-----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, Ge5TRTrkjA/ctuZPLvJMHb1fEBFjgKDgbzkKoHye9eHca31d9DA5sE3IzR79d99F X0WYeDHnket+aQ3/nHhDwQ== 0000950134-98-002468.txt : 19980330 0000950134-98-002468.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950134-98-002468 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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: SEC FILE NUMBER: 001-07120 FILM NUMBER: 98574967 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, 1997 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, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM_________________ TO________________ COMMISSION FILE NUMBER 1-7120 ----------------- 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 16, 1998, based on the $22.06 per share closing price for the Company's Common Stock on the New York Stock Exchange on such date: approximately $1,077,000,000. SHARES OUTSTANDING AT MARCH 16, 1998: Common Stock -- 73,589,784 shares DOCUMENTS INCORPORATED BY REFERENCE: The Company's Annual Report to Stockholders for the year ended December 31, 1997 (incorporated in Part II to the extent provided in Items 5, 6, 7 and 8 hereof). Definitive Proxy Statement for the Company's May 5, 1998 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (incorporated in Part III to the extent provided in Items 10, 11 and 12 hereof). ================================================================================ 2 2 Harte-Hanks Communications, Inc. Table of Contents Form 10-K Report December 31, 1997
Part I Page - ------ ---- Item 1. Business 3 Item 2. Properties 3 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Part II - ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 10 Item 8. Financial Statements and Supplementary Data 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 Part III - -------- Item 10. Directors and Executive Officers of the Registrant 11 Item 11. Executive Compensation 11 Item 12. Security Ownership of Certain Beneficial Owners and Management 11 Item 13. Certain Relationships and Related Transactions 11 Part IV - ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 11 Signatures 16
3 3 ITEM 1. BUSINESS AND ITEM 2. PROPERTIES INTRODUCTION Harte-Hanks is a highly focused targeted media company with continuing operations in two principal businesses - direct marketing and shoppers - as a result of the sale of the Company's newspaper and television operations on October 15, 1997. (See Note N of "Notes to Consolidated Financial Statements.") Since the newspaper and television operations represented entire business segments, their results are reported as "discontinued operations" for all periods presented. Results of the remaining business segments are reported as "continuing operations." The Company's shopper business operates in local markets throughout the United States, while its direct marketing business operates both nationally and internationally. The Company believes that marketing is undergoing a transition from traditional mass media marketing to targeted marketing, or to one-to-one customer relationships. The transition is being driven by the increasing sophistication and efficiency of computer technology and a growing need among marketers to customize the product and service choices they offer to individuals. Direct marketing, which represents 66.7% of the Company's revenue, is leading the movement toward highly targeted and relationship marketing. The Company's shopper business applies many of the same targeting principles as direct marketing. Harte-Hanks' strategy is based on five key elements: being a market leader in each of its businesses; increasing revenues through growing its base businesses, introducing new products, entering new markets and making acquisitions; using technology to create competitive advantage; employing people who can partner effectively with its clients; and creating shareholder value. Company revenues from continuing operations totaled $638.3 million in 1997. Harte-Hanks is the successor to a newspaper business begun in Texas in the early 1920's by Houston Harte and Bernard Hanks. In 1972, the Company went public and was listed on the New York Stock Exchange. The Company went private in a leveraged buyout initiated by management in 1984. In 1993, the Company again went public and listed its common stock on the NYSE. See Note P of "Notes to Consolidated Financial Statements" for certain financial information by business segment. DIRECT MARKETING GENERAL Harte-Hanks operates a national and international direct marketing business offering a broad range of specialized, coordinated and integrated services. The Company utilizes advanced technologies to enable its customers to identify, reach, influence and nurture specific consumers or businesses. The Company believes that developments in computer technology and trends toward more sophisticated marketing analysis and measurement will continue to result in increased usage of direct marketing services. Harte-Hanks' direct marketing customers include many of America's largest retailers, banks, mutual funds companies, pharmaceutical companies, healthcare organizations, insurance companies and high technology firms, along with a growing number of customers in such emerging markets as telecommunications, automotive, utilities and travel. Its client base is both domestic and international. In 1997, Harte-Hanks Direct Marketing had revenues of $425.5 million, which accounted for 66.7% of the Company's revenues. In 1997, Harte-Hanks' direct marketing business segment made three acquisitions. In the database marketing sector, Harte-Hanks made two acquisitions that strengthened its international services and expanded its 4 4 technology base. Information for Marketing (IFM), a leading database marketer in the United Kingdom, was acquired in January, expanding the company's overall database production capacity, especially for European clients. Mercantile Software Systems, Inc., a New Jersey-based provider of open architecture software and systems integration solutions for direct marketing and other applications, was acquired in November 1997. Mercantile's open architecture and the speed of its IRE product will be integrated with the many powerful tools of P/CIS(R). Harte-Hanks continued to expand its international capabilities and presence in the fast growing response management/teleservices business through the acquisition of TeleSupport Services (TSS), and by entering into a strategic alliance with the WP Group. TSS is a Pan-European provider of response management services to the high technology industry in Europe and has worked with Harte-Hanks Response Management since 1991. Harte-Hanks Direct Marketing offers a complete range of specialized, coordinated and integrated direct marketing services from a single source. These services are organized into three broad sectors - database marketing, marketing services and response management/teleservices. Database Marketing The Company builds customized marketing databases for specific clients and provides them with easy-to-use tools to target their best customers and prospects. Using proprietary name and address matching software, the Company standardizes large numbers of customer records from multiple sources, integrates them into a single database for each client and, if needed, appends demographic and lifestyle information. In most cases, these databases are delivered for use on clients' personal computers, networks or workstations, where the Company's P/CIS(R) software applications help clients predict the likely results of marketing promotions and track recipients' buying behavior. Relational databases are built for clients from a range of facilities, each specializing in specific market segments. These are moved to the client's site or maintained at Harte-Hanks with on-line access to client locations. In addition to building a client's database and installing the software, Harte-Hanks Direct Marketing performs regular database updates and offers its stand-alone software module Trillium(R) for clients who want to integrate this capability into their data warehouse. In addition, the Company operates as a service bureau for clients who need it, preparing list selections, maximizing deliverability and reducing clients' mailing costs through sophisticated postal coding, hygiene and address updates through a non-exclusive National Change of Address license with the U.S. Postal Service. Harte-Hanks moved its service bureau operation in Baltimore, Maryland into a new facility in nearby Glen Burnie to accommodate growth. The new offices double the space available for the operation, which performs a wide range of database and data processing services, primarily for the retail and financial services industries. Recently introduced services include Phone-Bank-Plus, featuring national telephone number append capabilities. Database services are marketed to specific industries or markets with software modifications tailored to each industry or market. Having established the basic technological foundation, the Company is able to provide database services to new industries and markets by modifying its existing technology. The Company currently provides database services to all of its primary markets in addition to a range of emerging markets where a specialized group has been formed to support the commitment to expand market coverage. As a further extension of the client's marketing arm, Harte-Hanks provides marketing research and analytics services. Specific capabilities include tracking and reporting, media analysis, modeling, database profiling, primary data collection, marketing applications, consulting and program development. 5 5 From the data and the analysis come the translation into marketing programs. Increasingly our clients seek an execution approach as part of the data-based offerings. These are accomplished from our database agencies which create the plan to manage direct marketing communication efforts. These efforts, which have a base in the health care/insurance and telecommunication businesses, are being expanded to include new core and emerging markets. The Company also provides database services internationally through offices in Australia, Brazil, London and Toronto. Marketing Services Harte-Hanks provides a variety of services to help clients develop and execute targeted marketing communication programs. These include such upfront services as creative, along with back-end services such as printing and graphics, personalization of communication pieces using laser and inkjet printing, target mail and fulfillment, and transportation logistics. The Company's mail tracking capability and long-standing relationships with the U.S. Postal Service help ensure that customer mailings reach their destinations on time. And, by controlling the final stage of the print distribution process through its logistics operations, the Company facilitates the delivery of its clients' materials while holding costs to a minimum. The Dallas marketing services operation was relocated to a larger 55,000-square-foot facility to accommodate its growth. In other developments, the Company implemented new routing software in its logistics business, beta tested a new release of its internal Order Management System and converted to a networked inkjet production system to enhance quality and reduce costs. It also initiated a number of productivity improvement measures in its newly acquired operations. Depending upon the needs of our clients, these capabilities are provided in a specialized, coordinated and integrated approach through eleven primary facilities nationwide. Response Management Harte-Hanks Response Management manages the inquiries clients receive from their marketing efforts, whether it is from 1-800 numbers, trade shows, fax programs or World Wide Web sites. These leads are qualified, tracked and distributed both to the appropriate sales channels as well as to client management for analysis and decision making. Many of these leads are processed and distributed over the Internet, accounting for more than 3.3 million transactions in 1997. In addition to qualifying and distributing sales leads, the Internet is being used to register attendees for seminars and training events and to manage open-ended electronic mail responses traditionally handled by phone. Using proprietary software, the Company also builds contact databases for its clients using the information gained from these response management activities. These databases help clients measure the return on their marketing communications and make more informed decisions about future marketing efforts. The Company's response management business continued on its rapid expansion path with the opening of a new call center in Langhorne, Pennsylvania in May. Focused on serving the healthcare industry, the new facility has current capacity for 105 seats and provides both inbound and outbound teleservices, including inquiry 6 6 management, lead generation and seminar management. Meanwhile, the Company's Southern California response management operation completed its move to a new 135,000-square-foot fulfillment/distribution facility in Valencia in late July. The new facility includes 100 call center stations initially, with significant capacity for expansion. The Company provides response management services at its Austin, Los Angeles, Framingham, Massachusetts, Brockton, Massachusetts and Langhorne facilities. These centers have some industry specialization and are linked together to support certain clients which have volume spikes or high growth needs. Sales and Marketing Harte-Hanks' national direct marketing sales forces are headquartered in Cincinnati, Ohio, with additional offices maintained throughout the United States and in Toronto, London, Sao Paulo, Brazil, Melbourne, Australia and Hasselt, Belgium. The overall sales focus is to position Harte-Hanks as a single-source solution for a client's targeted marketing needs. The sales forces emphasize cross-selling the range of direct marketing services and are supported by employees in each sector. The Company generally charges transaction-related fees each time it provides direct marketing services. For certain database projects, it charges a one-time, negotiated fee to build a database, plus an additional fee each time the database is updated. There are often start-up fees associated with response management and planning fees for many of the data-based solutions. Facilities Direct marketing services are provided at the following facilities: DATABASE MARKETING MARKETING SERVICES (CONTINUED) Baltimore, Maryland Westville, New Jersey Billerica, Massachusetts Heathrow, Florida RESPONSE MANAGEMENT/TELESERVICES Kansas City, Kansas Austin, Texas Langhorne, Pennsylvania Brockton, Massachusetts New York, New York Cherry Hill, New Jersey Piscataway, New Jersey Clearwater, Florida River Edge, New Jersey Framingham, Massachusetts Langhorne, Pennsylvania MARKETING SERVICES Los Angeles, California Baltimore, Maryland Cincinnati, Ohio NATIONAL SALES HEADQUARTERS Dallas/Fort Worth, Texas Cincinnati, Ohio Deerfield Beach, Florida Forty Fort, Pennsylvania INTERNATIONAL OFFICES Fullerton, California Hasselt, Belgium Jacksonville, Florida London, England Kansas City, Kansas Melbourne, Australia New York, New York Sao Paulo, Brazil South Belmar, New Jersey Toronto, Canada 7 7 Competition Harte-Hanks' direct marketing business faces competition from other direct marketing companies in each sector, as well as from print and electronic media and other forms of advertising. Harte-Hanks believes that its state-of-the-art database and response management/teleservices capabilities, combined with its national production capability, industry focus and ability to offer a full range of integrated services, enable the Company to compete effectively. SHOPPERS GENERAL Harte-Hanks is the largest publisher of advertising shoppers in North America based on weekly circulation and revenues, and the only national media company that focuses on shoppers as a core business. Shoppers are weekly advertising publications primarily delivered free by third-class mail to all households in a particular geographic area. Shoppers offer advertisers a targeted, cost-effective local advertising system, with virtually 100% penetration in their area of distribution. Shoppers are particularly effective in large markets with high media fragmentation in which major metropolitan newspapers generally have low penetration. As of December 31, 1997, shoppers reached over 9.3 million households in five markets each week -- Southern California, Northern California, South Florida, Dallas/Fort Worth, and Wichita, Kansas/Springfield, Missouri. The Company's Southern California publications account for 62% of these households. Harte-Hanks publishes 770 individual shopper editions each week distributed to zones of approximately 12,000 households each. This allows single-location, local advertisers to saturate a single geographic zone, while enabling multiple-location advertisers to saturate multiple zones. This unique delivery system gives large and small advertisers alike a cost-effective way to reach their target markets. The Company believes that its zoning capabilities and production technologies have enabled it to saturate and target geographic areas allowing its advertisers to effectively target their customers. The Company's strategy is to increase its share of local advertising in its existing circulation areas, and, over time, to increase circulation through internal expansion into contiguous areas and make selective acquisitions. In 1997, Harte-Hanks Shoppers had revenues of $213 million, accounting for approximately 33.3% of the Company's revenue from continuing operations. During the period 1992 through 1996, 1.1 million households were added to the Company's shopper circulation through internal expansion, primarily in Southern California, South Florida and Northern California. Throughout 1997, Harte-Hanks added another 138,000 contiguous households to its circulation through internal expansion in its Southern and Northern California markets and in its Miami, Florida market. The Company believes that expansions provide increased revenues and operating income as the publications in these new areas mature. In addition to internal expansion, Harte-Hanks Shoppers added 2.4 million households to its circulation through the acquisition of the ABC Shoppers Group from an indirect subsidiary of The Walt Disney Company. With the addition of over 2.0 million weekly circulation from this acquisition, primarily in the San Diego and Sacramento markets, the Company now reaches over 7.3 million households in California, or 65% of the state's total. The acquisition also added 0.3 million weekly circulation in the Wichita, Kansas/Springfield, Missouri markets. 8 8 Publications Harte-Hanks Shoppers are published in Southern California, Northern California, South Florida, Dallas/Fort Worth and Wichita, Kansas/Springfield, Missouri. The following table sets forth certain information with respect to shopper publications:
December 31, 1997 --------------------------- Number of Market Publication Name Circulation Zones - ------ ---------------- ----------- ----- Southern California PennySaver/South 5,793,000 496 Coast Shopper/Bargain Bulletin Northern California Potpourri/PennySaver 1,774,000 133 Miami/Ft. Lauderdale The Flyer 1,067,000 90 Dallas/Ft. Worth The Shopper's Guide 430,000 36 Wichita, Kansas/ Springfield, Missouri PennyPower 290,000 15 ---------- ----- Total: 9,354,000 770
