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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
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, 1995
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, Suite 800, San Antonio, Texas 78216 ------(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code -- 210-829-9000 ------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on Title of each class 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 filers 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 15, 1996, based on the $20 7/8 per share closing price for the Company's Common Stock on the New York Stock Exchange on such date: approximately $315,809,734.
Shares outstanding at March 15, 1996: Common Stock - 30,047,781 shares
Documents incorporated by reference: The Company's Annual Report to Stockholders for the year ended December 31, 1995 (incorporated in Part II to the extent provided in Items 5, 6, 7 and 8 hereof). Definitive Proxy Statement for the Company's April 30, 1996 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (incorporated in Part III to the extent provided in Items 10, 11 and 12 hereof).
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Harte-Hanks Communications, Inc. Table of Contents Form 10-K Report December 31, 1995
Part I Page ------
Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security 17 Holders
Part II ------
Item 5. Market for Registrant's Common Equity and 18 Related Stockholder Matters
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial 18 Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements with Accountants 18 on Accounting and Financial Disclosure
Part III ------
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners 19 and Management
Item 13. Certain Relationships and Related Transactions 19
Part IV ------
Item 14. Exhibits, Financial Statement Schedules and 19 Reports on Form 8-K.
Signatures 24
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ITEM 1. BUSINESS and ITEM 2. PROPERTIES
INTRODUCTION
Harte-Hanks is a diversified communications company with operations throughout the United States in four principal businesses -- direct marketing, shoppers, newspapers and television. The Company's shopper, newspaper and television businesses operate in local markets, while its direct marketing business operates nationally and internationally. The Company believes that its leadership positions within its markets have resulted from offering high-quality products, utilizing advanced technologies and innovative marketing strategies, and establishing strong relationships with its readers, viewers and advertising clients. The Company's strategy is to increase revenues by growing its base businesses and by applying the capabilities of each business across the other businesses and to new products and markets, enabling it to capitalize on trends in the media industry toward the use of more direct, targeted marketing. Consistent with this strategy, the Company is investing in advanced technologies, equipment and personnel, introducing new products and services in existing markets, entering new markets and making selective acquisitions. In 1995, the Company had revenues of $532.9 million.
Harte-Hanks is the successor to a newspaper business begun in Texas in the early 1920s by Houston Harte and Bernard Hanks. In 1972, the Company went public and was listed on the New York Stock Exchange. The Company went private in a leveraged buyout initiated by management in 1984. In 1993, the Company again went public and listed its common stock on the NYSE. See Note O 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 and coordinated services. The Company utilizes advanced technologies to enable its customers to identify, target and reach specific consumers or businesses. The Company believes that developments in computer technology and trends toward more sophisticated marketing analysis and measurement will continue to result in increased usage of direct marketing services. Harte-Hanks' direct marketing customers include many of America's largest retailers, banks, mutual funds companies, insurance companies and high technology firms, along with a growing number of international clients. In 1995, Harte-Hanks Direct Marketing had revenues of $197.6 million, which accounted for approximately 37% of the Company's revenues.
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Harte-Hanks Direct Marketing provides specialized services to assist its customers in each step of the direct marketing process. The Company's strategy is to provide services either on an individual basis or as part of an integrated marketing solution to achieve its customers' direct marketing objectives. These services are outlined below:
Response Management
Harte-Hanks Response Management manages the inquiries clients receive from their marketing efforts, whether it be from 1-800 numbers appearing in print or broadcast ads or from 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. Using proprietary software, the Company also builds marketing 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.
In 1995, Internet services were developed for distributing sales leads, creating and maintaining clients' Web pages, and developing seminar registration forms. The Company also offers response management services in Europe to its U.S. clients with international operations through a strategic alliance with a firm in Hasselt, Belgium. An agreement reached in early 1995 gives Harte-Hanks the option to acquire the Belgian firm, Tele Support Services.
The Company provides response management services in both its Austin and Boston operations. The Austin operation serves primarily high technology customers, while the Boston operation primarily serves the mutual fund industry. Both operations expanded their facilities in 1995 to accommodate growth.
Database
The Company builds customized marketing databases for specific clients and provides them with easy-to-use tools to target and track 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' behavior. In addition to building a client's database and installing the software, Harte-Hanks Direct Marketing performs regular database updates and operates as a service bureau for those clients who need it. The Company also offers its stand-alone software Trillium(R) for clients who want to integrate this capability into their data warehouses.
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Database services are marketed to specific industries or markets with software modifications tailored to each industry or market. Having established the basic technological foundation for providing database services, the Company is able to provide database services to new industries and markets by modifying its existing database technology. The Company currently provides database services to the banking, retail, insurance, utilities, automotive and business-to- business markets. The Company also provides database services in Canada and the United Kingdom, primarily in the banking industry, and has expanded into Europe, Asia, Latin America and New Zealand.
