense for options whose market price of the underlying stock exceeds the exercise price on the date of grant under the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted under SFAS No. 123. 43 16 Had compensation expense for the Company's options been determined based on the fair value at the grant date for awards in 1996 and 1995, the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below.
- ------------------------------------------------------------------------------- Year Ended December 31, In thousands, except per share amounts 1996 1995 - ------------------------------------------------------------------------------- Net income-- as reported ............... $ 40,621 $ 39,985 Net income-- proforma .................. 39,021 39,370 Earnings per share-- as reported ....... 1.05 1.07 Earnings per share-- proforma .......... 1.01 1.05
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995:
- ------------------------------------------------------------------------------- Year Ended December 31, 1996 1995 - ------------------------------------------------------------------------------- Expected dividend yield................ 0.3% 0.3% Expected stock price volatility........ 22.1% 21.3% Risk-free interest rate................ 6.3% 6.1% Expected life of options............... 3-10 YEARS 3-10 years
The weighted-average fair value of market price options granted during 1996 and 1995 was $8.14 and $5.18, respectively. The weighted-average fair value and exercise price of performance options was $14.63 and $1.14 in 1996, and $12.14 and $0.67 in 1995, respectively. NOTE H -- FAIR VALUE OF FINANCIAL INSTRUMENTS Because of maturities and/or interest rates, the Company's financial instruments have a fair value approximating their carrying value. These instruments primarily include accounts receivable, revolving credit borrowings and trade payables. NOTE I -- COMMITMENTS AND CONTINGENCIES At December 31, 1996, the Company had outstanding letters of credit in the amount of $23.1 million, which included $18.8 million to support an acquisition note payable which was repaid in January 1997 with borrowings under the Company's revolving credit commitment. NOTE J -- LEASES The Company leases certain real estate and equipment under various operating leases. Most of the leases contain renewal options for varying periods of time. The total rent expense under all operating leases was $14.4 million, $12.1 million and $11.9 million for the years ended December 31, 1996, 1995 and 1994, respectively. The future minimum rental commitments for all non-cancellable operating leases with terms in excess of one year as of December 31, 1996 are as follows:
- ------------------------------------------------------------------------------- In thousands - ------------------------------------------------------------------------------- 1997................................ $ 11,560 1998................................ 9,855 1999................................ 8,107 2000................................ 6,225 2001................................ 5,130 After 2001.......................... 10,306 -------- $ 51,183 ========
NOTE K -- DIVESTITURES In March and July 1995, respectively, the Company sold its suburban Boston community newspapers and a small local hand distribution advertising business. These sales resulted in gains on divestitures of $3.1 million, or 8 cents per share, net of $10.6 million of income taxes. In March 1997, the Company announced plans to explore the divestiture of its newspaper and television operations. NOTE L -- SELECTED QUARTERLY DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------ Quarter Ended In thousands, except per share amounts December 31 September 30 June 30 March 31 - ------------------------------------------------------------------------------------------------------ 1996 Revenues ......................................... $189,098 $166,248 $159,916 $150,611 Operating income ................................. 31,217 25,204 13,736 17,838 Net income ....................................... 16,106 12,292 3,906(c) 8,317 Earnings per common share-- primary .............. .42 .32 .10(c) .22 Earnings per common share-- fully diluted ........ .42 .32 .10(c) .22 1995 Revenues ......................................... $158,344 $146,459 $149,686 $149,022 Operating income ................................. 24,599 20,504 22,310 16,523 Net income ....................................... 11,885 9,976(a) 9,701 8,423(b) Earnings per common share-- primary .............. .31 .26(a) .27 .24(b) Earnings per common share-- fully diluted. ....... .31 .26(a) .26 .23(b)
(a) Includes a net gain on divestiture of $0.8 million, or 1 cent per share. (b) Includes a net gain on divestiture of $2.3 million, or 7 cents per share. (c) Includes merger costs of $ 8.7 million, or 23 cents per share. 44 17 NOTE M -- BUSINESS SEGMENTS Harte-Hanks Communications, Inc. is a diversified communications company with operations throughout the United States in four principal businesses -- direct marketing, shoppers, newspapers and television. Harte-Hanks Direct Marketing is a nationwide and international business that serves customers primarily in the retail, financial services, insurance, high technology, pharmaceutical and healthcare industries. The Company's other businesses operate in local markets and serve the retail, automotive, real estate and other service industries.