Shopper publications contain classified and display advertising and are primarily delivered to consumers' homes by third-class saturation mail. The typical shopper publication contains over 40 pages and is 7 by 9-1/2 inches in size. Each edition, or zone, is targeted around a natural neighborhood marketing pattern. Shoppers also serve as a distribution vehicle for multiple ads from national and regional advertisers; "print and deliver" single-sheet inserts designed and printed by the Company; coupon books; preprinted inserts from major retail chains; and a four-color proprietary product, MARQUEE. Harte-Hanks shopper publications also offer audiotext voice mail in a pay-per-call format. The Company has acquired, developed and applied innovative technology and customized equipment in the publication of its shoppers, contributing to efficiency and growth. A proprietary pagination system, jointly developed by the Company and a software company, became fully operational for the shoppers in Southern California and South Florida in 1995. This software has made it possible for the hundreds of weekly zoned editions to be designed, built and output to plate-ready negatives in a paperless, digital environment. Automating the production process saves on labor, newsprint and overweight postage. This software also allows for better ad tracking, immediate checks on individual zone and ad status, and more on-time press starts with less manpower. In another technological innovation, Harte-Hanks has expanded the ways its advertisers can reach prospective customers by establishing World Wide Web sites for its Southern California, Northern California and South Florida shoppers. The websites offer electronic access to ads from that week's printed publications. Visitors to these sites can search the overall database for specific types of products or services. 9 9 Sales and Marketing The Company maintains local sales offices throughout its geographic markets and employs more than 650 commissioned sales representatives who develop both targeted and saturation advertising programs for customers. The sales organization provides service to both national and local advertisers through its telemarketing departments and field sales representatives. Shopper customers vary from individuals with a single item for sale to local neighborhood advertisers to large multi-location advertisers. The core customers continue to be local service businesses and small retailers. The Company is increasingly focusing its marketing efforts on larger national accounts by emphasizing its ability to deliver saturation advertising in defined zones in combination with advertising in the shopper publication. Additional focus is being placed on particular industries through the development of sales specialists. These sales specialists are being used to drive revenue growth in the automotive, real estate, employment and health care industries. The Company utilizes a proprietary sales and marketing system (SAMS) to enter customer orders directly from the field, instantly checking space availability, ad costs and other pertinent information. A paperless order entry system on a Unix platform, SAMS has built-in error-reducing safeguards, minimizing costly sales adjustments. In addition, SAMS facilitates placement of advertising in multiple zoned editions. The Company has expanded SAMS so that, in addition to allowing advertising information to be entered for immediate publication, it will build a relational customer database, enabling sales personnel to access customer history by designated variables, thereby identifying similar potential customers and assisting follow-up with existing customers. Facilities Harte-Hanks shoppers are produced at owned or leased facilities in the markets they serve. The Company has seven production facilities -- three in Southern California, two in Northern California and one in each of its Florida and Texas markets -- and 32 sales offices. Competition Harte-Hanks shoppers compete primarily with metropolitan daily newspapers, shared mail packages and other local advertising media. Shoppers also compete in varying degrees for advertisers and readers with magazines, radio, broadcast and cable television, directories, other shoppers and other communications media that operate in their markets. The Company believes that its production systems and technology, which enable it to publish separate editions in narrowly targeted zones, allow it to compete effectively, particularly in large markets with high media fragmentation. EMPLOYEES As of December 31, 1997, Harte-Hanks employed 5,550 full-time employees and 1,346 part-time employees, as follows: direct marketing -- 3,591 full-time and 923 part-time employees; shoppers-- 1,935 full-time and 423 part-time employees; and corporate office -- 24 full-time employees. None of the work force is represented by labor unions. The Company considers its relations with its employees to be good. 10 10 FACILITIES Harte-Hanks' executive offices are located in San Antonio, Texas and occupy approximately 17,000 square feet in leased premises. The Company's business is conducted in facilities nationwide containing aggregate space of approximately 2.7 million square feet. Approximately 2.6 million square feet are held under leases, which expire at dates through 2010. The balance of the properties, which are used primarily in the Company's Southern California shopper operations, are owned by the Company. ITEM 3. LEGAL PROCEEDINGS The Company from time to time becomes involved in various claims and lawsuits incidental to its businesses. In the opinion of management, after consultation with counsel, any ultimate liability arising out of currently pending claims and lawsuits will not have a material effect on the financial condition or operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1997 at page 32. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1997 at page 31. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1997 at pages 14 through 18. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable to the Company for this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following information is set forth in the Company's Annual Report to Stockholders for the year ended December 31, 1997, which is incorporated herein by reference: All Consolidated Financial Statements (pages 19 through 22); all Notes to Consolidated Financial Statements (pages 23 through 30); and the Independent Auditors' Report (page 32). With the exception of the information herein expressly incorporated by reference, the Company's Annual Report to Stockholders for the year ended December 31, 1997 is not deemed filed as part of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 11 ITEM 10. MANAGEMENT Incorporated herein by reference from the information in the Company's definitive proxy statement dated March 27, 1998 for the May 5, 1998 Annual Meeting of Stockholders under the caption "Management -- Directors and Executive Officers" on pages 9 and 10. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the information in the Company's definitive proxy statement dated March 27, 1998 for the May 5, 1998 Annual Meeting of the Stockholders under the caption, "Executive Compensation and Other Information" on pages 11 through 15. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the information in the Company's definitive proxy statement dated March 27, 1998 for the May 5, 1998 Annual Meeting of Stockholders under the caption "Security Ownership of Management and Principal Stockholders" on pages 8 and 9. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements are incorporated by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1997 attached hereto: Consolidated Balance Sheets, December 31, 1997 and 1996 Consolidated Statements of Operations, Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows, Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity, Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Independent Auditors' Report (a)(2) The following accountants' report and financial schedule for years ending December 31, 1997, 1996 and 1995 are submitted herewith: Independent Auditors' Report 10-K Schedule Schedule II -- Valuation and Qualifying Accounts All other schedules are omitted as the required information is inapplicable. 12 12 (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. 333-02047 and incorporated by reference herein). 2(c) Agreement and Plan of Merger and Reorganization, dated as of May 16, 1997, by and between The E.W. Scripps Company and Harte-Hanks Communications, Inc. (filed as Exhibit 2.1 to the Company's Form 8-K dated May 22, 1997 and incorporated by reference herein). 2(d) Acquisition Agreement, dated as of May 16, 1997, by and between The E.W. Scripps Company and Harte-Hanks Communications, Inc. (filed as Exhibit 2.2 to the Company's Form 8-K dated May 22, 1997 and incorporated by reference herein). 2(e) Stock Purchase Agreement dated as of July 26, 1997 between ABC, Inc. and Harte-Hanks Communications, Inc. (filed as Exhibit 2(e) to the Company's Form 10-Q for the nine months ended September 30, 1997 and incorporated by reference herein). 3(a) Amended and Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 3(b) Amended and Restated Bylaws (filed as Exhibit 3(b) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 3(c) Amendment dated April 30, 1996 to Amended and Restated Certificate of Incorporation (filed as Exhibit 3(c) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein).
13 13 (a) (3) EXHIBITS (continued)
Exhibit No. Description of Exhibit Page No. - ------- ------------------------------------------------------------- -------- 3(d) Amended and Restated Certificate of Incorporation as amended through April 30, 1996 (filed as Exhibit 3(d) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). 4(a) Long term debt instruments are not being filed pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K. Copies of such instruments will be furnished to the Commission upon request. 10(a) 1984 Stock Option Plan (filed as Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1984 and incorporated herein by reference). 10(b) Registration Rights Agreement dated as of September 11, 1984 among HHC Holding Inc. and its stockholders (filed as Exhibit 10(b) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 10(c) HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1991 and incorporated by reference herein). 10(d) Amendment to HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit 10(j) to the Company's Form 10-K for the year ended December 31, 1992 and incorporated by reference herein). 10(e) Severance Agreement between Harte-Hanks Communications, Inc. and Larry Franklin, dated as of July 23, 1993 (filed as Exhibit 10(f) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). *10(f) Form of Severance Agreement between Harte-Hanks Communications, Inc. and certain Executive Officers of the Company, dated as of July 7 or December 28,1997. 19
14 14 (a) (3) EXHIBITS (continued)
Exhibit No. Description of Exhibit Page No. - ------- -------------------------------------------------------------- -------- 10(g) Amendment No. 2 to HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit 10(1) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(h) Harte-Hanks Communications, Inc. Pension Restoration Plan (filed as Exhibit 10(j) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein). 10(i) Amendment No. 3 to Harte-Hanks Communications (formerly HHC Holding Inc.) 1991 Stock Option Plan (filed as Exhibit 10(o) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). 10(j) Harte-Hanks Communications, Inc. 1996 Incentive Compensation Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the six months ended June 30, 1996 and incorporated by reference herein). *13 Annual Report to Securityholders (only those portions incorporated by reference into the Form 10-K are filed herewith). 26 *21 Subsidiaries of the Company. 46 *23 Consent of KPMG Peat Marwick. 47 *27 Financial Data Schedule. 48
- -------------------- *Filed herewith 15 15 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) 14(b) Reports on Form 8-K A Form 8-K ( in response to items 5 and 7 thereof) was filed dated October 30, 1997. 14(c) Exhibits -- The response to this portion of item 14 is submitted as a separate section of this report on pages 19 to 48. 14(d) Financial Statement Schedule -- The response to this portion of Item 14 is submitted as a separate section of this report on page 18. The agreements set forth above describe the contents of certain exhibits thereunto which are not included. However, such exhibits will be furnished to the Commission upon request. 16 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Harte-Hanks Communications, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARTE-HANKS COMMUNICATIONS, INC. By: /s/ Larry Franklin ------------------------------------- Larry Franklin President & Chief Executive Officer By: /s/ Jacques D. Kerrest ------------------------------------- Jacques D. Kerrest Senior Vice President, Finance and Chief Financial and Accounting Officer Date: March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated. /s/ Houston H. Harte /s/ Christopher M. Harte - -------------------------------- --------------------------------- Houston H. Harte, Chairman Christopher M. Harte, Director /s/ Larry Franklin /s/ James L. Johnson - -------------------------------- --------------------------------- Larry Franklin, Director James L. Johnson, Director /s/ Richard M. Hochhauser /s/ David L. Copeland - -------------------------------- --------------------------------- Richard M. Hochhauser, Director David L. Copeland, Director /s/ Dr. Peter T. Flawn - -------------------------------- Dr. Peter T. Flawn, Director 17 17 INDEPENDENT AUDITORS' REPORT 10-K SCHEDULE The Board of Directors and Stockholders Harte-Hanks Communications, Inc.: Under date of January 27, 1998, we reported on the consolidated balance sheets of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of operations, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1997. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP San Antonio, Texas January 27, 1998 18 18 Harte-Hanks Communications, Inc. and Subsidiaries Financial Statement Schedule Schedule II 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, 1997... $1,121 $4,050 $2,336 $2,835 ====== ====== ====== ====== Year ended December 31, 1996... $1,761 $1,457 $2,097 $1,121 ====== ====== ====== ====== Year ended December 31, 1995... $1,956 $2,183 $2,378 $1,761 ====== ====== ====== ======
19 Exhibit Index
Exhibit No. Description of Exhibit Page No. - ------- ------------------------------------------------------------- -------- *10(f) Form of Severance Agreement between Harte-Hanks Communications, Inc. and certain Executive Officers of the Company, dated as of July 7 or December 28,1997. 19 *13 Annual Report to Securityholders (only those portions incorporated by reference into the Form 10-K are filed herewith). 26 *21 Subsidiaries of the Company. 46 *23 Consent of KPMG Peat Marwick. 47 *27 Financial Data Schedule. 48
- ------------ * Filed herewith EX-10.F 2 SEVERANCE AGREEMENT 1 19 Exhibit 10(f) SEVERANCE AGREEMENT AGREEMENT made as of the _____ of _________, 199_, between Harte-Hanks Communications, Inc., a Delaware corporation (the "Company"), and ___________________ (the "Executive"). WHEREAS, the Executive is currently serving as __________________ Vice President of the Company; WHEREAS, the Executive possesses an intimate knowledge of the business and affairs of the Company, its policies, methods, personnel and plans for the future and has acquired contacts of considerable value to the Company; and WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the Executive's contribution to the growth and success of the Company has been substantial and wishes to offer an inducement to the Executive to remain in the employ of the Company; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, this Agreement sets forth benefits which the Company will pay to Executive in the event of termination of Executive's employment under the circumstances described herein: 1. Term. Except as otherwise provided in Section 4, the term of this Agreement shall be effective upon a Change in Control (as defined herein) and continue until the earlier of (i) the expiration of the second anniversary of the occurrence of a Change in Control, (ii) the Executive's death, or (iii) the Executive's earlier voluntary retirement (except as provided in Section 3(a)(2)) (the "Term"). 2. Definitions. (a) Cause. For "Cause" means that the Executive shall have committed: (i) an intentional material act of fraud or embezzlement in connection with his duties or in the course of his employment with the Company; (ii) intentional wrongful material damage to property of the Company; or (iii) intentional wrongful disclosure of material secret processes or material confidential information of the Company. 2 20 For the purposes of this Agreement, no act, or failure to act, on the part of the Executive will be deemed "intentional" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (b) Change in Control. A "Change in Control" of the Company shall have occurred if any of the following events shall occur: (i) The Company is merged, consolidated or reorganized into or with another corporation or other legal person and as a result of such merger, consolidation or reorganization less than 60% of the combined voting power of the then outstanding securities of the remaining corporation or legal person or its ultimate parent immediately after such transaction is received in respect of or in exchange for voting securities of the Company pursuant to such transaction; (ii) The Company sells all or substantially all of its assets to any other corporation or other legal person and as a result of such sale less than 60% of the combined voting power of the then outstanding securities of such corporation or legal person or its ultimate parent immediately after such transaction is received in respect of or in exchange for voting securities of the Company pursuant to such sale; (iii) Any person (including any "person" as such term is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities which when added to any securities already owned by such person would represent in the aggregate 30% or more of the combined voting power of the then outstanding securities of the Company; or (iv) Such other events that cause a Change in Control of the Company as determined by the Board in its sole discretion. (c) Code. The "Code" shall mean the Internal Revenue Code of 1986, as amended. (d) Disability. "Disability" shall have the meaning given to disability in the Company's long term disability insurance plan. 3 21 (e) Severance Compensation. The "Severance Compensation" shall be a lump sum cash amount equal to 200% of the sum of (A) the annual base salary of the Executive in effect immediately prior to the Change in Control or the Termination Date, whichever is larger, plus (B) the average of the bonus or incentive compensation of the Executive, received from the Company for the two fiscal years preceding the year in which the Change in Control occurred or for the two fiscal years preceding the year in which the Termination Date occurs, whichever is larger. (f) Termination Date. The "Termination Date" shall be the date upon which the Executive or the Company terminates the employment of the Executive. 