Marketing Planning and Analysis
Harte-Hanks Direct Marketing's newest specialized service offering strengthens its ability to offer clients complete marketing solutions. Marketing planning and analysis builds on the Company's existing strategic, database and personalization offerings and serves as an extension of the client's marketing arm. Specific products and services include tracking and reporting, mailing analysis, modeling, database profiling, marketing applications consulting and program development.
Research
Specializing in custom research for direct marketers, Harte-Hanks Market Research provides clients an additional analytical tool to help define their marketing objectives, develop effective programs, target the right prospects and measure the results. Information gathered by the research operation can be used to enrich clients' marketing databases integrating with the other services provided by Harte-Hanks Direct Marketing's database, marketing planning and analysis, and strategy service offerings.
Strategy
Harte-Hanks Direct Marketing helps businesses establish a strategic framework for their marketing and communication programs combining the capabilities of its research, creative and marketing planning and analysis services. The Company develops customer acquisition, retention, activation and ongoing frequency loyalty programs for its clients.
Creative
The Company provides full-service creative capabilities from developing concepts to producing final layouts, copy and art. Direct marketing promotions are created to meet specific client needs as well as ongoing direct marketing programs. In both cases, emphasis is placed on measuring the results of marketing communications.
Service Bureau
Harte-Hanks Direct Marketing prepares list selections, maximizes deliverability and reduces clients' mailing costs through sophisticated postal coding, elimination of duplicates and updating of addresses of people who move through a non-exclusive National Change of Address license with the U.S.
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Postal Service. The Company's service bureau offering also establishes the framework for mailings to be personalized with individual messaging capability.
Media
In addition to being one of America's largest solo mailers, Harte-Hanks Direct Marketing uses inbound telemarketing, the Internet and media planning software to help clients develop the most effective media mix possible.
Print and Graphics
In addition to its creative capabilities, Harte-Hanks Direct Marketing provides clients with full service print and graphic services, from typesetting and production to laser form printing, envelope printing and sheetfed printing of materials to be inserted into envelopes and mailed.
Personalization
Harte-Hanks Direct Marketing creates and delivers personalized communication pieces to specific consumers and businesses selected from clients' databases or other mailing lists, using sheetfed and continuous form laser and inkjet printers.
Mail and Fulfillment
Six Harte-Hanks Direct Marketing production facilities across the nation perform targeted mailing services for clients. The Company's mail tracking ability helps ensure that client mailings reach their destinations on time. Harte-Hanks Direct Marketing also operates fulfillment services to distribute literature, product samples and other client materials to consumers who respond to promotional campaigns or request information.
Logistics
Harte-Hanks Direct Marketing arranges the transportation of time-sensitive advertising materials to post offices, newspapers and mail processing facilities nationwide. By controlling this final stage of the print distribution process, the Company maximizes the on-time delivery of its clients' materials while keeping costs to a minimum. Proprietary software is used to lower customers' transportation and postage costs by optimizing routes, co-mingling freight and entering mail into the mailstream as close as possible to its destination.
Sales and Marketing
Harte-Hanks' national direct marketing sales force is headquartered in Cincinnati, Ohio, with database sales offices maintained throughout the United States, and in Toronto, London and Sao Paulo, Brazil. The focus of the sales force is to position Harte-Hanks as a single-source solution for a customer's target marketing needs. The sales force emphasizes cross-selling the range of direct marketing services. The sales force is supported by employees in each
7 7 core service. 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.
Facilities
Direct marketing services are provided at the following facilities:
Billerica, Massachusetts (Boston) INTERNATIONAL SALES OFFICES Brockton, Massachusetts (Boston) Toronto, Canada Austin, Texas London, England Jacksonville, Florida Sao Paulo, Brazil Cincinnati, Ohio River Edge, New Jersey REGIONAL SALES OFFICES New York, New York Harrisburg, Pennsylvania Baltimore, Maryland Chicago, Illinois Forty Fort, Pennsylvania Plano, Texas Dallas/Fort Worth, Texas Wilmington, Delaware Fullerton, California Fredericksburg, Virginia Deerfield Beach, Florida San Diego, California Bloomfield, Connecticut
The Company continued to support its growth with facility expansions at a number of locations during 1995. In Boston, both the database and response management operations expanded into nearby second facilities. The response management operation in Austin moved into a state-of-the-art new building. In Jacksonville, Florida, ground was broken on a new facility to house many of Harte-Hanks Direct Marketing's service capabilities under one roof. The New Jersey research operation moved into a larger facility. Outside the United States, the Company's database service established a presence in a third international market, Brazil. Meanwhile, the London area sales group relocated to larger new offices.