- ------------------------------------------------------------------------------- Year Ended December 31, In thousands 1996 1995 1994 - ------------------------------------------------------------------------------- Operating revenues Direct Marketing .................... $ 330,255 $ 268,257 $ 233,751 Shoppers ............................ 185,205 185,045 176,461 Newspapers(a)........................ 124,313 125,077 140,761 Television .......................... 26,100 25,132 28,629 --------- --------- --------- Total operating revenues .......... $ 665,873 $ 603,511 $ 579,602 ========= ========= ========= Operating income Direct Marketing .................... $ 44,794 $ 37,774 $ 27,910 Shoppers ............................ 24,017 20,020 17,743 Newspapers(a)........................ 29,559 27,281 26,363 Television .......................... 9,097 7,379 8,946 General corporate expense, net ...... (19,472)(b) (8,518) (8,399) --------- --------- --------- Total operating income ............ $ 87,995 $ 83,936 $ 72,563 ========= ========= ========= Identifiable assets Direct Marketing .................... $ 231,365 $ 149,855 $ 128,197 Shoppers ............................ 99,061 108,743 104,528 Newspapers(a)........................ 184,846 192,607 223,632 Television .......................... 65,735 66,754 70,333 General corporate ................... 11,276 11,320 13,440 --------- --------- --------- Total identifiable assets ......... $ 592,283 $ 529,279 $ 540,130 ========= ========= ========= Depreciation Direct Marketing .................... $ 9,139 $ 6,693 $ 5,063 Shoppers ............................ 4,600 4,410 3,905 Newspapers(a)........................ 3,927 4,010 4,510 Television .......................... 1,044 1,066 1,041 General corporate ................... 40 32 104 --------- --------- --------- Total depreciation ................ $ 18,750 $ 16,211 $ 14,623 ========= ========= ========= Goodwill amortization Direct Marketing .................... $ 1,791 $ 1,377 $ 1,042 Shoppers ............................ 1,867 1,867 1,867 Newspapers(a)........................ 4,638 4,776 5,189 Television .......................... 1,748 1,748 1,748 --------- --------- --------- Total goodwill amortization ....... $ 10,044 $ 9,768 $ 9,846 ========= ========= ========= Capital expenditures Direct Marketing .................... $ 20,706 $ 14,595 $ 10,400 Shoppers ............................ 2,929 2,724 3,316 Newspapers(a)........................ 2,740 3,609 4,409 Television .......................... 789 1,060 883 General corporate ................... 250 122 43 --------- --------- --------- Total capital expenditures ........ $ 27,414 $ 22,110 $ 19,051 ========= ========= =========
(a) In March 1995, the Company sold its suburban Boston newspapers. See Note K of Notes to Consolidated Financial Statements. (b) Included is $12.1 million in merger expenses. See Note B of Notes to Consolidated Financial Statements. 45 18 FIVE-YEAR FINANCIAL SUMMARY
- ---------------------------------------------------------------------------------------------------------------------- In thousands, except per share amounts 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------- Income Statement Data Revenues ........................................ $ 665,873 $ 603,511 $ 579,602 $ 515,905 $ 469,317 --------- --------- --------- --------- --------- Operating expenses Payroll, production and distribution ....... 477,293 435,373 424,474 381,002 321,070 Selling, general and administrative ......... 59,655 58,223 58,096 53,116 72,337 Depreciation ................................ 18,750 16,211 14,623 13,317 13,274 Goodwill amortization ....................... 10,044 9,768 9,846 10,446 11,181 Merger costs(a) ............................. 12,136 -- -- -- -- Goodwill write-down(b) ...................... -- -- -- 55,463 -- --------- --------- --------- --------- --------- Total operating expenses ............... 577,878 519,575 507,039 513,344 417,862 --------- --------- --------- --------- --------- Operating income ..................................... 87,995 83,936 72,563 2,561 51,455 Interest expense, net ................................ 12,125 16,227 17,193 30,811 36,670 Income (loss) from continuing operations ............. 40,621 39,985 28,885 (41,941)(c) 5,593 Net income (loss) .................................... 40,621(d) 39,985(e) 28,885 (49,334)(f) 5,593 Earnings (loss) from continuing operations per common share-- fully diluted(g) ............. 1.05(d) 1.07(e) .80 (1.64)(c) .24 Earnings (loss) per common share-- fully diluted(g) ................................ 1.05(d) 1.07(e) .80 (1.92)(h) .24 Cash dividends per common share(g) ................... .07 .07 -- -- -- Weighted average common and common equivalent shares outstanding -- fully diluted ................................... 38,654 37,747 37,144 25,638 22,853 Segment Data Revenues Direct Marketing ............................ $ 330,255 $ 268,257 $ 233,751 $ 182,021 $ 153,372 Shoppers .................................... 185,205 185,045 176,461 174,521 164,021 Newspapers(i) ............................... 124,313 125,077 140,761 131,545 126,222 Television .................................. 26,100 25,132 28,629 27,818 25,702 --------- --------- --------- --------- --------- Total revenues .............................. $ 665,873 $ 603,511 $ 579,602 $ 515,905 $ 469,317 ========= ========= ========= ========= ========= Operating income Direct Marketing ............................ $ 44,794 $ 37,774 $ 27,910 $ 18,921 $ 15,119 Shoppers .................................... 24,017 20,020 17,743 12,685 15,517 Newspapers(i) ............................... 29,559 27,281 26,363 (30,974) 20,973 Television .................................. 