3. Rights of Executive Upon Change in Control and Termination. (a) The Company shall provide the Executive, within ten days following the Termination Date, Severance Compensation in lieu of compensation to the Executive for periods subsequent to the Termination Date, if, following the occurrence of a Change in Control, any of the following events shall occur: (1) the Company terminates the Executive's employment during the Term of this Agreement other than for any of the following reasons: (i) the Executive dies; (ii) the Executive suffers a Disability and is unable to work for a period of 180 consecutive days; or (iii) for Cause, (2) the Executive terminates his employment after such Change in Control and the occurrence of at least one of the following events: (i) A material adverse change in the nature or scope of the authorities, functions or duties attached to the position with the Company that the Executive had immediately prior to the Change in Control; a reduction in the Executive's salary, bonus or incentive compensation or a significant reduction in scope or value of other monetary or nonmonetary benefits (other than benefits pursuant to a broad based employee benefit plan) to which the Executive was entitled from the Company immediately prior to the Change in Control, any of which is not remedied within ten calendar days after receipt by the Company of written notice from the Executive of such change, reduction, alteration or termination, as the case may be; 4 22 (ii) A determination by the Executive made in good faith that as a result of a Change in Control and a change in circumstances thereafter, he has been rendered substantially unable to carry out, or has been substantially hindered in the performance of, the authorities, functions or duties attached to his position immediately prior to the Change in Control, which situation is not remedied within ten calendar days after receipt by the Company of written notice from the Executive of such determination; (iii) The Company shall require the Executive to relocate his principal location of work from the location thereof immediately prior to the Change in Control, or to travel away from his office in the course of discharging his responsibilities or duties significantly more than required of him prior to the Change in Control without, in either case, the Executive's prior written consent; or (iv) the Company commits any material breach of this Agreement. (3) the Executive terminates his employment for any reason during the 30-day period following the first anniversary of the Change in Control. (b) Severance Compensation pursuant to this Section 3 will not be subject to setoff or mitigation. (c) Upon a Change in Control, or in the event the Company becomes obligated to make the payments specified in Section 4(a), all stock options previously granted by the Company to the Executive and not yet exercised will become vested and fully exercisable by the Executive. Such options shall remain exercisable for their original term; provided, however, that the Company has the right to require the Executive to exercise such options within 90 days after receipt of written notice to the Executive. If the Executive fails to exercise his options within such 90-day period, the Company has the right to cancel the options. (d) In the event the Company becomes obligated hereunder to pay the Executive the Severance Compensation or the payments specified in Section 4(a), the Company shall also pay the Executive a lump sum cash payment in the amount necessary to make continuation coverage (COBRA) payments under the Company's group health insurance plan for a period of 18 months. 5 23 (e) Notwithstanding the above section or any other provision of this Agreement, in no event shall the Company pay or be obligated to pay the Executive an amount which would be an Excess Parachute Payment. For purposes of this Agreement, the term "Excess Parachute Payment" shall mean any payment or any portion thereof which would be an "excess parachute payment" within the meaning of Section 280G of the Code, and would result in the imposition of an excise tax under Section 4999 of the Code, in the opinion of tax counsel selected by the Company and acceptable to the Executive. To the extent that the payments hereunder must be reduced to avoid any Excess Parachute Payment, such reduction shall be applied in the following order: (i) to cash amounts payable as Severance Compensation; (ii) to amounts payable for the maintenance of continuation coverage (COBRA) payments under the Company's group health insurance plan; (iii) to the accelerated vesting of options as provided in Section 3(c). 4. Additional Rights of Executive Prior to Change in Control. (a) In the event the employment of the Executive with the Company is terminated prior to a Change in Control, the Company shall provide the Executive, within ten days following the Termination Date, Severance Compensation in lien of compensation to the Executive for periods subsequent to the Termination Date, if, and only if, (i) the Company terminates the Executive's employment without "Justification" (as defined herein); or (ii) the Executive terminates his employment with "Good Reason" (as defined herein). (b) "Justification" means that the Executive shall have (i) committed an act of fraud, dishonesty, gross misconduct or other unethical practices, or (ii) materially failed to perform his duties to the satisfaction of the chief executive officer of the Company, which failure has not been cured within 60 days after receipt of written notice from the chief executive officer. (c) With "Good Reason" means that the Executive shall have terminated his employment following a reduction (which is instituted without his consent and which is not rescinded within 30 days after the Executive delivers written notice of objection to the chief executive officer) in his functions, duties or responsibilities (i) to a level that is not commensurate with those of an executive in the position of the Executive prior to such reduction (it being understood that the reassignment of any of the Executive's functions, duties or responsibilities to one or more persons who report directly or indirectly to the Executive is not such a reduction), or (ii) which causes the Employee's position with the Company to become one of lesser importance or scope. 6 24 5. Successors; Binding Agreement. This Agreement will be binding upon the Company, its successors and assigns, and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 6. Notice. The Company shall give written notice to Executive within ten days after any Change in Control. Failure to give such notice shall constitute a material breach of this Agreement. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or received after being mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: ---------------------------- c/o Harte-Hanks Communications, Inc. 200 Concord Plaza Drive, Suite 800 San Antonio, Texas 78216 If to the Company: Harte-Hanks Communications, Inc. 200 Concord Plaza Drive, Suite 800 San Antonio, Texas 78216 Attention: Donald R. Crews or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 7. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, unless specifically referred to herein, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the substantive laws of the State of Delaware, without regard to principles of conflicts of law. This Agreement replaces any prior severance agreement between the Company and the Executive. 7 25 8. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Employment Rights. Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to any Change in Control; provided, however, that any termination of employment of the Executive or removal of the Executive as an elected officer of the Company following the commencement of any discussion authorized by the Board of Directors of the Company with a third person that ultimately results in a Change in Control shall be deemed to be a termination or removal of the Executive after a Change in Control for purposes of this Agreement and shall entitle the Executive to all Severance Compensation. Notwithstanding any other provision hereof to the contrary, the Executive may, at any time during his employment with the Company upon the giving of 30 days prior written notice, terminate his employment hereunder. If this Agreement or the employment of the Executive is terminated under circumstances in which the Executive is not entitled to any Severance Compensation, neither the Executive nor the Company shall have any further obligation or liability hereunder. 10. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or government regulation or ruling; provided, however, that no withholding pursuant to Section 4999 of the Code shall be made unless, in the opinion of tax counsel selected by the Company and acceptable to the Executive, such withholding relates to payments which result in the imposition of an excise tax pursuant to Section 4999 of the Code. IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date and year first above written. HARTE-HANKS COMMUNICATIONS, INC. By: ---------------------------------- Title: ---------------------------------- ---------------------------------- NAME OF EXECUTIVE EX-13 3 ANNUAL REPORT TO SECURITY HOLDERS 1 26 EXHIBIT 13 FINANCIAL CONTENTS Management's Discussion & Analysis .............................. 14 Consolidated Balance Sheets ..................................... 19 Consolidated Statements of Operations ........................... 20 Consolidated Statements of Cash Flows ........................... 21 Consolidated Statements of Stockholders' Equity ................. 22 Notes to Consolidated Financial Statements ...................... 23 Five-Year Financial Summary ..................................... 31 Independent Auditors' Report .................................... 32 Corporate Information ........................................... 32 Directors, Officers and Harte-Hanks Operations .................. 33 13 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's overall performance reflects its commitment to its growth strategy of being a market leader, introducing new products and entering new markets, investing in technology and people, and increasing shareholder value. The pursuit of this strategy was accelerated by the October 1997 sale of the Company's newspaper and television operations. (See Note N of "Notes to Consolidated Financial Statements.") This sale enables the Company to increasingly focus on building one-to-one relationships with its customers, in execution of its targeted marketing strategy. As a result of this strategy, Harte-Hanks has grown revenues 41.8% since December 31, 1995, excluding the results of operations sold by the Company during that time. On the same basis, operating income increased 55.8%. The Company extinguished all of its long-term debt ($306.3 million) on October 15, 1997 using proceeds from the sale of its newspaper and television operations. Harte-Hanks has grown internally by adding new customers and products, cross-selling existing products, entering new markets and expanding its international presence. The Company also used proceeds from the sale of its newspaper and television operations to fund several acquisitions in 1997. These acquisitions, as well as several previous acquisitions, have enhanced the Company's growth over the past three years. Harte-Hanks has funded $175.8 million in acquisitions during the period from 1995 through 1997. These acquisitions have all been in the Company's direct marketing and shopper segments, which now comprise 100% of the Company's revenues. In addition to the purchase acquisitions mentioned above, DiMark, Inc. merged with a wholly owned subsidiary of the Company on April 30, 1996 under the basis discussed on page 16 under "Acquisitions." The merger was accounted for on a pooling-of-interests basis, and all historical information has been restated as if the pooling occurred at the beginning of the periods presented. Harte-Hanks derives the majority of its revenues from the sale of direct marketing and advertising services. The Company's shoppers operate in local markets and are affected by the strength of the local economies. As a national business, direct marketing is affected to a greater extent by general national economic trends. The Company's principal expense items are payroll, postage, transportation and outsourced specialized printing. Postal rates, which typically increase every three to four years, increased 14% in January 1995. In 1996, the Company experienced postal savings in its shopper operations and increased costs in its direct marketing operations due to a mid-year postal reclassification rate case. Postal rate savings continued in the first half of 1997 in the shopper operations as a result of the 1996 postal reclassification. ================================================================================ RESULTS OF CONTINUING OPERATIONS As described in Note N of the "Notes to Consolidated Financial Statements" included herein, the Company sold its newspaper and television operations on October 15, 1997. Therefore, the newspaper and television operations results are excluded from management's discussion and analysis of financial condition and results of operations below. Operating results from continuing operations -- direct marketing and shoppers -- were as follows, exclusive of merger costs:
- ------------------------------------------------------------------------------------------ In thousands 1997 % Change 1996 (a) % Change 1995 - ------------------------------------------------------------------------------------------ Revenues $638,349 23.8 $515,460 13.7 $453,302 Operating expenses 561,257 23.7 453,563 12.4 403,518 -------- -------- -------- Operating income $ 77,092 24.5 $ 61,897 24.3 $ 49,784 ======== ======== ========
(a) Excludes 1996 one-time merger costs (discussed under "Acquisitions"). Including these costs, operating expenses and operating income were $465.7 million and $49.8 million, respectively. Consolidated revenues from continuing operations grew 23.8% in 1997 to $638.3 million, and 1997 operating income grew 24.5% to $77.1 million when compared to 1996. The Company's overall growth resulted from acquisitions and increased business from both new and existing customers. Overall operating expenses increased as a result of the overall revenue growth and the hiring of additional personnel to support the growth. Overall growth in the Company's 1996 revenues and operating income from continuing operations resulted from acquisitions, increased business with both new and existing customers, and new products and services. Overall operating expenses increased as a result of the overall revenue growth and higher paper prices experienced in 1996. 14 3 ================================================================================ DIRECT MARKETING Direct marketing operating results were as follows:
- ------------------------------------------------------------------------------------------ In thousands 1997 % Change 1996 % Change 1995 - ------------------------------------------------------------------------------------------ Revenues $425,489 28.8 $330,255 23.1 $268,257 Operating expenses 371,129 30.0 285,461 23.9 230,483 -------- -------- -------- Operating income $ 54,360 21.4 $ 44,794 18.6 $ 37,774 ======== ======== ========
Direct marketing revenues increased $95.2 million, or 28.8%, in 1997 when compared to 1996. The response management, database marketing, and marketing services sectors all experienced significant revenue growth. Response management growth is attributable to increased business with existing customers as well as new customer gains. The high technology and mutual fund industry sectors contributed significantly to overall response management revenues. Database marketing revenue increased primarily from database processing and acquisitions. The acquisitions included: Information for Marketing, a London-based database marketer, in January 1997; and Mercantile Software Systems, a New Jersey-based open architecture software provider, in November 1997. The retail industry sector provided the largest revenue increase for database marketing. Marketing services growth was largely due to an increase in logistics services and a full year of revenue from the acquisition of Marketing Communications, Inc., in November of 1996. Overall, revenue growth for direct marketing increased as a result of providing service to both new and existing customers across several industry sectors including retail, high technology, financial services, pharmaceutical and insurance industries. Operating expenses increased $85.7 million, or 30%, in 1997 when compared to 1996. Payroll costs increased $40.1 million due to the addition of personnel to support the revenue growth. Also contributing to increased operating expenses were additional production costs of $32.2 million due to increased volumes. Depreciation expense increased $3.5 million due to higher levels of capital investment to support growth. Operating expenses were also impacted by the acquisitions noted above. Direct marketing's 1996 revenue growth of $62.0 million, or 23.1%, occurred primarily in the database marketing and response management sectors. Database marketing revenues increased mainly from database construction and updates, and higher sales volume of software products. Response management revenues increased as a result of the addition of new customers, increased sales to existing customers, and acquisitions in January, May, and August 1996. These included DiMark's January 1996 acquisition of PRO Direct Response Corp., a telemarketing company with a strong customer base in the financial services industry; the May 1996 acquisition of Inquiry Handling Service, a Los Angeles-based response management company that serves the high technology and electronics industries; and the August 1996 acquisition of Lead Management Group, a Boston-based response management, telemarketing and fulfillment company that serves the high technology industry. In addition, the Company purchased Marketing Communications, Inc., a marketing company that serves the pharmaceutical industry. Overall, revenue growth resulted from acquisitions and increased business with both new and existing customers, particularly in services provided to the retail, high technology, financial services, healthcare, pharmaceutical and insurance industries. Operating expenses increased $55.0 million, or 23.9%, during 1996 due primarily to revenue growth. Payroll costs increased $31.1 million due to expanded hiring to support revenue growth. Also contributing to the increased operating expenses were additional production costs of $16.2 million due to increased volumes. Depreciation expense increased $2.4 million due to higher levels of capital investment to support growth. Operating expenses were also impacted by the acquisitions noted above. 15 4 ================================================================================ SHOPPERS Shopper operating results were as follows:
- ----------------------------------------------------------------------------------------- In thousands 1997 % Change 1996 % Change 1995 - ----------------------------------------------------------------------------------------- Revenues $212,860 14.9 $185,205 0.1 $185,045 Operating expenses 181,771 12.8 161,188 (2.3) 165,025 -------- -------- -------- Operating income $ 31,089 29.4 $ 24,017 20.0 $ 20,020 ======== ======== ========
Shopper revenues increased $27.7 million, or 14.9%, in 1997 when compared to 1996. The increase was primarily due to an acquisition in 1997. The ABC Shoppers Group, comprised of 6 publications located primarily in California, was acquired in September 1997 and accounted for $17.3 million of the increase. Excluding the revenue contributed by these newly-acquired units, revenue increased $10.4 million, or 5.6%, in 1997 over 1996. This remaining revenue increase was attributed to higher in-book advertising revenue and continued growth of core business accounts as well as an additional publication week in 1997. Shopper operating expenses increased $20.6 million, or 12.8%, in 1997 due primarily to revenue growth contributed by the shopper acquisition which accounted for $15.4 million of the increase. Other factors included increased costs directly associated with increased product volumes and higher promotion costs. Shopper revenues increased $0.2 million, or 0.1%, in 1996 when compared to 1995. The increase was due primarily to higher in-book advertising revenues resulting from higher display advertising volumes. Display advertising growth came from the Company's core business accounts as well as increased in-column display advertisements made possible by pagination technology implemented in 1995. These increases were offset by lower insert revenues as a result of reduced volumes and revenue declines from reductions of marginal circulation in Dallas. Shopper operating expenses decreased $3.8 million, or 2.3%, in 1996 when compared to 1995. Postage expense decreased $4.8 million due to lower rates as a result of postal reclassification and less overweight postage associated with the lower insert volumes. Insurance costs and outsourced printing costs were also lower when compared to 1995. In addition, reduced circulation in the Dallas market contributed to the decreased expense. These decreases were offset by paper cost increases of $2.1 million attributable to higher paper prices experienced through the first three quarters of 1996. ================================================================================ ACQUISITIONS As described in Note B of the "Notes to Consolidated Financial Statements" included herein, the Company made several acquisitions in the current year. The Company acquired the ABC Shoppers Group for $104 million from an indirect subsidiary of The Walt Disney Company in September 1997. The group consisted of 6 publications with a strong presence primarily in California, which added more than 2.4 million in circulation to the Company's existing shopper businesses. The Company also acquired Information for Marketing Limited, a leading London-based database marketer which services the United Kingdom, and Mercantile Software Systems, Inc., a New Jersey-based provider of open architecture software and systems integration solutions for direct marketing, in January 1997 and November 1997, respectively. These acquisitions help strengthen the international services, and support and expand the technology base of the database marketing sector. The Company also expanded its international capabilities in the response management sector through the acquisition of Tele Support Services, a leading provider of response management services to the high technology industry in Europe, in October 1997. Also described in Note B of the "Notes to Consolidated Financial Statements" included herein, on April 30, 1996, DiMark was merged with a wholly owned subsidiary of the Company and each outstanding share of DiMark common stock was converted into 1.312 shares of the Company's common stock. As a result, the Company issued approximately 12.2 million shares of its common stock to the shareholders of DiMark, and DiMark's outstanding stock options were converted into options to acquire approximately 3.0 million shares of Company common stock. The merger was accounted for on a pooling-of-interests basis, and all historical information has been restated as if the pooling occurred at the beginning of the periods presented. One-time merger expenses of $12.1 million ($8.7 million after-tax) were recognized in the second quarter of 1996. 16 5 INTEREST EXPENSE/INTEREST INCOME Total interest income and expense through October 15, 1997 was allocated to continuing operations and discontinued operations based upon percentage of net assets. The percentages allocated to continuing operations were approximately 58%, 55% and 44% for 1997, 1996 and 1995, respectively. Interest expense for continuing operations decreased $1.2 million in 1997 over 1996 due primarily to the October extinguishment of $306.3 million of long-term debt, using proceeds from the sale of the newspaper and television operations, as described in Note N of the "Notes to Consolidated Financial Statements" included herein. Total interest expense decreased in 1996 when compared to 1995 due to lower effective interest rates and debt levels. However, interest expense for continuing operations was flat due to the increased allocation percentage from 1995 to 1996. Interest income from continuing operations increased $3.7 million in 1997 as compared to 1996. This increase was due to the short-term investment of the proceeds from the sale of the newspaper and television operations after debt extinguishment and operational fundings. These short-term investments are comprised of both taxable and non-taxable components with an aggregate balance of $388.1 million at December 31, 1997. (See Note C of the "Notes to Consolidated Financial Statements.") Interest income increased $0.4 million in 1996 when compared to 1995, due to interest income related to an income tax refund from a favorable tax settlement. EXTRAORDINARY ITEM The Company extinguished its debt on October 15, 1997 using the proceeds from the sale of its newspaper and television operations. The early extinguishment of debt resulted in an extraordinary loss in the amount of $0.9 million, or one cent per share. INCOME TAXES Excluding income taxes related to the 1996 merger costs and the 1995 gain on divestiture, income tax expenses for continuing operations increased $7.7 million in 1997 and $4.8 million in 1996 due to higher income levels. The effective income tax rate (excluding the unusual items) was 41.1%, 42.1%, and 43.8% in 1997, 1996 and 1995, respectively. CAPITAL INVESTMENTS Net cash used in investing activities for 1997 included $114.6 million for acquisitions and $28.4 million for capital expenditures. In addition to the cash outlay for acquisitions, the Company issued stock with a value of $6.3 million in connection with its November 1997 acquisition. The acquisition investments were made in both the direct marketing and shopper segments, discussed under "Direct Marketing" and "Shoppers," respectively. The capital expenditures consisted primarily of additional computer capacity, technology, systems and equipment upgrades for the direct marketing business to support its growth in all sectors. The shopper segment's capital expenditures were primarily related to two new inserting machines. Additionally, the Company has invested significantly in the reengineering of its financial systems and processes through the purchase of new accounting systems software with implementation beginning December 1997. The Company also invested in facility expansions in its database marketing, response management and marketing services businesses. Net cash used in investing activities for 1996 included $32.7 million for acquisitions and $23.9 million for capital expenditures. In addition to the cash outlay for acquisitions, the Company incurred $18.8 million in notes payable in connection with its November 1996 acquisition, which was repaid in January 1997 with borrowings under the Company's revolving credit commitment. The acquisition investments were made in the direct marketing segment discussed under "Direct Marketing." The capital expenditures consisted primarily of additional computer capacity for the direct marketing business to support the growth in its database marketing sector. The Company also invested in facility expansions in its database and response management businesses as well as the opening of sales offices in Brazil and Australia. Other investments included upgraded prepress technology in the shopper business. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities of continuing operations was $68.5 million for 1997. Net cash inflows from investing activities were $231.7 million in 1997. Included in 1997 investing activities was $789.9 million in proceeds, less $24.5 million of sales related costs, from the sale of the Company's newspaper and television operations. Proceeds from the sale were used to extinguish outstanding debt under the Company's credit facility, purchase short-term securities, and fund several acquisitions. Total cash outflows in 1997 related to acquisitions was $114.6 million (see Note B of the "Notes to Consolidated Financial Statements" included herein for further information). Cash provided by operating activities of continuing operations for 1996 and 1995 was $39.8 million and $34.5 million, respectively. Net cash outflows for investing activities of continuing operations were $56.2 million in 1996 and $23.6 million in 1995. These investing outflows are the result of the Company's expansion through acquisitions and investments in infrastructure to support growth. Capital resources were available from, and provided through, the Company's unsecured credit facility, through October 15, 17 6 1997. This credit facility, a $320 million variable rate, revolving loan commitment put in place on February 2, 1995, was to have been repaid by December 31, 2001. However, the outstanding borrowings under this facility ($306.3 million) were extinguished on October 15, 1997, funded primarily through the proceeds of the sale of the Company's newspaper and television operations as described in Note N of the "Notes to Consolidated Financial Statements" included herein. Management believes that the proceeds from the sale of the Company's newspaper and television operations, after extinguishment of debt and payment of income taxes related to the sale, together with cash provided from operating activities, will be sufficient to fund operations and anticipated capital service needs for the foreseeable future. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The FASB also issued in June 1997 SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information" which establishes new standards for the way public companies disclose information about operating segments, products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The Company does not expect the adoption of SFAS No. 131 to affect the groupings of its businesses for purposes of segment reporting. FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION From time to time, in both written reports and oral statements by senior management, the Company may express its expectations regarding its future performance. These "forward-looking statements" are inherently uncertain, and investors should realize that events could turn out to be other than what senior management expected. Set forth below are some key factors which could affect the Company's future performance. Acquisitions -- In recent years the Company has made a number of acquisitions in its direct marketing and shopper businesses, and it expects to pursue additional acquisition opportunities. Acquisition activities, even if not consummated, require substantial amounts of management time and can distract from normal operations. In addition, there can be no assurance that the synergies and other objectives sought in acquisitions will be achieved. Competition -- Direct marketing is a rapidly evolving business, subject to periodic technological advancements, high turnover of customer personnel who make buying decisions, and changing customer needs and preferences. Consequently, the Company's direct marketing business faces competition in each of its three sectors - database marketing, marketing services, and response management. The Company's shopper business competes for advertising, as well as for readers, with other print and electronic media. Competition comes from local and regional newspapers, magazines, radio, broadcast and cable television, shoppers and other communications media that operate in the Company's markets. The extent and nature of such competition is, in large part, determined by the location and demographics of the markets targeted by a particular advertiser, and the number of media alternatives in those markets. Postal Rates -- The Company's shoppers are delivered by standard mail, and postage is the second largest expense, behind payroll, in the Company's shopper business. The present standard postage rates went into effect in January 1995, and the next increase is expected in 1998. Postal rates also influence the demand for the Company's direct marketing services even though the cost of mailings is borne by the Company's customers and is not directly reflected in the Company's revenues or expenses. Newsprint Prices -- Newsprint represents a substantial expense in the Company's shopper operations. In recent years newsprint prices have fluctuated widely, and such fluctuations can materially affect the results of the Company's operations. Economic Conditions -- Changes in national economic conditions can affect levels of advertising expenditures generally, and such changes can affect each of the Company's businesses. In addition, revenues from the Company's shopper business are dependent to a large extent on local advertising expenditures in the markets in which they operate. Such expenditures are substantially affected by the strength of the local economies in those markets. Direct marketing revenues are dependent on national and international economics. Year 2000 Issue -- The Year 2000 issue is a result of computer programs being written using two digits rather than four to define the applicable year. The Company has conducted a comprehensive review of its computer systems to identify those that could be affected by the Year 2000 issue and has developed an implementation plan to resolve the issue. The Company is utilizing both internal and external resources to correct or reprogram, and test the systems for the Year 2000 compliance. It is anticipated that all reprogramming efforts will be completed by December 31, 1998, allowing adequate time for testing. The Company is also in the process of obtaining confirmations, from primary processing vendors and customers, that plans are being developed to address processing of transactions in the year 2000. The Company does not expect the amounts required to be expensed over the next two years to have a material effect on its financial position or results of operations. 18 7 ================================================================================ HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, In thousands, except per share and share amounts 1997 1996 - ---------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents .................................... $ 83,675 $ 12,017 Short-term investments ....................................... 388,145 -- Accounts receivable (less allowance for doubtful accounts of $2,835 in 1997 and $1,121 in 1996) ........... 109,340 87,510 Inventory .................................................... 7,703 9,012 Prepaid expenses ............................................. 8,473 8,502 Current deferred income tax asset ............................ 12,518 5,201 Other current assets ......................................... 3,285 2,074 --------- --------- Total current assets ..................................... 613,139 124,316 --------- --------- Net assets of discontinued operations ............................. -- 223,477 Property, plant, and equipment Land ......................................................... 3,069 3,657 Buildings and improvements ................................... 20,913 20,161 Software ..................................................... 13,175 10,300 Equipment and furniture ...................................... 141,161 106,411 --------- --------- 178,318 140,529 Less accumulated depreciation ................................ (91,072) (69,542) --------- --------- 87,246 70,987 Construction and equipment installations in progress ......... 2,105 1,208 --------- --------- Net property, plant and equipment ............................ 89,351 72,195 --------- --------- Intangible and other assets Goodwill (less accumulated amortization of $34,307 in 1997 and $28,782 in 1996) .................. 250,363 142,053 Other assets ................................................. 2,070 4,441 --------- --------- Total intangible and other assets ........................ 252,433 146,494 --------- --------- Total assets ............................................. $ 954,923 $ 566,482 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ............................................. $ 49,918 $ 37,356 Accrued payroll and related expenses ......................... 23,097 18,799 Customer deposits and unearned revenue ....................... 17,944 16,242 Income taxes payable ......................................... 270,440 2,748 Other current liabilities .................................... 9,950 7,989 --------- --------- Total current liabilities ................................ 371,349 83,134 --------- --------- Long-term debt .................................................... -- 218,005 Other long-term liabilities (including deferred income taxes of $9,723 in 1997 and $2,601 in 1996) ........... 17,337 12,651 --------- --------- Total liabilities ........................................ 388,686 313,790 ========= ========= Stockholders' equity Common stock, $1 par value, authorized 125,000,000 shares. Issued 1997: 74,842,982; 1996: 73,603,402 shares ............. 74,843 73,604 Additional paid-in capital ................................... 177,238 149,875 Unrealized losses on short-term investments .................. (577) -- Retained earnings ............................................ 362,000 29,213 --------- --------- 613,504 252,692 Less treasury stock, 1,648,608 shares at cost ................ (47,267) -- --------- --------- Total stockholders' equity ............................... 566,237 252,692 --------- --------- Total liabilities and stockholders' equity ............... $ 954,923 $ 566,482 ========= =========