Competition
Harte-Hanks' direct marketing business faces competition primarily from other companies in each core service offering, 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 capabilities, combined with its national production capability, its industry focus and its ability to offer a full range of integrated services (i.e., targeting and identification of potential markets, and production and delivery of advertising materials), enable the Company to compete effectively.
On February 4, 1996 the Company entered into a definitive agreement providing for the merger of DiMark, Inc. with a wholly owned subsidiary of Harte-Hanks in a stock-for-stock transaction. DiMark had net sales and net income of $73.4 million and $5.1 million, respectively, for the year ended February 28, 1995. For the nine months ended November 30, 1995, DiMark had net sales of $56.6 million and net income of $3.6 million. The merger is expected to be
8 8 consummated in late spring 1996, subject to approval by the stockholders of both companies. DiMark, Inc. provides a full range of outsource marketing and database services to clients in the insurance, healthcare, pharmaceutical, financial services and telecommunications industries, as well as direct response printing services.
SHOPPERS
General
Harte-Hanks is the largest publisher of shoppers in North America based on weekly circulation and revenues, and is the only national media company that focuses on shoppers as a core business. Shoppers are weekly advertising publications delivered free by third-class saturation 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, 1995, shoppers reached approximately 6.9 million households in four markets each week -- Southern California, Northern California, Miami/Ft. Lauderdale and Dallas/Fort Worth. The Company's Southern California shopper, The Original PennySaver, accounted for 63% of these households.
Harte-Hanks publishes 570 individual shopper editions each week distributed to zones of approximately 12,100 households each. This allows single-location, local advertisers to saturate a single geographic zone, while enabling multiple-location advertisers to saturate multiple zones. This unique delivery system gives large and small advertisers alike a cost-effective way to reach their target markets. The Company believes that its zoning capabilities and production technologies have enabled it to saturate and target geographic areas allowing its advertisers to effectively target their customers. The Company's strategy in its shopper business is to increase its share of local advertising in its existing circulation areas, and, over time, increase circulation through expansion into contiguous areas and make selective acquisitions. In 1995, Harte-Hanks shoppers had revenues of $185.0 million and accounted for approximately 35% of the Company's revenues.
Since the beginning of 1993, 1.0 million households were added through internal expansion, primarily in Southern California, Miami/Ft. Lauderdale and Northern California. The Company believes that this expansion will provide increased revenue and operating income as the publications in these areas mature.
Publications
Harte-Hanks shoppers are published in Southern California, Northern California, Miami/Ft. Lauderdale and Dallas/Fort Worth. The Southern California unit accounted for 70% of shopper revenues in 1995.
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The following table sets forth certain information with respect to shopper publications:
December 31, 1995 Number of Market Publication Name Circulation Zones ------
Southern California The Original PennySaver 4,344,000 372 Northern California Potpourri 1,052,000 79 Miami/Ft. Lauderdale The Flyer 1,052,000 83 Dallas/Fort Worth Shopper's Guide 421,000 36 ------Total 6,869,000 570
Shopper publications consist of classified and display advertising and are delivered to consumers' homes by third-class saturation mail. The typical shopper publication contains over 40 pages and is 7 by 9 1/2 inches in size. Each edition, or zone, is targeted around a natural neighborhood marketing pattern. Shoppers also serve as a distribution vehicle for a four-color proprietary product, MARQUEE, carrying multiple ads from national and regional advertisers; "print-and-deliver," single-sheet inserts designed and printed by the Company; coupon books; and preprinted inserts from major retail chains. Harte-Hanks shopper publications also use 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 Miami/Ft. Lauderdale in 1995. This software makes 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 in this manner 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 addition, the software allowed the shoppers to group ads from individual zoned editions into newsstand products in Florida and Southern California, providing customers an additional distribution channel and creating a new revenue source.
In another example of technological innovation, Harte-Hanks Shoppers expanded the ways its advertisers can reach prospective customers by establishing World Wide Web sites for the Southern California PennySaver and Northern California Potpourri. Both sites offer electronic access to ads from that week's printed publications. Visitors to these sites can search the overall database for specific types of products or services.
Sales and Marketing
The Company maintains local sales offices throughout its geographic markets and employs more than 400 commissioned sales representatives who develop both targeted and saturation advertising programs for customers. The sales organization provides service to both national and local advertisers
10 10 through its telemarketing departments and its 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.
Shopper sales teams developed new ways to service advertisers with the addition of sales specialists with expertise in key industries. These sales specialists are being used to serve automotive, real estate, employment and healthcare advertisers.