9,097 7,379 8,946 8,164 6,140 General corporate ........................... (19,472) (8,518) (8,399) (6,235) (6,294) --------- --------- --------- --------- --------- Total operating income ...................... $ 87,995 $ 83,936 $ 72,563 $ 2,561 $ 51,455 ========= ========= ========= ========= ========= Other Data Operating cash flow(j) .......................... $ 116,789(k) $ 109,915 $ 97,032 $ 81,787 $ 75,910 Capital expenditures ............................ 27,414 22,110 19,051 25,276 11,295 Balance Sheet Data (at end of period) Property, plant and equipment, net .............. $ 112,908 $ 102,164 $ 103,768 $ 101,516 $ 85,764 Goodwill, net ................................... 319,289 283,149 298,407 301,363 355,911 Total assets .................................... 592,283 529,279 540,130 515,924 547,350 Total long term debt ............................ 218,005 220,468 294,499 323,056 220,469(1) Total stockholders' equity ...................... 252,692 201,856 137,845 108,025(m) 60,156
(a) Merger cost of $12.1 million related to DiMark merger. See Note B of Notes to Consolidated Financial Statements. (b) Goodwill write-down of $55.5 million related to newspaper and shopper segments. Newspaper and shopper operating income was affected by $52.7 million and $2.8 million, respectively. See Note A of Notes to Consolidated Financial Statements. (c) Represents income loss and earnings loss per common share before extraordinary item. (d) Includes merger costs of $8.7 million, or 23 cents per share, net of $3.4 million income tax benefit. Excluding these costs, earnings were $1.28 per share. (e) Includes gains on divestitures of $3.1 million, or 8 cents per share, net of $10.6 million income tax expense. Excluding these gains, earnings were 98 cents per share. (f) Includes extraordinary loss from the early extinguishment of debt of $7.4 million, net of $4.3 million income tax benefit. (g) Restated to reflect the three-for-two stock split effected as a stock dividend effective December 15, 1995. (h) Excluding the goodwill write-down and extraordinary items, earnings on a fully diluted basis were 53 cents per share. (i) In March 1995, the Company sold its suburban Boston newspapers. See Note K of Notes to Consolidated Financial Statements. (j) Operating cash flow is defined as operating income plus depreciation, goodwill amortization and goodwill write-down. Operating cash flow is not intended to represent cash flow or any other measure of performance in accordance with generally accepted accounting principles. (k) Excluding 1996 one-time merger costs, operating cash flow was $128.9 million. (l) Long term debt in 1992 excludes $174.7 million of borrowings under the Company's revolving credit commitment and commercial paper borrowings classified as current maturities. (m) Includes the net proceeds from issuance of 9,375,000 shares of the Company's common stock at $11.00 per share in the initial public offering in November 1993. 46 19 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Harte-Hanks Communications, Inc.: We have audited the accompanying consolidated balance sheets of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP San Antonio, Texas January 24, 1997 47 20 DIRECTORS DAVID L. COPELAND President, SIPCO, Inc. DR. PETER T. FLAWN President Emeritus The University of Texas at Austin Chairman, Audit Committee LARRY FRANKLIN President and Chief Executive Officer RICHARD M. HOCHHAUSER Executive Vice President CHRISTOPHER M. HARTE Private Investor EDWARD H. HARTE Retired Publisher, Corpus Christi Caller-Times HOUSTON H. HARTE Chairman of the Board JAMES L. JOHNSON Chairman Emeritus, GTE Corporation Chairman, Compensation Committee OFFICERS LARRY FRANKLIN President and Chief Executive Officer RICHARD M. HOCHHAUSER Executive Vice President MICHAEL J. CONLY Senior Vice President, Television DONALD R. CREWS Senior Vice President, Legal and Secretary PETER E. GORMAN Senior Vice President, Shoppers STEPHEN W. SULLIVAN Senior Vice President, Newspapers KEVIN J. BARRY Vice President, Newspapers CRAIG COMBEST Vice President, Direct Marketing CHARLES DALL'ACQUA Vice President, Direct Marketing FRANK PUCKETT, JR. Vice President, Newspapers CORPORATE INFORMATION COMMON STOCK The Company's common stock is listed on the New York Stock Exchange (symbol: HHS). The quarterly stock price ranges for 1996 and 1995 were as follows:
1996 1995 HIGH LOW HIGH LOW First Quarter 23 19 3/4 13 3/8 12 1/2 Second Quarter 27 3/4 20 5/8 16 7/8 13 1/4 Third Quarter 27 7/8 25 1/8 19 7/8 16 5/8 Fourth Quarter 28 1/2 24 7/8 22 1/4 18 3/4
Quarterly dividends were paid at the rate of 1.67 cents per share for the first three quarters of 1996 and 2 cents per share in the fourth quarter of 1996. In 1995, quarterly dividends were paid at a rate of 1.67 cents per share. The stock prices and dividends reflect retroactively the three-for-two stock split in the form of a stock dividend on December 15, 1995. There are approximately 2,300 holders of record. TRANSFER AGENT AND REGISTRAR Bank of Boston c/o Boston EquiServe, L.P. Mail Stop 45-02-64 P. O. Box 644 Boston, Massachusetts 02102-0644 ANNUAL MEETING OF STOCKHOLDERS The annual meeting of stockholders will be held at 10:00 a.m. May 6, 1997, at 200 Concord Plaza Drive, First Floor, San Antonio, Texas. FORM 10-K ANNUAL REPORT A copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K may be obtained, without charge, upon written request to: Donald R. Crews, Secretary Harte-Hanks Communications, Inc. P. O. Box 269 San Antonio, Texas 78291-0269 Design: Harte-Hanks Direct Marketing Photography: Mark Langford Production: Seale Studios Printing: Avon Behren Printing Co. Printed on Recycled Paper 48 EX-21 4 LIST OF SUBSIDIARIES OF REGISTRANT 1 Exhibit 21 RESTRICTED SUBSIDIARIES OF HARTE-HANKS COMMUNICATIONS, INC.