See Notes to Consolidated Financial Statements 19 8 ================================================================================ HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, In thousands, except per share amounts 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Revenues ........................................................... $ 638,349 $ 515,460 $ 453,302 --------- --------- --------- Operating expenses Payroll ....................................................... 236,319 187,765 156,901 Production and distribution ................................... 243,423 204,729 190,619 Advertising, selling, general and administrative .............. 59,054 43,632 41,619 Depreciation .................................................. 17,327 13,779 11,135 Goodwill amortization ......................................... 5,134 3,658 3,244 Merger costs .................................................. -- 12,136 -- --------- --------- --------- 561,257 465,699 403,518 --------- --------- --------- Operating income ................................................... 77,092 49,761 49,784 --------- --------- --------- Other expenses (income) Interest expense .............................................. 6,189 7,346 7,506 Interest income ............................................... (4,412) (717) (285) Gains on divestitures ......................................... -- -- (1,454) Other, net .................................................... 196 395 842 --------- --------- --------- 1,973 7,024 6,609 --------- --------- --------- Income from continuing operations before income taxes ........................................... 75,119 42,737 43,175 Income tax expense ................................................. 30,848 19,653 18,874 --------- --------- --------- Income from continuing operations .................................. 44,271 23,084 24,301 --------- --------- --------- Income from discontinued operations, net of income taxes ........... 15,483 17,537 15,684 Gain on sale, net of income taxes .................................. 276,869 -- -- --------- --------- --------- Total discontinued operations ...................................... 292,352 17,537 15,684 --------- --------- --------- Income before extraordinary item ................................... 336,623 40,621 39,985 Extraordinary item -- loss due to early extinguishment of debt, net of income tax benefit of $586 ............................. (875) -- -- --------- --------- --------- Net income ......................................................... $ 335,748 $ 40,621 $ 39,985 ========= ========= ========= Basic earnings per common share Continuing operations ......................................... $ 0.60 $ 0.32 $ 0.35 Discontinued operations ....................................... 3.95 0.24 0.22 Extraordinary item, net of income taxes ....................... (0.01) -- -- --------- --------- --------- Basic earnings per common share ........................... $ 4.54 $ 0.56 $ 0.57 ========= ========= ========= Weighted-average common shares outstanding .................... 73,998 72,830 69,956 ========= ========= ========= Diluted earnings per common share Continuing operations ......................................... $ 0.57 $ 0.30 $ 0.32 Discontinued operations ....................................... 3.80 0.23 0.21 Extraordinary item, net of income taxes ....................... (0.01) -- -- --------- --------- --------- Diluted earnings per common share ......................... $ 4.36 $ 0.53 $ 0.53 ========= ========= ========= Weighted-average common and common equivalent shares outstanding .......................... 77,000 77,154 75,338 ========= ========= =========
See Notes to Consolidated Financial Statements 20 9 ================================================================================ HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, In thousands 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income .......................................................................... $ 335,748 $ 40,621 $ 39,985 Adjustments to reconcile net income to net cash provided by continuing operations: Income from discontinued operations ........................................ (15,483) (17,537) (15,684) Gain on sale of discontinued operations .................................... (539,647) -- -- Depreciation ............................................................... 17,327 13,779 11,135 Goodwill amortization ...................................................... 5,134 3,658 3,244 Amortization of option-related compensation ................................ 769 661 1,349 Deferred income taxes ...................................................... 2,716 333 662 Gains on divestitures ...................................................... -- -- (1,454) Extraordinary item ......................................................... 1,461 -- -- Other, net ................................................................. (1,192) 1,158 278 Changes in operating assets and liabilities, net of effects from acquisitions and divestitures: Increase in accounts receivable, net ....................................... (12,737) (17,495) (2,265) Decrease (increase) in inventory ........................................... 2,435 7,900 (7,208) Decrease (increase) in prepaid expenses and other current assets ........... 2,454 (3,313) (761) Increase in accounts payable ............................................... 7,818 1,703 3,748 Increase (decrease) in other accrued expenses and other liabilities ........ 263,242 8,550 (1,547) Other, net ................................................................. (1,546) (250) 3,048 --------- --------- --------- Net cash provided by continuing operations ................................. 68,499 39,768 34,530 Net cash provided by discontinued operating activities .......................... 24,250 32,717 13,919 --------- --------- --------- Net cash provided by operating activities .................................. 92,749 72,485 48,449 --------- --------- --------- Cash Flows from Investing Activities Acquisitions ........................................................................ (114,589) (32,749) (9,661) Purchases of property, plant and equipment .......................................... (28,396) (23,885) (17,441) Proceeds from the sale of property, plant and equipment ............................. 1,997 408 1,067 Proceeds from divestiture ........................................................... -- -- 2,388 Net purchases of available-for-sale short-term investments .......................... (386,687) -- -- Discontinued operations: Purchases of property, plant and equipment ...................................... (4,548) (3,529) (4,669) Proceeds from the sale of property, plant and equipment ......................... 34 270 310 Payments on film contracts ...................................................... (1,481) (1,572) (1,817) Proceeds from divestiture ....................................................... -- -- 39,643 Proceeds from sale of discontinued operations ................................... 789,882 -- _ Costs related to sale of discontinued operations ................................ (24,544) -- -- --------- --------- --------- Net cash provided by (used in) investing activities .......................... 231,668 (61,057) 9,820 --------- --------- --------- Cash Flows from Financing Activities Long-term borrowings ................................................................ 497,600 244,573 895,463 Payments on debt, including current maturities and financing costs .................. (714,465) (267,224) (949,289) Issuance of common stock ............................................................ 14,334 7,488 5,598 Purchase of treasury stock .......................................................... (47,267) -- -- Dividends paid ...................................................................... (2,961) (2,350) (1,968) --------- --------- --------- Net cash (used in) financing activities ....................................... (252,759) (17,513) (50,196) --------- --------- --------- Net increase (decrease) in cash ..................................................... 71,658 (6,085) 8,073 Cash and cash equivalents at beginning of period .................................... 12,017 18,102 11,533 Pooling adjustment to beginning of year balance to conform fiscal years ............. -- -- (1,504) --------- --------- --------- Cash and cash equivalents at end of period .......................................... $ 83,675 $ 12,017 $ 18,102 ========= ========= ========= Supplemental cash flow information: Non-cash investing and financing activities: Acquisitions; stock issued (1997) and debt issued (1996) ....................... $ 6,255 $ 18,765 $ -- ========= ========= =========
See Notes to Consolidated Financial Statements 21 10 ================================================================================ HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Accumulated Additional Deficit) Common Paid-In Retained Treasury In thousands Stock Capital Earnings Stock - ------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 ..................... $ 67,120 $ 117,605 $ (44,935) $ -- Common stock issued-- employee benefit plans ............................. 282 1,648 -- -- Exercise of stock options ...................... 399 1,961 -- -- Tax benefit of options exercised ............... -- 743 -- -- Dividends paid ($0.0335 per share) ............. -- -- (1,968) -- Net income ..................................... -- -- 39,985 -- Stock issued in conjunction with acquisition ... -- 1,310 -- -- Conversion of 61/4% Convertible Notes .......... 4,287 15,667 -- -- Pooling adjustment to beginning of year balance to conform fiscal year ............ -- (108) (2,140) -- Reduction of minimum pension liability ......... -- -- -- -- -------- --------- --------- -------- Balance at December 31, 1995 ................... 72,088 138,826 (9,058) -- Common stock issued -- employee benefit plans ............................. 208 2,441 -- -- Exercise of stock options ...................... 1,192 4,699 -- -- Tax benefit of options exercised ............... -- 2,766 -- -- Dividends paid ($0.0335 per share) ............. -- -- (2,350) -- Net income ..................................... -- -- 40,621 -- Stock issued in conjunction with acquisition earnout ....................... 116 1,143 -- -- -------- --------- --------- -------- Balance at December 31, 1996 ................... 73,604 149,875 29,213 -- Common stock issued -- employee benefit plans ............................. 278 3,370 -- -- Exercise of stock options ...................... 2,250 8,566 -- -- Tax benefit of options exercised ............... -- 7,841 -- -- Dividends paid ($0.04 per share) ............... -- -- (2,961) -- Net income ..................................... -- -- 335,748 -- Stock issued in conjunction with acquisition ............................... 360 5,937 -- -- Treasury stock repurchase ...................... (1,649) 1,649 -- (47,267) Unrealized loss on short-term investments (net of tax) .............................. -- -- -- -- -------- --------- --------- -------- Balance at December 31, 1997 ................... $ 74,843 $ 177,238 $ 362,000 $(47,267) ======== ========= ========= ======== Minimum Unrealized Pension (Loss) on Total Liability Short-Term Stockholders' In thousands Adjustment Investments Equity - ---------------------------------------------------------------------------------------------- Balance at January 1, 1995 ..................... $(1,945) $ -- $ 137,845 Common stock issued-- employee benefit plans ............................. -- -- 1,930 Exercise of stock options ...................... -- -- 2,360 Tax benefit of options exercised ............... -- -- 743 Dividends paid ($0.0335 per share) ............. -- -- (1,968) Net income ..................................... -- -- 39,985 Stock issued in conjunction with acquisition ... -- -- 1,310 Conversion of 61/4% Convertible Notes .......... -- -- 19,954 Pooling adjustment to beginning of year balance to conform fiscal year ............ -- -- (2,248) Reduction of minimum pension liability ......... 1,945 -- 1,945 ------- ----- --------- Balance at December 31, 1995 ................... -- -- 201,856 Common stock issued -- employee benefit plans ............................. -- -- 2,649 Exercise of stock options ...................... -- -- 5,891 Tax benefit of options exercised ............... -- -- 2,766 Dividends paid ($0.0335 per share) ............. -- -- (2,350) Net income ..................................... -- -- 40,621 Stock issued in conjunction with acquisition earnout ....................... -- -- 1,259 ------- ----- --------- Balance at December 31, 1996 ................... -- -- 252,692 Common stock issued -- employee benefit plans ............................. -- -- 3,648 Exercise of stock options ...................... -- -- 10,816 Tax benefit of options exercised ............... -- -- 7,841 Dividends paid ($0.04 per share) ............... -- -- (2,961) Net income ..................................... -- -- 335,748 Stock issued in conjunction with acquisition ............................... -- -- 6,297 Treasury stock repurchase ...................... -- -- (47,267) Unrealized loss on short-term investments (net of tax) .............................. -- (577) (577) ------- ----- --------- Balance at December 31, 1997 ................... $ -- $(577) $ 566,237 ======= ===== =========
See Notes to Consolidated Financial Statements 22 11 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The accompanying Consolidated Financial Statements present the financial position of Harte-Hanks Communications, Inc. and subsidiaries (the "Company"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from the estimates. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified for comparative purposes. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS All highly liquid investments with a remaining maturity of 90 days or less at the time of purchase are considered to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value. The short-term investments comprise readily marketable debt and equity securities with remaining maturities of more than 90 days at the time of purchase. Even where the remaining maturity is more than one year, the securities are classified as short-term investments, as the Company's intention is to convert them into cash within one year. The Company considers all of its short-term investments to be available-for-sale and are recorded at fair value, with the unrealized gain (loss) recognized as a separate component of stockholders' equity. INVENTORY Inventory, consisting primarily of newsprint and operating supplies, is stated at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated on the basis of cost. Depreciation of buildings and equipment is computed generally on the straight-line method at rates calculated to amortize the cost of the assets over their useful lives. The general ranges of estimated useful lives are: Buildings and improvements 10 to 40 years Equipment and furniture 4 to 20 years GOODWILL Goodwill is stated on the basis of cost, adjusted as discussed below, and is amortized on a straight-line basis over 15 to 40 year periods. For each of its investments, the Company assesses the recoverability of its goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows over the remaining amortization period. If projected undiscounted future cash flows indicate that unamortized goodwill will not be recovered, an impairment loss is recognized based on projected discounted future cash flows. Cash flow projections are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. INCOME TAXES Income taxes are calculated using the asset and liability method required by Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred income taxes are recognized for the tax consequences resulting from "temporary differences" by applying enacted statutory tax rates applicable to future years. These "temporary differences" are associated with differences between the financial and the tax basis of existing assets and liabilities. Under SFAS No. 109, a statutory change in tax rates will be recognized immediately in deferred taxes and income. EARNINGS PER SHARE Basic earnings per common share are based upon the weighted-average number of common shares outstanding. Diluted earnings per common share are based upon the weighted-average number of common shares outstanding, dilutive common stock equivalents from the assumed exercise of stock options using the treasury stock method and assumed conversion of the 61/4% Convertible Notes due 2002 until May 1995, at which time the Company issued shares of its common stock upon conversion of the notes. See Note M. STOCK SPLIT In January 1998, the Company announced a two-for-one split of its common stock in the form of a 100% stock dividend payable March 16 to holders of record on March 2, 1998. All share, per share and common stock information in the Consolidated Financial Statements and the Notes thereto have been restated to reflect the stock split. NOTE B -- ACQUISITIONS PURCHASES In January 1997, the Company acquired Information for Marketing Limited, a London-based database marketer servicing the United Kingdom. In September 1997, the Company acquired the ABC Shoppers Group from an indirect subsidiary of The Walt Disney Company for $104 million. The group consisted of 6 publications located primarily in California, and added over 2.4 million circulation to the shopper segment, for a total circulation of more than 9 million per week. In October 1997, the Company exercised the option to acquire Tele Support Services, a provider of response management services to the high technology industry in Europe, and in November 1997, the Company acquired Mercantile Software Systems, Inc., a New Jersey-based provider of open architecture software and systems integration solutions for direct marketing. In January 1996, DiMark acquired PRO Direct Response Corp., a telemarketing company that serves the financial services industry. In May 1996, the Company acquired Inquiry Handling Service, a Los Angeles-based response management company that serves the high technology and electronics industries, and in August 1996, the Company acquired Lead Management Group, a Boston-based response management, telemarketing and fulfillment company that serves the high technology industry. 23 12 In November 1996, the Company acquired Marketing Communications, Inc., a Kansas City-based integrated database marketing company that serves the pharmaceutical industry. The total cash outlay in 1997 for acquisitions was $114.6 million. In addition, the Company issued stock with a value of $6.3 million for its November 1997 acquisition. The total cash outlay in 1996 for acquisitions was $32.7 million. In addition, the Company incurred $18.8 million in notes payable for its November 1996 acquisition, which was repaid in January 1997 with borrowings under its revolving credit commitment. The operating results of the acquired companies have been included in the accompanying Consolidated Financial Statements from the date of acquisition. The following table summarizes, on an unaudited pro forma basis, the estimated combined results of operations of the Company and the 1997 acquisitions (ABC Shoppers Group, Information for Marketing Limited, Tele Support Services and Mercantile Software Systems) assuming the acquisitions had taken place on January 1, 1996. The pro forma information includes adjustments for interest expense that would have been incurred to finance the acquisitions and amortization of the intangible assets acquired. The unaudited pro forma results of operations are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on January 1, 1996.