The Company utilizes a proprietary sales and marketing system (SAMS) to enter customer orders directly from the field, instantly checking space availability, ad costs and other pertinent information. A paperless order entry system on a Unix platform, SAMS also has built-in error-reducing safeguards, minimizing costly sales adjustments. In addition, SAMS facilitates placement of advertising in multiple zoned editions. The Company has expanded SAMS so that, in addition to allowing advertising information to be entered for immediate publication, it will build a relational customer database, enabling sales personnel to access customer history by designated variables, thereby identifying similar potential customers and assisting follow-up with existing customers.
Facilities
Harte-Hanks shoppers are produced at owned or leased facilities in the markets they serve. The Company has five production facilities -- two in Southern California and one in each of its other markets -- and 21 sales offices.
Competition
Harte-Hanks shoppers compete primarily with metropolitan daily newspapers, shared mail packages and other local advertising media. The Company believes that its production systems and technology, which permit it to publish separate editions in narrowly targeted zones, allow it to compete effectively, particularly in large markets with high media fragmentation. 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.
HARTE-HANKS NEWSPAPERS
General
Harte-Hanks publishes the only daily newspaper in Abilene, Corpus Christi, San Angelo and Wichita Falls, Texas and Anderson, South Carolina (the "five principal newspapers"). The Company also publishes one daily and seven nondaily newspapers in higher-income suburban areas of Dallas. In all of its daily newspaper markets, the Company realizes additional revenue from niche
11 11 publications and specialized services (such as special interest publications and direct mail programs) aimed at targeted consumer groups. Harte-Hanks' strategy in its newspaper business is to build upon its strong local franchises, to offer complementary products and services and to expand its market areas and customer base.
The Company's five principal newspapers have achieved high levels of paid household penetration. For 1995, circulation penetration in the city zones for the five principal newspapers ranged from 49% to 70% on a daily basis and from 66% to 82% on Sunday, providing advertisers with broad coverage of these local markets. According to Standard Rate & Data's Circulation '96, the daily editions of the Company's newspapers in Abilene, San Angelo and Wichita Falls ranked among the top 40 in the United States based on household penetration in United States Census Bureau metropolitan statistical areas. In addition, these same newspapers' Sunday editions rank in the top 20 in the United States based on household penetration. Harte-Hanks' Community Newspapers in suburban Dallas concentrate on local news stories and other items of interest to those affluent communities. Harte-Hanks newspapers are recognized for their editorial excellence and community leadership, with each newspaper edited locally to reflect the views and interests of the particular market it serves. In 1995, Harte-Hanks newspapers had revenues of $125.1 million and accounted for approximately 23% of the Company's revenues.
Five Principal Newspapers
The Company believes that the high penetration levels of its five principal newspapers are important to advertisers in their determination of where to allocate advertising dollars, as advertisers increasingly require evidence that their messages are actually reaching consumers. The Company's five principal newspapers, together with their related niche publications, accounted for approximately 85% of Harte-Hanks' newspaper revenues in 1995.
The following table sets forth certain information with respect to the Company's five principal newspapers for 1995:
Average Average Paid Circulation Circulation(1) Penetration(2) ------Publication Daily Sunday Daily Sunday ------
Corpus Christi Caller-Times 66,724 94,614 49% 66% (Founded 1877)
Abilene Reporter-News 42,606 52,881 60% 75% (Founded 1881)
Anderson Independent-Mail 42,273 48,510 70% 79% (Founded 1899)
Wichita Falls Times Record News 38,423 46,654 62% 76% (Founded 1907)
San Angelo Standard-Times 32,833 39,472 66% 82% (Founded 1884)
(1) In 1995, approximately 86% of daily circulation was home-delivered, with the remaining 14% derived from single- copy sales. (2) Penetration is average paid circulation in the city zone divided by the number of households in the city zone.
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The Corpus Christi Caller-Times is a morning newspaper serving Corpus Christi and 17 surrounding counties in South Texas. For the sixth time in the past seven years, the Press Club of Dallas named the Caller-Times the best daily newspaper in Texas with circulation under 100,000. Average Sunday circulation of the Sunday edition of the Caller-Times increased from 87,745 in 1988 to 94,614 in 1995. The Corpus Christi metropolitan statistical area had an estimated population of 378,900 as of December 31, 1994. The Corpus Christi economy is based on tourism, military, shipping, oil and gas production, petrochemicals, refining, manufacturing, agriculture, higher education, regional health services and regional retail services. The Port of Corpus Christi is the nation's sixth largest in terms of shipping tonnage.
The Abilene Reporter-News is a morning newspaper serving Abilene and a 15-county regional trade market in Central West Texas. The Abilene metropolitan statistical area had an estimated population of 122,200 as of December 31, 1994. The Reporter-News was a finalist in the Press Club of Dallas selections as best daily newspaper in Texas for its circulation size in both 1994 and 1995. Individuals among the news staff won first place awards in the same competition. The Abilene economy is built around the oil and gas industry, agriculture, light industry, military, regional health services and higher education.