State of % of Stock Name of Corporation Incorporation Owned - ------------------- ------------- ---------- DiMark, Inc. New Jersey 100% DiMark Marketing, Inc. Pennsylvania 100%(1) Direct Market Concepts, Inc. Florida 100% DMK, Inc. Delaware 100%(2) The Flyer Publishing Corporation Florida 100% Harte-Hanks Community Newspapers, Inc. Texas 100% Harte-Hanks Data Technologies, Inc. Massachusetts 100% Harte-Hanks Direct, Inc. Delaware 100% Harte-Hanks Direct Marketing/Baltimore, Inc. Maryland 100% Harte-Hanks Direct Marketing/Cincinnati, Inc. Ohio 100% Harte-Hanks Direct Marketing/Dallas, Inc. Delaware 100% Harte-Hanks Direct Marketing/Fullerton, Inc. California 100% Harte-Hanks do Brazil Consultoria e Servicos Ltda. Brazil 100%(3) Harte-Hanks Limited England 100%(3) Harte-Hanks Market Research, Inc. New Jersey 100% Harte-Hanks Pty. Limited Australia 100%(3) Harte-Hanks Response Management/Boston, Inc. Massachusetts 100% Harte-Hanks Shoppers, Inc. California 100% Harte-Hanks Stock Plan, Inc. Delaware 100% Harte-Hanks Television, Inc. Delaware 100% H&R Communications, Inc. New Jersey 100%(2) HTS, Inc. Connecticut 100% Independent Publishing Company South Carolina 100% Information for Marketing Limited England 100%(5) Marketing Communications, Inc. Missouri 100% Mars Graphic Services, Inc. New Jersey 100%(4) Northern Comprint Co. California 100% NSO, Inc. Ohio 100% Pennysaver Publications, Inc. Texas 100% Potpourri Shopper, Inc. California 100% PRO Direct Response Corp. New Jersey 100%(2) Select Marketing, Inc. Texas 100% Southern Comprint Co. California 100%
(1) Owned by Mars Graphic Services, Inc. (2) Owned by DiMark Marketing, Inc. (3) Owned by Harte-Hanks Data Technologies, Inc. (4) Owned by DiMark, Inc. (5) Owned by Harte-Hanks Limited Dated: February 19, 1997 49 EX-23 5 CONSENT OF INDEPENDENT AUDITORS REPORT 1 EXHIBIT 23 Independent Auditors' Consent The Board of Directors Harte-Hanks Communications, Inc.: We consent to incorporation by reference in the registration statements (No. 33-51723 and No. 33-54303) on Form S-8 of Harte-Hanks Communications, Inc. of our report dated January 24, 1997 relating to the consolidated balance sheets of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the years in the three-year period ended December 31, 1996, which report appears in the 1996 annual report to shareholders which is incorporated by reference in the December 31, 1996 annual report on Form 10-K of Harte-Hanks Communications, Inc. and our report dated January 24, 1997, relating to the related financial statement schedule as of and for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of the Company. /s/ KPMG Peat Marwick LLP San Antonio, Texas March 25, 1997 50 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 DEC-31-1996 12,017 0 109,554 1,995 13,720 153,147 234,735 121,827 592,283 97,727 218,005 0 0 36,802 215,890 592,283 665,873 665,873 477,293 577,878 513 0 13,484 75,357 34,736 40,621 0 0 0 40,621 1.05 1.05
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