- ---------------------------------------------------------------------- In thousands, except For the years ended December 31, per share amounts 1997 1996 - ---------------------------------------------------------------------- Revenues ............................ $698,809 $592,681 Income from continuing operations ... 45,257 23,273 Net income .......................... 336,734 40,810 Diluted earnings per common share: Continuing operations ............... 0.59 0.30 Net income .......................... 4.37 0.53
POOLING-OF-INTERESTS Effective April 30, 1996, DiMark, Inc. was merged with a wholly owned subsidiary of the Company, and each outstanding share of DiMark common stock was converted into the right to acquire 1.312 shares of Company common stock. As a result, the Company issued approximately 12.2 million shares of common stock to the shareholders of DiMark, and DiMark's outstanding stock options were converted into options to acquire approximately 3.0 million shares of Company common stock. The merger was accounted for on a pooling-of-interests basis. Accordingly, the Company's financial statements have been restated to include the results of DiMark for all periods presented. The combined financial results include reclassifications to conform to financial statement preparation. Merger expenses related to the transaction were $12.1 million ($8.7 million, net of income taxes). Prior to the combination, the Company's fiscal year ended on December 31 and DiMark's fiscal year ended February 28. In recording the business combination, DiMark's financial statements for the 12 months ended December 31, 1996 and 1995 were combined with the Company's consolidated financial statements for the same periods. DiMark's financial statements for the fiscal year ended February 28, 1995 were combined with the Company's consolidated financial statements for the year ended December 31, 1994. Net income, the issuance of common stock, and the net increase in cash and cash equivalents were adjusted to eliminate the effect of including DiMark's results of operations, financial position, and cash flows for the two months ended January and February, 1995 in the years ended December 31, 1995 and December 31, 1994. Combined and separate results of the Company and DiMark during the reporting periods preceding the merger were as follows:
- --------------------------------------------------------------------------------------------------------------------------- Three Months Ended Year Ended In thousands March 31, 1996 December 31, 1995 - --------------------------------------------------------------------------------------------------------------------------- Revenues from continuing operations Harte-Hanks ....................... $ 89,794 $ 382,643 DiMark ............................ 27,377 77,583 Adjustments ....................... (1,665) (6,924) --------- --------- Combined .......................... $ 115,506 $ 453,302 ========= ========= Income from continuing operations Harte-Hanks ....................... $ 3,056 $ 18,301 DiMark ............................ 1,932 6,000 --------- --------- Combined .......................... $ 4,988 $ 24,301 ========= =========
Adjustments consist of elimination of DiMark's postage costs from revenues and cost of sales to conform to the Company's accounting classification. NOTE C -- SHORT-TERM INVESTMENTS The Company's intention is to maintain a liquid portfolio to take advantage of investment opportunities; therefore all securities are considered to be available-for-sale and are classified as current assets. Short-term investments consist of the following:
- ------------------------------------------------------------------------------ December 31, 1997 Gross Amortized Unrealized Fair In thousands Cost Loss Value - ------------------------------------------------------------------------------ Tax exempt variable rate demand notes ................. $241,018 $ -- $241,018 Tax exempt auction rate securities ................... 3,100 -- 3,100 Tax exempt commercial paper ....... 37,233 -- 37,233 Taxable commercial paper .......... 71,102 -- 71,102 Taxable certificates of deposit ... 33,244 -- 33,244 Taxable federal securities ........ 990 -- 990 Equity securities ................. 2,346 (888) 1,458 -------- ----- -------- Total ............................. $389,033 $(888) $388,145 ======== ===== ========
The fair value of the Company's investment in securities by contractual maturity is as follows:
- ----------------------------------------------------------------- In thousands December 31, 1997 - ----------------------------------------------------------------- Due in less than 1 year .......................... $141,579 Due in 1 to 5 years .............................. 990 Due in more than 5 years ......................... 244,118 No stated maturity-equity securities ............. 1,458 -------- Total ............................................ $388,145 ========
The gross realized gains and losses on the sale of available-for-sale securities were immaterial for the year ended December 31, 1997. The net change in the unrealized loss on marketable securities classified as available-for-sale included as a component of equity was $577,000 at December 31, 1997. 24 13 NOTE D -- LONG-TERM DEBT Long-term debt consists of the following:
- ----------------------------------------------------------------------------- December 31, In thousands 1997 1996 - ----------------------------------------------------------------------------- Revolving loan commitment, various interest rates (effective rate of 6.0% at December 31, 1996), due in mandatory reductions beginning June 30, 1998 through December 31, 2001 ........................ $ -- $195,000 Bank lines, various interest rates (effective rates of 7.8% at December 31, 1996) ....................... -- 3,000 Acquisition notes payable (interest rate of 5.5%) ............................ -- 18,765 Miscellaneous notes payable, interest rates ranging from 7.3% to 8%, due on various dates through 1998 ............ 1,240 1,340 -------- -------- 1,240 218,105 Less current maturities ....................... 1,240 100 -------- -------- $ -- $218,005 ======== ========
CREDIT FACILITY The Company extinguished its $320 million revolving credit facility on October 15, 1997. As of December 31, 1997, the Company had no long-term debt. Cash payments for interest were $10.5 million, $13.5 million and $16.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. BANK LINES The Company has two separate uncommitted short-term borrowing arrangements. Under these arrangements, the Company can borrow up to a maximum of $50 million. These short-term borrowings were previously classified as long-term debt since the Company's intent was to maintain unused and available credit under its credit facility in an amount equal to its outstanding short-term borrowings. As of December 31, 1997, the Company had no borrowings related to these bank lines. ACQUISITION NOTES PAYABLE In November 1996, the Company issued notes payable of $18.8 million in connection with an acquisition. These notes payable were repaid in January 1997 with borrowings under the Company's revolving credit commitment. NOTE E -- INCOME TAXES The components of income tax expense are as follows:
- ---------------------------------------------------------------- Year Ended December 31, In thousands 1997 1996 1995 - ---------------------------------------------------------------- Current Federal ............... $23,216 $ 16,475 $ 16,149 State and local ....... 4,916 2,845 2,063 ------- -------- -------- Total current ...... $28,132 $ 19,320 $ 18,212 ======= ======== ======== Deferred Federal ............... $ 2,201 $ (23) $ (1,212) State and local ....... 515 356 1,874 ------- -------- -------- Total deferred ..... $ 2,716 $ 333 $ 662 ======= ======== ========
Included in income tax expense for 1996 is a tax benefit of $3.4 million related to merger costs. Included in income tax expense for 1995 is $0.6 million related to the gain on divestiture. The differences between total income tax expense and the amount computed by applying the statutory federal income tax rate to income from continuing operations before income taxes were as follows:
- --------------------------------------------------------------------------------------- Year Ended December 31, In thousands 1997 1996 1995 - --------------------------------------------------------------------------------------- Computed expected income tax expense ................ $26,292 35% $ 14,958 35% $15,111 35% Net effect of state income taxes ........... 3,531 5% 2,081 5% 2,559 6% Effect of goodwill amortization ........... 1,017 1% 977 2% 889 2% Effect of non-taxable investment income ................. (912) -1% -- -- -- -- Merger costs ................ -- -- 1,498 4% -- -- Change in the beginning of the year balance of the valuation allowance .............. -- -- (95) 0% 119 0% Other, net .................. 920 1% 234 0% 196 1% ------- -- -------- -- ------- -- Income tax expense for the period ......... $30,848 41% $ 19,653 46% $18,874 44% ======= == ======== == ======= ==
Total income tax expense (benefit) was allocated as follows:
- ---------------------------------------------------------------------- Year Ended December 31, In thousands 1997 1996 1995 - ---------------------------------------------------------------------- Continuing operations ...... $ 30,848 $ 19,653 $ 18,874 Discontinued operations .... 275,548 15,064 21,724 Extraordinary items ........ (586) -- -- Stockholders' equity ....... (8,152) (2,766) (743) --------- -------- -------- Total ................. $ 297,658 $ 31,951 $ 39,855 ========= ======== ========
25 14 The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
- ----------------------------------------------------------------------------- December 31, In thousands 1997 1996 - ----------------------------------------------------------------------------- Deferred tax assets: State net income tax ........................... $ 4,967 $ 1,046 Deferred compensation and retirement plans ..... 4,651 6,098 Accrued expenses not deductible until paid ..... 3,743 2,870 Accounts receivable, net ....................... 439 476 Other, net ..................................... 253 237 State net operating loss carryforwards ......... 191 67 -------- -------- Total gross deferred tax assets ............. 14,244 10,794 Less valuation allowance .................... (191) (67) -------- -------- Net deferred tax assets ..................... 14,053 10,727 -------- -------- Deferred tax liabilities: Property, plant and equipment .................. (8,643) (7,522) Goodwill ....................................... (2,324) (605) Other, net ..................................... (291) -- -------- -------- Total gross deferred tax liabilities ........ (11,258) (8,127) -------- -------- Net deferred tax assets ..................... $ 2,795 $ 2,600 ======== ========
The valuation allowance for deferred tax assets as of January 1, 1996 was $60,000. The valuation allowance at December 31, 1997 and 1996 relate to state net operating losses, which are not expected to be realized. The net deferred tax asset is recorded both as a current deferred income tax asset and as other long-term liabilities based upon the classification of the related temporary difference. Cash payments for income taxes were $25.7 million, $19.8 million and $19.7 million in 1997, 1996 and 1995, respectively. NOTE F -- EMPLOYEE BENEFIT PLANS The Company maintains a defined benefit pension plan for which most of its employees are eligible. Benefits are based on years of service and the employee's compensation for the five highest consecutive years of salary during the last ten years of service. Benefits vest to the participants upon completion of five years of service or upon reaching age 65, whichever is earlier. Harte-Hanks' policy is to accrue as expense an amount computed by its actuary and to fund at least the minimum amount required by ERISA. In 1994, the Company adopted a non-qualified, supplemental pension plan covering certain employees, which provides for incremental pension payments so that total pension payments equal amounts that would have been payable from the Company's principal pension plan if it were not for limitations imposed by income tax regulation. Net pension cost applicable to continuing operations for all plans included the following components:
- --------------------------------------------------------------------------- December 31, In thousands 1997 1996 1995 - --------------------------------------------------------------------------- Service cost - benefits earned during the period .............. $ 2,644 $ 2,803 $ 2,251 Interest cost on projected benefit obligation ............. 4,118 3,656 3,292 Actual return on plan assets ....... (11,184) (5,759) (7,377) Net deferrals and amortization ..... 6,184 1,803 4,227 -------- ------- ------- Net periodic pension cost .......... $ 1,762 $ 2,503 $ 2,393 ======== ======= =======
In determining the 1997, 1996 and 1995 actuarial present value of benefit obligations, discount rates of 71/4%, 73/4% and 71/4% were used, respectively. The assumed annual rate of increase in future compensation levels was 4%, and the expected long-term rate of return on plan assets was 10%. The status of Harte-Hanks' employee retirement plans at year-end was as follows:
- ---------------------------------------------------------------------------------------------------------- Year Ended December 31, In thousands 1997 1996 - ---------------------------------------------------------------------------------------------------------- Qualified Non-Qualified Qualified Non-Qualified Plan Plan Plan Plan --------------------------------------------------------- Actuarial present value of benefit obligations: Vested .............................. $(60,054) $(2,129) $(49,581) $ -- Non-vested .......................... (3,975) (315) (4,790) (1,033) -------- ------- -------- ------- Total accumulated benefit obligations ................. (64,029) (2,444) (54,371) (1,033) Additional obligation related to projected salary increases ............ (12,551) (1,011) (16,123) (1,295) -------- ------- -------- ------- Projected benefit obligations for service rendered to date .......... (76,580) (3,455) (70,494) (2,328) Fair value of plan assets, primarily listed stocks and government securities ............. 79,392 -- 65,316 -- -------- ------- -------- ------- Projected benefit obligation less than (in excess of) plan assets ............ 2,812 (3,455) (5,178) (2,328) Unrecognized net loss (gain) from past experience different from that assumed ..................... (425) 726 2,173 209 Unrecognized prior service costs ......................... 30 1,070 47 1,126 Unrecognized net assets at January 1, 1987 being recognized over average expected remaining service period of employees ................... (706) -- (828) -- Adjustment to recognize minimum liability ..................... -- (585) -- (40) -------- ------- -------- ------- Recorded pension asset (liability) ....... $ 1,711 $(2,244) $ (3,786) $(1,033) ======== ======= ======== =======
During 1997, the Company recognized a pension curtailment gain of $4.1 million related to the divestiture of its newspaper and television operations. This curtailment gain is included in the calculation of the gain on the sale of discontinued operations. The Company also sponsors 401(k) plans to provide employees with additional income upon retirement. The Company generally matches a portion of employees' voluntary before-tax contributions. Employees are fully vested in their own contributions and vest in the Company's matching contributions upon three years of service. The 1994 Employee Stock Purchase Plan provides for a total of 2,000,000 shares to be sold to participating employees at 85% of the fair market value at specified quarterly investment dates. Shares available for sale totaled 1,082,486 at December 31, 1997. 26 15 NOTE G -- STOCKHOLDERS' EQUITY In January 1998, the Company announced a two-for-one split of its common stock in the form of a 100% stock dividend payable March 16 to holders of record on March 2, 1998. All share, per share and common stock amounts have been restated to retroactively reflect the stock split. Also in January 1998, the Company announced an increase in the regular quarterly dividend from 1 cent to 1.5 cents per share payable March 16 to holders of record on March 2, 1998. Under the 1.8 million share repurchase program authorized in January 1997, the Company repurchased 1,606,300 shares of its common stock for $47.3 million. In December, a new repurchase program was authorized for an additional 2 million shares. In April 1996, the Company amended its Certificate of Incorporation to increase its total authorized capitalization to 125,000,000 shares of common stock. On May 26, 1995, the Company issued 4,285,714 shares of common stock upon conversion of the $20 million principal amount of the Company's 61/4% Convertible Notes. Accordingly, the Company transferred $20 million, less $0.1 million of unamortized issue costs, to stockholders' equity. NOTE H -- STOCK OPTION PLANS 1984 PLAN In 1984, the Company adopted a Stock Option Plan ("1984 Plan") pursuant to which it issued to officers and key employees options to purchase shares of common stock at prices equal to the market price on the grant date. Market price was determined by the Board of Directors for purposes of granting stock options and making repurchase offers. Options granted under the 1984 Plan become exercisable five years after date of grant. At December 31, 1997, 1996 and 1995, options to purchase 629,000 shares, 939,600 shares and 1,315,800 shares, respectively, were outstanding under the 1984 Plan, with exercise prices ranging from $1.67 to $3.34 per share. No additional options will be granted under the 1984 Plan. 1991 PLAN The Company adopted the 1991 Stock Option Plan ("1991 Plan") pursuant to which it may issue to officers and key employees options to purchase up to 8,000,000 shares of common stock. Options have been granted at prices equal to the market price on the grant date ("market price options") and at prices below market price ("performance options"). As of December 31, 1997, 1996 and 1995, market price options to purchase 4,194,650 shares, 4,324,000 shares and 3,356,550 shares, respectively, were outstanding with exercise prices ranging from $3.34 to $17.38 per share. Market price options become exercisable after the fifth anniversary of their date of grant. The weighted-average exercise price for outstanding options and exercisable options at December 31, 1997 was $8.83 and $5.21, respectively. The weighted-average remaining life for outstanding options was 7.88 years. At December 31, 1997, 1996 and 1995, performance options to purchase 737,800 shares, 994,250 shares and 1,115,550 shares, respectively, were outstanding with exercise prices ranging from $0.34 to $1.00 per share. The performance options become exercisable in whole or in part after three years, and the extent to which they become exercisable at that time depends upon the extent to which the Company achieves certain goals established at the time the options are granted. That portion of the performance options which does not become exercisable at an earlier date becomes exercisable after the ninth anniversary of the date of grant. Compensation expense of $0.8 million, $1.0 million and $1.8 million was recognized for the performance options for the years ended December 31, 1997, 1996 and 1995, respectively. The weighted-average exercise price for outstanding options and exercisable options at December 31, 1997 was $0.44 and $0.34, respectively. The weighted-average remaining life for outstanding options was 6.91 years. DIMARK MERGER In connection with the DiMark merger, DiMark's outstanding stock options were converted into options to acquire approximately 3.0 million shares of Harte-Hanks common stock. As of December 31, 1997, 1996 and 1995, DiMark options to purchase 435,466 shares, 2,534,684 shares and 3,132,028 shares, respectively, were outstanding with exercise prices ranging from $3.28 to $10.48 per share. As of December 31, 1997, all outstanding DiMark options were exercisable. The weighted-average exercise price at December 31, 1997 was $7.94 and the weighted-average remaining life was 2.18 years. The following summarizes all stock option plans activity during 1997, 1996 and 1995:
- --------------------------------------------------------------------- Weighted- Number Average of Shares Option Price - --------------------------------------------------------------------- Options outstanding at January 1, 1995 ........... 8,041,650 $ 3.21 Granted ........................... 1,766,964 7.05 Exercised ......................... (682,224) 2.62 Cancelled ......................... (244,116) 4.14 Pooling adjustment to conform fiscal year .......... 37,654 4.42 ========== Options outstanding at December 31, 1995 ......... 8,919,928 4.09 Granted ........................... 1,471,500 10.88 Exercised ......................... (1,194,108) 3.97 Cancelled ......................... (404,786) 5.61 ---------- Options outstanding at December 31, 1996 ......... 8,792,534 5.16 Granted ........................... 1,302,350 13.12 Exercised ......................... (2,249,240) 4.80 Cancelled ......................... (1,848,728) 4.83 ---------- Options outstanding at December 31, 1997 ............ 5,996,916 $ 7.13 ========== Exercisable at December 31, 1997 ............ 2,246,766 $ 3.99 ==========
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation." Accordingly, no compensation expense has been recognized for options granted where the exercise price is equal to the market price of the underlying stock at the date of grant. The Company does recognize compensation expense for options whose market price of the underlying stock exceeds the exercise price on the date of grant under the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, as permitted under SFAS No. 123. 27 16 Had compensation expense for the Company's options been determined based on the fair value at the grant date for awards in 1997, 1996 and 1995, consistent with the provisions of SFAS No. 123, the Company's income from continuing operations, net income and earnings per share would have been reduced to the pro forma amounts indicated below:
- ------------------------------------------------------------------------------- Year Ended December 31, In thousands, except per share amounts 1997 1996 1995 - ------------------------------------------------------------------------------- Income from continuing operations-- as reported .......... $ 44,271 $ 23,084 $ 24,301 Income from continuing operations-- pro forma ............ 42,512 21,630 23,734 Net income-- as reported ............ 335,748 40,621 39,985 Net income-- pro forma .............. 333,989 39,021 39,370 Diluted earnings per share from continuing operations -- as reported .................... 0.57 0.30 0.32 Diluted earnings per share from continuing operations -- pro forma ...................... 0.55 0.28 0.31 Diluted earnings per share -- as reported .................... 4.36 0.53 0.53 Diluted earnings per share -- pro forma ...................... 4.34 0.51 0.52
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995:
- ------------------------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------- Expected dividend yield.............. 0.3% 0.3% 0.3% Expected stock price volatility...... 20.3% 22.1% 21.3% Risk free interest rate.............. 6.4% 6.3% 6.1% Expected life of options............. 3-10 years 3-10 years 3-10 years
The weighted-average fair value of market price options granted during 1997, 1996 and 1995 was $5.12, $4.07 and $2.59 respectively. The weighted-average fair value and exercise price of performance options was $8.96 and $0.71 in 1997, $7.32 and $0.57 in 1996, and $6.07 and $0.34 in 1995, respectively. NOTE I -- FAIR VALUE OF FINANCIAL INSTRUMENTS Because of their maturities and/or interest rates, the Company's financial instruments have a fair value approximating their carrying value. These instruments include short-term investments, accounts receivable, revolving credit borrowings, trade payables, and miscellaneous notes receivable and payable. NOTE J -- COMMITMENTS AND CONTINGENCIES At December 31, 1997, the Company had outstanding letters of credit in the amount of $3.1 million. These letters of credit exist to support the Company's insurance programs relating to worker's compensation, automobile and general liability. NOTE K -- LEASES The Company leases certain real estate and equipment under various operating leases. Most of the leases contain renewal options for varying periods of time. The total rent expense applicable to continuing operations under all operating leases was $16.0 million, $13.0 million and $10.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. The future minimum rental commitments for all non-cancellable operating leases with terms in excess of one year as of December 31, 1997 are as follows:
- ------------------------------------------------------------------------------- In thousands - ------------------------------------------------------------------------------- 1998............................................................. $ 13,673 1999............................................................. 10,827 2000............................................................. 8,537 2001............................................................. 7,218 2002............................................................. 4,007 After 2002....................................................... 8,113 -------- $ 52,375 ========
NOTE L -- EXTRAORDINARY ITEM The Company extinguished its debt on October 15, 1997 using the proceeds from the sale of its newspaper and television operations. The early extinguishment of debt resulted in an extraordinary loss in the amount of $0.9 million, or one cent per share, net of $0.6 million tax benefit. NOTE M -- EARNINGS PER SHARE The Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This statement requires the presentation of basic earnings per share (EPS) and diluted earnings per share for reporting periods of all public companies ending after December 15, 1997, instead of the primary and fully diluted EPS previously required. The new standard requires the restatement of EPS for all periods presented. EPS restated as required by SFAS No. 128 is as follows:
- -------------------------------------------------------------------------------- Year Ended December 31, In thousands, except per share amounts 1997 1996 1995 - ------------------------------------------------------------------------------- BASIC EPS Income from continuing operations ....... $ 44,271 $ 23,084 $ 24,301 Income from discontinued operations ..... 292,352 17,537 15,684 Extraordinary item ...................... (875) -- -- --------- --------- --------- Net income .............................. $ 335,748 $ 40,621 $ 39,985 ========= ========= ========= Weighted-average common shares outstanding used in net earnings per share computations ............. 73,998 72,830 69,956 ========= ========= ========= Earnings per share: Continuing operations .............. $ 0.60 $ 0.32 $ 0.35 Discontinued operations ............ 3.95 0.24 0.22 Extraordinary item ................. (0.01) -- -- --------- --------- --------- Net income ......................... $ 4.54 $ 0.56 $ 0.57 ========= ========= =========
28 17
- ------------------------------------------------------------------------------- Year Ended December 31, In thousands, except per share amounts 1997 1996 1995 - ------------------------------------------------------------------------------- DILUTED EPS Income from continuing operations ...... $ 44,271 $ 23,084 $ 24,301 Income from discontinued operations .... 292,352 17,537 15,684 Extraordinary item ..................... (875) -- -- -------- -------- -------- Net income ............................. $335,748 $ 40,621 $ 39,985 ======== ======== ======== Adjusted income from continuing operations ........................... $ 44,271 $ 23,084 $ 24,476 Adjusted income from discontinued operations ........................... 292,352 17,537 15,822 Extraordinary item ..................... (875) -- -- -------- -------- -------- Adjusted net income for interest on convertible note ..................... $335,748 $ 40,621 $ 40,298 ======== ======== ======== Shares used in net earnings per share computations ................... 77,000 77,154 75,338 ======== ======== ======== Earnings per share: Continuing operations ................ $ 0.57 $ 0.30 $ 0.32 Discontinued operations .............. 3.80 0.23 0.21 Extraordinary item ................... (0.01) -- -- -------- -------- -------- Net income ........................... $ 4.36 $ 0.53 $ 0.53 ======== ======== ======== Computation of Shares Used In Net Earnings Per Share Computations Average outstanding common shares....... 73,998 72,830 69,956 Average common equivalent shares-- dilutive effect of option shares...... 3,002 4,324 3,654 Dilutive effect of convertible note..... -- -- 1,728 -------- -------- -------- Shares used in net earnings per share computations................ 77,000 77,154 75,338 ======== ======== ========
NOTE N -- DISCONTINUED OPERATIONS The Company sold its newspaper operations, KENS-TV, the CBS affiliate in San Antonio and KENS-AM radio to The E.W. Scripps Company on October 15, 1997 for a cash price of $775 million plus approximately $15 million for estimated working capital. This transaction resulted in gain on sale of $276.9 million, or $3.60 per share diluted, net of $262.8 million of income taxes. Because the newspaper and television operations represent entire business segments that were divested on October 15, 1997, their results are reported as "discontinued operations" for all periods presented. Results of the remaining business segments are reported as "continuing operations." Summarized operating results for the combined newspaper and television discontinued operations are as follows:
- ------------------------------------------------------------------------------- Year Ended December 31, In thousands 1997 1996 1995 - ------------------------------------------------------------------------------- Revenues ....................... $121,169 $150,413 $150,209 Income from discontinued operations before gain on divestiture and income tax expense ........... $ 28,231 $ 32,601 $ 25,115 Gain on divestiture ............ -- -- 12,293 Income tax expense ............. 12,748 15,064 21,724 -------- -------- -------- Income from discontinued operations ................... $ 15,483 $ 17,537 $ 15,684 ======== ======== ========
Summarized balance sheet data for the combined newspaper and television discontinued operations is as follows:
- ------------------------------------------------------------------------------- Year Ended December 31, In thousands 1997 1996 - ------------------------------------------------------------------------------- Current assets .................................... $ -- $ 28,831 Property, plant and equipment ..................... -- 40,713 Goodwill and other intangibles .................... -- 177,236 Other assets ...................................... -- 2,498 Current liabilities ............................... -- (14,593) Deferred income tax liabilities ................... -- (8,148) Other liabilities ................................. -- (3,060) --------- --------- Net assets of discontinued operations ............. $ -- $ 223,477 ========= =========
The major components of cash flows for the combined newspaper and television discontinued operations are as follows:
- ------------------------------------------------------------------------------- Year Ended December 31, In thousands 1997 1996 1995 - ------------------------------------------------------------------------------- Income from discontinued operations .................... $ 15,483 $ 17,537 $ 15,684 Depreciation and goodwill amortization .................. 9,062 11,357 11,600 Film amortization ............... 1,369 1,347 2,188 Gain on divestiture ............. -- -- (12,293) Other, net ...................... (1,664) 2,476 (3,260) -------- -------- -------- Net cash provided by discontinued operations ....... $ 24,250 $ 32,717 $ 13,919 ======== ======== ========
29 18 NOTE O -- SELECTED QUARTERLY DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------ 1997 Quarter Ended ----------------------------------------------------- In thousands, except per share amounts(a) December 31 September 30 June 30 March 31 - ------------------------------------------------------------------------------------------------------ Revenues from continuing operations ........... $ 193,900 $ 155,061 $ 150,964 $ 138,424 Operating income from continuing operations ... 24,610 20,224 19,765 12,493 Income from continuing operations ............. 17,193 10,470 10,640 (b) 5,968 Income before extraordinary items ............. 294,712 15,549 16,345 (b) 10,017 Net income .................................... 293,837 15,549 16,345 (b) 10,017 Basic earnings per share: Continuing operations ......................... 0.24 0.14 0.14 (b) 0.08 Discontinued operations ....................... 3.80 0.07 0.08 0.05 Net income .................................... 4.02 0.21 0.22 (b) 0.13 Diluted earnings per share: Continuing operations ......................... 0.23 0.13 0.13 (b) 0.08 Discontinued operations ....................... 3.67 0.07 0.07 0.05 Net income .................................... 3.88 0.20 0.21 (b) 0.13 - ------------------------------------------------------------------------------------------------------ 1996 Quarter Ended ----------------------------------------------------- In thousands, except per share amounts(a) December 31 September 30 June 30 March 31 - ------------------------------------------------------------------------------------------------------ Revenues from continuing operations ........... $ 148,459 $ 129,210 $ 122,285 $ 115,506 Operating income from continuing operations ... 19,268 15,863 3,981 (c) 10,649 Income from continuing operations ............. 10,654 8,031 (589)(c) 4,988 Income before extraordinary items ............. 16,106 12,292 3,906 (c) 8,317 Net income .................................... 16,106 12,292 3,906 (c) 8,317 Basic earnings per share: Continuing operations ......................... 0.15 0.11 (0.01)(c) 0.07 Discontinued operations ....................... 0.07 0.06 0.06 0.05 Net income .................................... 0.22 0.17 0.05 (c) 0.12 Diluted earnings per share: Continuing operations ......................... 0.14 0.10 (0.01)(c) 0.07 Discontinued operations ....................... 0.07 0.06 0.06 0.04 Net income .................................... 0.21 0.16 0.05 (c) 0.11
(a) See Note N for discussion of discontinued operations, including the gain on sale from discontinued operations recognized in the fourth quarter of 1997. The amounts disclosed in the above table do not agree with the amounts previously reported on Form 10-Q for all quarters of 1996 and the first quarter of 1997 because of the reclassification for discontinued operations. (b) Includes one-time non-operating net gain of $0.4 million, or one-half cent per share. (c) Includes merger costs of $8.7 million, or 11 cents per share. NOTE P -- BUSINESS SEGMENTS Harte-Hanks Communications, Inc. is a diversified communications company with operations throughout the United States in two principal businesses -- direct marketing and shoppers. Harte-Hanks Direct Marketing is a nationwide and international business that serves customers primarily in the retail, financial services, insurance, high technology, pharmaceutical and healthcare industries. Harte-Hanks Shoppers operate in local markets and serve the retail, automotive, real estate and other service industries through weekly advertising publications.