The Anderson Independent-Mail is a morning newspaper serving Anderson, South Carolina and its surrounding area. The Independent-Mail has a record of product improvement and circulation growth spanning six years. The Independent- Mail has won the National Headliner Award for outstanding reporting in its circulation class in the United States two of the last four years. In 1994, the newspaper won the J. C. Penney/University of Missouri Lifestyle Award for excellence in lifestyle sections and has placed among the Associated Press top 20 sports sections in the United States in its circulation class in each of the last six years. Anderson County had an estimated population of 153,600 as of December 31, 1994 and is the retail and manufacturing center for a nine-county area covering the northeast corner of Georgia and the northwest corner of South Carolina. The market, astride the Interstate 85 business corridor between Atlanta, Georgia and Charlotte, North Carolina, includes major industries producing rubber products, textiles and automotive parts and supplies. Service industries focus on government, healthcare, recreation and retirement. The market is also home to Clemson University.
The Wichita Falls Times Record News is a morning newspaper serving Wichita Falls, Texas and 16 surrounding counties in North Texas and Southern Oklahoma. The Times Record News is ranked second among all Texas daily newspapers in paid household penetration in its metropolitan statistical area in both Sunday and daily circulation categories. The Wichita Falls metropolitan statistical area had an estimated population of 133,000 as of December 31, 1994. The Wichita Falls economy is diversified and consists of manufacturing, military, agriculture, oil and gas and retail and wholesale trade. Sheppard Air Force Base is a significant factor in the Wichita Falls economy. The base has undergone a $250 million facility expansion, which has made it the largest training center in the United States Air Force. The market also benefits from the construction of an $80 million Texas Department of Criminal Justice unit, which was completed in May 1995.
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The San Angelo Standard-Times is a morning newspaper serving San Angelo, Texas and its surrounding area. The San Angelo metropolitan statistical area had an estimated population of 102,800 as of December 31, 1994. San Angelo has a diversified economic base consisting of petroleum, military, regional health services, agriculture, light industry and higher education. Goodfellow Air Force Base is a significant factor in the San Angelo economy. Currently, there are over $11 million in building projects at Goodfellow, including a new civil engineering complex and upgrading of all communications infrastructure which will support further expansions of missions at the base. In late 1995, a telecommunications company moved its largest field operation to San Angelo and created 200 new jobs with more anticipated.
Harte-Hanks Community Newspapers
The Company publishes one daily and seven nondaily newspapers in the higher income suburban communities of northern Dallas. Harte-Hanks Community Newspapers concentrate on local news stories and other items of interest to the communities they serve and allow advertisers to target consumers in these communities. The community newspapers compete with daily newspapers published in the metropolitan Dallas area as well as zoned editions and other nondaily products. The Company's nondaily newspapers are published either once or twice a week, and many of them are distributed free of charge.
The following table sets forth certain information with respect to the Company's community newspapers for 1995:
Type of Average Location Publication Name Publication Circulation ------
Dallas Area Plano Star Courier Daily 12,483 Sunday 13,874 Mesquite News Nondaily 30,800 Lewisville Leader Nondaily 26,500 McKinney Messenger Nondaily 8,016 Frisco Life Nondaily 4,500 The Colony Leader Nondaily 4,300 Coppell Gazette Nondaily 4,300 Allen American Nondaily 4,022
Niche Publications and Services
In addition to its primary newspaper products, the Company publishes numerous niche advertising and special interest publications in all of its markets to achieve increased market coverage. The specialized publications include newsstand publications, total market coverage vehicles, guides covering specialized subjects such as television and real estate, editions zoned to particular geographic areas, weekly news products and military publications. The Company's newspapers continue to grow their local direct marketing services and will expand this in 1996 with the installation of specialized printing equipment in each of the principal markets. The Company also offers audiotext "voice mail" services to readers and advertisers, and each newspaper now provides advertising and information services on the World Wide Web. 14 14
Sales and Marketing
The Company maintains local sales offices in each of its newspaper markets. Each office has commissioned sales representatives dedicated specifically to advertising or circulation sales. In 1995 the Company launched its Potential Based Marketing strategy which uses databases of information to support growth by examining the "potential" of its customers, products, services and people. Harte-Hanks uses marketing techniques including programs whereby an advertiser purchases a package consisting of multiple advertisements over a specified period of time for a fixed budget amount. Harte-Hanks offers a combination of products and services as part of these advertising programs. The niche publications and services offer customers increased market coverage or the ability to target specific consumer groups.
Facilities
Harte-Hanks newspaper operations are housed in modern facilities that are owned by the Company in its five principal newspaper markets and leased facilities in suburban Dallas. The Company made substantial investments in prepress systems and equipment in 1995. These investments are expected to increase productivity and shorten manufacturing time, allowing for later news and advertising deadlines.
Competition
There are no competing daily newspapers in the markets where the Company publishes its five principal newspapers. The Company's community newspapers face increasing competition from the strong metropolitan daily newspaper in Dallas, including its local editions. Each of the Company's newspapers competes in varying degrees for advertisers and readers with newspapers, magazines, radio, broadcast and cable television, shoppers, directories, direct mail and other communications media that operate in its markets.
TELEVISION
General
The Company owns and operates KENS-TV, a CBS-affiliated VHF station in San Antonio, Texas, the 37th largest television market in the United States according to Nielsen Ratings Service. San Antonio is the business and retail center for South Texas and has a diversified economy based on tourism, military, healthcare and international trade. In 1995, Harte-Hanks Television had revenues of $25.1 million, which accounted for approximately 5% of the Company's revenues.
The Company believes that its market leadership results from strong local news programming and highly visible community involvement and public affairs projects. In 1995, KENS added a 5:30 a.m. newscast preceding its existing weekday morning local news hour. Another half-hour local newscast premiered at 4:30 p.m. weekdays in January, 1996. Altogether, KENS programs 24 hours a week of live, local news.
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KENS has been affiliated with CBS since the station's inception. In 1995, CBS placed third among the major networks in the primetime ratings. KENS renegotiated its contract with CBS in September 1995 for a 10-year term. Despite CBS's weak prime time performance Monday through Friday, KENS' late night newscast finished 1995 as San Antonio's top rated newscast for the 23rd consecutive year, growing its ratings 85% over the CBS prime time average. The station was the only CBS affiliate in the 33 major metered markets to place first in late news in the November 1995 rating sweeps, also ranking as the network's highest rated late news affiliate in these markets.
According to the November 1995 Nielsen Ratings Index, KENS broadcasts to a market of approximately 652,000 households, defined as the designated market area (the "DMA"). The San Antonio DMA is served by 10 stations, including stations affiliated with the other two major national networks, a Fox affiliate, two stations affiliated with Spanish language networks, three independent stations and one public broadcasting station. Cable penetration in the City of San Antonio is approximately 66%. San Antonio historically has ranked higher in terms of total television advertising dollars spent than its market ranking. Because of its market ranking and ethnic diversity, San Antonio has experienced regional and national advertising growth and frequently enjoys test-market status.
Harte-Hanks' strategy is to maintain its leadership position in order to continue to increase its television revenues and to capitalize on the station's reputation and leadership position by providing additional products and services for advertisers. The Company acquired an AM radio station in San Antonio, which began broadcasting as KENS-AM on October 15, 1993. KENS-AM's news and information format features simulcasts of KENS-TV's "Eyewitness News" along with call-in talk shows, issues-oriented programming and expanded advertiser information programs. Harte-Hanks expanded its radio commitment in 1995 by doubling KENS-AM's signal power.
The Company also offers video production and graphic services in its full-service production facility. Video production services are provided for programming, commercial and industrial applications and live satellite uplinking, worldwide. KENS also operates a high-end print graphics facility, providing print advertisers with complete ad design, production, color separation and film output capabilities. KENS also offers CD-ROM production and World Wide Web page design.
Sales and Marketing
Local advertising spots are sold by KENS sales personnel. National advertising spots are sold by Katz Communications, an independent advertising sales agent with offices throughout the United States. Generally, advertising rates for national spot and local advertising are determined by the individual station, which receives all of the revenues (less sales commissions). Rates are influenced both by the demand for advertising time and the popularity of the station's programming. Most advertising during network programs is sold by the network, which pays its affiliated stations negotiated fees for broadcasting such programs. Advertising rates charged by a television station
16 16 are based primarily on the size of the market and the station's ability to attract audiences as reflected in surveys made by national rating services. Rates are highest during the most desirable viewing hours. Normally a majority of local affiliate station revenues comes from locally programmed dayparts, particularly local newscasts.
Sales of advertising for KENS-AM and of graphics and production services are handled by a separate sales staff working with KENS' television sales staff.
Facilities
KENS owns a 50,000 square-foot facility constructed in 1982. The facility includes two video production studios with separate technical control rooms, a graphics facility and a satellite uplink facility. The offices and studio of KENS-AM radio are also located at this facility.
Competition
KENS competes with other advertising media such as newspapers and magazines, and, within its coverage areas, television and radio stations serving the same or nearby areas. KENS also competes with the local cable television system, which has 66% penetration in the City of San Antonio, according to a report published by Nielsen Ratings in November 1995.