- ------------------------------------------------------------------------------- Year Ended December 31, In thousands 1997 1996 1995 - ------------------------------------------------------------------------------- Operating revenues Direct Marketing ................... $ 425,489 $ 330,255 $ 268,257 Shoppers ........................... 212,860 185,205 185,045 --------- --------- --------- Total operating revenues ........ $ 638,349 $ 515,460 $ 453,302 ========= ========= ========= Operating income Direct Marketing ................... $ 54,360 $ 44,794 $ 37,774 Shoppers ........................... 31,089 24,017 20,020 General corporate .................. (8,357) (19,050)(a) (8,010) --------- --------- --------- Total operating income .......... $ 77,092 $ 49,761 $ 49,784 ========= ========= ========= Identifiable assets Direct Marketing ................... $ 272,847 $ 231,365 $ 149,855 Shoppers ........................... 207,541 99,061 108,743 General corporate .................. 474,535 12,579 10,396 --------- --------- --------- Total identifiable assets ....... $ 954,923 $ 343,005 $ 268,994 ========= ========= ========= Depreciation Direct Marketing ................... $ 12,673 $ 9,139 $ 6,693 Shoppers ........................... 4,572 4,600 4,410 General corporate .................. 82 40 32 --------- --------- --------- Total depreciation .............. $ 17,327 $ 13,779 $ 11,135 ========= ========= ========= Goodwill amortization Direct Marketing ................... $ 2,659 $ 1,791 $ 1,377 Shoppers ........................... 2,475 1,867 1,867 --------- --------- --------- Total goodwill amortization ..... $ 5,134 $ 3,658 $ 3,244 ========= ========= ========= Capital expenditures Direct Marketing ................... $ 22,434 $ 20,706 $ 14,595 Shoppers ........................... 5,912 2,929 2,724 General corporate .................. 50 250 122 --------- --------- --------- Total capital expenditures ...... $ 28,396 $ 23,885 $ 17,441 ========= ========= =========
(a) Included is $12.1 million in merger expenses. See Note B of Notes to Consolidated Financial Statements. 30 19 =============================================================================== FIVE-YEAR FINANCIAL SUMMARY
In thousands, except per share amounts 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Income Statement Data Revenues .......................................... $ 638,349 $ 515,460 $ 453,302 $ 410,212 $ 356,542 Operating expenses Payroll, production and distribution ........... 479,742 392,494 347,520 321,995 281,234 Selling, general and administrative ............ 59,054 43,632 41,619 38,483 36,272 Depreciation ................................... 17,327 13,779 11,135 9,072 7,777 Goodwill amortization .......................... 5,134 3,658 3,244 2,909 2,727 Merger costs ................................... -- 12,136 (a) -- -- -- Goodwill write-down ............................ -- -- -- -- 2,756 (b) --------- --------- --------- --------- --------- Total operating expenses .................... 561,257 465,699 403,518 372,459 330,766 --------- --------- --------- --------- --------- Operating income .................................... 77,092 49,761 49,784 37,753 25,776 Interest expense, net ............................... 1,777 6,629 7,221 6,851 10,938 Income from continuing operations(c) ................ 44,271 (d) 23,084 (e) 24,301 (f) 16,262 7,637 Income from continuing operations after extraordinary items, net of taxes ................. 43,396 (g) 23,084 24,301 16,262 244 (h) Earnings from continuing operations per common share-- diluted(i) ......................... 0.57 (d) 0.30 (e) 0.32 (f) 0.23 0.15 (j) Earnings from continuing operations after extraordinary items per common share-- diluted(i).. 0.56 (g) 0.30 (e) 0.32 (f) 0.23 0.01 (h) Cash dividends per common share(k) .................. 0.04 0.03 0.03 -- -- Weighted-average common and common equivalent shares outstanding-- diluted(i) ........ 77,000 77,154 75,338 74,186 55,562 Segment Data Revenues Direct Marketing ............................... $ 425,489 $ 330,255 $ 268,257 $ 233,751 $ 182,021 Shoppers ....................................... 212,860 185,205 185,045 176,461 174,521 --------- --------- --------- --------- --------- Total revenues ................................. $ 638,349 $ 515,460 $ 453,302 $ 410,212 $ 356,542 ========= ========= ========= ========= ========= Operating income Direct Marketing ............................... $ 54,360 $ 44,794 $ 37,774 $ 27,910 $ 18,921 Shoppers ....................................... 31,089 24,017 20,020 17,743 12,685 General corporate .............................. (8,357) (19,050) (8,010) (7,900) (5,830) --------- --------- --------- --------- --------- Total operating income ......................... $ 77,092 $ 49,761 $ 49,784 $ 37,753 $ 25,776 ========= ========= ========= ========= ========= Other Data Operating cash flow(l) ............................ $ 99,553 $ 67,198 (m) $ 64,163 $ 49,734 $ 39,036 Capital expenditures .............................. 28,396 23,885 17,441 13,759 14,959 Balance Sheet Data (at end of period) Property, plant and equipment ..................... $ 89,351 $ 72,195 $ 59,878 $ 53,081 $ 49,962 Goodwill, net ..................................... 250,363 142,053 99,528 92,391 88,547 Total assets ...................................... 954,923 343,005 268,994 246,166 219,916 Total long-term debt .............................. -- 218,005 220,468 294,499 323,056 Total stockholders' equity ........................ 566,237 252,692 201,856 137,845 108,025
(a) Merger cost of $12.1 million related to DiMark merger. See Note B of Notes to Consolidated Financial Statements. (b) Goodwill write-down of $2.8 million related to shopper segment. See Note A of Notes to Consolidated Financial Statements. (c) Represents income and earnings from continuing operations per common share before extraordinary items. (d) Includes non-recurring income of $0.4 million, or one-half cent per share, net of $0.4 million income tax expense related to the sale of stock in another company partially offset by other non-recurring items. Excluding this income, earnings were $0.57 per share. (e) Includes merger costs of $8.7 million, or 11 cents per share, net of $3.4 million income tax benefit. Excluding these costs, earnings were 41 cents per share. (f) Includes gain on divestiture of $0.9 million, or one cent per share, net of $0.6 million income tax expense. Excluding this gain, earnings were 31 cents per share. (g) Includes extraordinary loss from the early extinguishment of debt of $0.9 million, net of $0.6 million income tax benefit. (h) Includes extraordinary loss from the early extinguishment of debt of $7.4 million, net of $4.3 million income tax benefit. (i) Earnings per share and weighted-average common and common equivalent shares have been calculated and restated in accordance with Statement of Financial Accounting Standards No. 128 for all periods presented. See Note M of Notes to Consolidated Financial Statements. (j) Excluding the goodwill write-down and extraordinary item, earnings on a diluted basis were 19 cents per share. (k) Restated to reflect the two-for-one stock split effected as a stock dividend effective March 16, 1998. (l) Operating cash flow is defined as operating income plus depreciation, goodwill amortization and goodwill write-down. Operating cash flow is not intended to represent cash flow or any other measure of performance in accordance with generally accepted accounting principles. (m) Excluding 1996 merger costs, operating cash flow was $79,334. 20 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Harte-Hanks Communications, Inc.: We have audited the accompanying consolidated balance sheets of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP San Antonio, Texas January 27, 1998 CORPORATE INFORMATION COMMON STOCK The Company's common stock is listed on the New York Stock Exchange (symbol: HHS). The quarterly stock price ranges for 1997 and 1996 were as follows:
1997 1996 HIGH LOW HIGH LOW - ----------------------------------------------------------------------- First Quarter 14 7/8 12 7/8 11 1/2 9 7/8 Second Quarter 15 9/16 13 3/8 13 7/8 10 5/16 Third Quarter 16 15/32 14 21/32 13 15/16 12 9/16 Fourth Quarter 19 3/16 16 3/8 14 1/4 12 7/16
In 1997, quarterly dividends were paid at the rate of 1 cent per share. In 1996, quarterly dividends were paid at the rate of 0.835 cents per share for the first three quarters and 1 cent per share in the fourth quarter. The stock prices and dividends reflect retroactively the two-for-one stock split in the form of a stock dividend on March 16, 1998. There are approximately 2,500 holders of record. TRANSFER AGENT AND REGISTRAR BankBoston c/o Boston EquiServe, L.P. P.O. Box 8040 Boston, Massachusetts 02266-8040 ANNUAL MEETING OF STOCKHOLDERS The annual meeting of stockholders will be held at 10:00 a.m. on May 5, 1998, at 200 Concord Plaza Drive, First Floor, San Antonio, Texas. FORM 10-K ANNUAL REPORT A copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K may be obtained, without charge, upon written request to: Donald R. Crews, Secretary Harte-Hanks Communications, Inc. P.O. Box 269 San Antonio, Texas 78291-0269 32 EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 46 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 Data Technologies, Inc. Massachusetts 100% Harte-Hanks Delaware, Inc. Delaware 100% Harte-Hanks Direct, Inc. Delaware 100% Harte-Hanks Direct Marketing/Baltimore, Inc. Maryland 100% Harte-Hanks Direct Marketing/Cincinnati, Inc. Ohio 100% Harte-Hanks Direct Marketing/Dallas, Inc. Delaware 100% Harte-Hanks Direct Marketing/Fullerton, Inc. California 100% Harte-Hanks do Brazil Consultoria e Servicos Ltda. Brazil 100%(3) Harte-Hanks Limited England 100%(3) Harte-Hanks Market Research, Inc. New Jersey 100% Harte-Hanks Partnership, Ltd. Texas 100%(7) Harte-Hanks Pty. Limited Australia 100%(3) Harte-Hanks Response Management/Boston, Inc. Massachusetts 100% Harte-Hanks Response Management Call Centers, Inc. Delaware 100% Harte-Hanks Response Management Europe Belgium 100% Harte-Hanks Shoppers, Inc. California 100% Harte-Hanks Stock Plan, Inc. Delaware 100% H&R Communications, Inc. New Jersey 100%(2) HTS, Inc. Connecticut 100% Information for Marketing Limited England 100%(5) Marketing Communications, Inc. Missouri 100% Mars Graphic Services, Inc. New Jersey 100%(4) Mercantile Software Systems, Inc. New Jersey 100% Northern Comprint Co. California 100% NSO, Inc. Ohio 100% Pennypower Shopping News, Inc. Kansas 100% Pennysaver Publications, Inc. Texas 100% Potpourri Shopper, Inc. California 100% PRO Direct Response Corp. New Jersey 100%(2) PSP&D, Inc. Delaware 100%(6) Select Marketing, Inc. Texas 100% Southern Comprint Co. California 100% Sutton Industries, Inc. Delaware 100%
(1) Owned by Mars Graphic Services, Inc. (2) Owned by DiMark Marketing, Inc. (3) Owned by Harte-Hanks Data Technologies, Inc. (4) Owned by DiMark, Inc. (5) Owned by Harte-Hanks Limited (6) Owned by Sutton Industries, Inc. (7) 99.5% Owned by Harte-Hanks Delaware, Inc. .5% Owned by Harte-Hanks Communications, Inc. EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 47 Exhibit 23 Independent Auditors' Consent The Board of Directors Harte-Hanks Communications, Inc.: We consent to incorporation by reference in the registration statements (No. 33-51723, No. 33-54303, No. 333-03045 and No. 333-30995) on Form S-8 of Harte-Hanks Communications, Inc. of (i) our report dated January 27, 1998 relating to the consolidated balance sheets of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1997, which report appears in the 1997 annual report to shareholders which is incorporated by reference in the December 31, 1997 annual report on Form 10-K of Harte-Hanks Communications, Inc. and (ii) our report dated January 27, 1998, relating to the related financial statement schedule as of and for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of the Company. /s/ KPMG Peat Marwick LLP San Antonio, Texas March 27, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 DEC-31-1997 83,675 388,145 112,175 2,835 7,703 613,139 180,423 91,072 954,923 371,349 0 0 0 74,843 491,394 954,923 638,349 638,349 479,742 561,257 196 0 6,189 75,119 30,848 44,271 292,352 (875) 0 335,748 4.54 4.36
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