Regulation of Television and Radio
The FCC regulates television and radio stations under the Communications Act of 1934, as amended (the "Communications Act"), which together with FCC rules and policies thereunder governs the issuance, renewal and assignment of licenses; technical operation; and, to a limited extent, program, employment and commercial practices. The recently enacted Telecommunications Act of 1996 ("Telecommunications Act") effected sweeping changes in the Communications Act, many of which will influence the Company's broadcasting operations. Under the Telecommunications Act, television and radio broadcast station licenses are issued for a maximum term of eight years and are renewable upon application for additional eight-year terms. The KENS-TV broadcast station license was renewed in September 1993 for a term expiring August 1, 1998. The license of the AM radio station will expire August 1, 1997. Renewal applications are granted without hearing if the licensee's qualifications are not materially challenged by either a third party or the FCC. Despite the relatively short term license period, the broadcast industry has been characterized by stability. Harte-Hanks has operated television broadcast stations since 1962, and to date its renewal applications have been granted without hearing. Under the Communications Act, as amended by the Telecommunications Act, a broadcast license may not be granted to or held by a corporation if more than one-fifth of its capital stock is owned or voted by aliens or their representatives, by foreign governments or their representatives, or by non-U.S. corporations; or a broadcast license also may not be granted to or held by corporation that is controlled, directly or indirectly, by any other corporation if more than one-fourth of capital stock of the parent corporation is owned or voted by aliens or their
17 17 representatives, by foreign governments or their representatives, or by non-U.S. corporations unless the FCC finds that the public interest will be served. The Communications Act and FCC rules also generally prohibit the common ownership, operation or control of a television broadcast station and a radio broadcast station serving the same local market and of a broadcast station and a daily newspaper serving the same local market. However, the FCC has waived this rule as it applies to the ownership of KENS-TV and the Company's AM radio station. The FCC generally applies its ownership limits to "attributable" interests held by an individual, corporation, partnership or other association.
Employees
As of December 31, 1995, Harte-Hanks employed 4,957 full-time employees and 670 part-time employees, as follows: direct marketing -- 2,076 full-time and 221 part-time employees; shoppers -- 1,443 full-time and 259 part-time employees; newspapers -- 1,267 full-time and 178 part-time employees; television -- 146 full-time and 12 part-time employees; and corporate office -- 25 full-time employees. None of the work force is represented by labor unions. The Company considers its relations with its employees to be good.
Facilities
Harte-Hanks' executive offices are located in San Antonio, Texas and occupy approximately 35,000 square feet in leased premises. The Company's business is conducted in facilities nationwide containing aggregate space of approximately 2.5 million square feet. Approximately 1.7 million square feet are held under leases, which expire at dates through 2010. The balance of the properties, which are used primarily in the Company's newspaper, television and Southern California shopper operations, are owned by the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time becomes involved in various claims and lawsuits incidental to its businesses, including defamation actions. In the opinion of management, after consultation with counsel, any ultimate liability arising out of currently pending claims and lawsuits will not have a material effect on the financial condition or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1995 at page 32. 18 18
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1995 at page 30.
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, 1995 at pages 13 through 18.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information is set forth in the Company's Annual Report to Stockholders for the year ended December 31, 1995, which is incorporated herein by reference: All Consolidated Financial Statements (pages 19 through 22); all Notes to Consolidated Financial Statements (pages 23 through 29); and the Independent Auditors' Report (page 31). With the exception of the information herein expressly incorporated by reference, the Company's Annual Report to Stockholders for the year ended December 31, 1995 is not deemed filed as part of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10. MANAGEMENT
Incorporated herein by reference from the information in the Company's definitive proxy statement dated March 29, 1996 for the April 30, 1996 Annual Meeting of Stockholders under the caption "Management -- Directors and Executive Officers" on pages 54 and 55.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the information in the Company's definitive proxy statement dated March 29, 1996 for the April 30, 1996 Annual Meeting of Stockholders under the caption "Executive Compensation and Other Information" on pages 56 through 60.
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 29, 1996 for the April 30, 1996 Annual Meeting of Stockholders under the caption "Security Ownership of Management and Principal Stockholders" on pages 61 and 62.
19 19
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, 1995 attached hereto:
Consolidated Balance Sheets, December 31, 1995 and 1994
Consolidated Statements of Operations, Years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows, Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity, Years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) The following accountants' report and financial schedule for years ending December 31, 1995, 1994 and 1993 are submitted herewith:
Independent Auditors' Report 10-K Schedule
Schedule VIII - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is inapplicable.
20 20
(a)(3) Exhibits
Exhibit No. Description of Exhibit Page No. ------
2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein).
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).
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(l) 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(l) to the Company's Form 10-K for the year ended December 31, 1992 and incorporated by reference herein).
10(e) Third Amended and Restated Loan Agreement dated May 19, 1993 among the Company, The Toronto-Dominion Bank, NationsBank of Texas, N.A., National Westminster Bank USA, The First National Bank of Boston, Bank of Hawaii, Corestates Bank, N.A., The Bank of Nova Scotia, CIBC Inc., and National Bank of Canada; and Toronto-Dominion (Texas), Inc., as agent (filed as Exhibit 10(l) to the Company's 10-Q for the quarter ended June 30, 1993 and incorporated by reference herein).
21 21
(a)(3) Exhibits (continued).
Exhibit No. Description of Exhibit Page No. ------
10(f) Note Purchase Agreement by and between HHC Holding Inc. and The Goldman Sachs Group, L.P. (filed as Exhibit 10(f) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein).
10(g) Severance Agreement between Harte-Hanks Communications, Inc. and Larry Franklin, dated as of July 23, 1993 (filed as Exhibit 10(f) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein).
10(h) Form of Severance Agreement between Harte-Hanks Communications, Inc. and certain Executive Officers of the Company, dated as of July 23, 1993 (filed as Exhibit 10(h) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein).
10(i) Amendment No. 2 to HHC Holding Inc. 1991 Stock Option Plan (filed as Exhibit 10(l) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein).
10(j) Harte-Hanks Communications, Inc. Pension Restoration Plan (filed as Exhibit 10(j) to the Company's Registration Statement No. 33-69202 and incorporated by reference herein).
10(k) First Amendment, dated as of November 3, 1993 to Third Amended and Restated Loan Agreement dated May 19, 1993 among the Company, The Toronto-Dominion
Bank, NationsBank of Texas, N.A., National Westminster Bank USA, The First National Bank of Boston, Bank of Hawaii, Corestates Bank, N.A., The Bank of Nova Scotia, CIBC Inc., and National Bank of Canada; and Toronto- Dominion (Texas), Inc., as agent (filed as Exhibit 10(l) to the Company's Form 10-Q for the quarter ended September 30, 1993 and incorporated by reference herein).
22 22
(a)(3) Exhibits (continued).
Exhibit No. Description of Exhibit Page No. ------
10(l) Amendment No. 1, dated as of November 10, 1993 to Note Purchase Agreement by and between Harte-Hanks Communications, Inc. and GS Capital Partners, L.P., Stone Street Fund 1992, L.P. and Bridge Street Fund 1992, L.P. (filed as Exhibit 10(l) to the Company's Form 10-Q for the quarter ended September 30, 1993 and incorporated by reference herein).
10(m) Harte-Hanks Communications, Inc. Incentive Bonus Plan (filed as Exhibit 10(m) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated by reference herein). 10(n) Second Amendment to Third Amended and Restated Loan Agreement dated as of February 2, 1995 among the Company, NationsBank of Texas, N.A., National Westminster Bank USA, The Bank of Nova Scotia, The First National Bank of Boston, Bank of Hawaii, The Bank of Tokyo, LTD., Dallas Agency, Corestates Bank, N.A. and CIBC Inc. and Toronto-Dominion (Texas), Inc. in its Individual Capacity and as Agent (filed as Exhibit 10(n) to the Company's Form 10-Q for the quarter ended March 31, 1995 and incorporated by reference herein).
*11 Statement Regarding Computation of Net Income (Loss) 27 Per Common Share.
*13 Annual Report to Securityholders (only those portions 28 incorporated by reference into the Form 10-K are filed herewith).
*21 Subsidiaries of the Company. 48
*23 Consent of KPMG Peat Marwick. 49
24 Power of Attorney (included on the signature page of the Registration Statement on Form S-2 filed with the Commission on September 23, 1993).
*27 Financial Data Schedule. 50
______*Filed herewith.
23 23
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth quarter of 1995.
(c) Exhibits -- The response to this portion of Item 14 is submitted as separate section of this report on pages 27 to 50.
(d) Financial Statement Schedule -- The response to this portion of Item 14 is submitted as a separate section of this report on page 26.
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.
24 24
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 D. Franklin ------Larry D. Franklin President & Chief Executive Officer By: /s/ Richard L. Ritchie ------Richard L. Ritchie Senior Vice President, Finance & Chief Financial and Accounting Officer
Date: March 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated.
/s/ Houston H. Harte /s/ Dr. Peter T. Flawn ------Houston H. Harte, Chairman Dr. Peter T. Flawn, Director
/s/ Larry D. Franklin /s/ Christopher M. Harte ------Larry D. Franklin, Director Christopher M. Harte, Director
/s/ Edward H. Harte /s/ James L. Johnson ------Edward H. Harte, Director James L. Johnson, Director
/s/ Andrew B. Shelton ------Andrew B. Shelton, Director
25 25
INDEPENDENT AUDITORS' REPORT 10-K SCHEDULES
The Board of Directors and Stockholders Harte-Hanks Communications, Inc.:
Under date of January 24, 1996, except as to Note M of the consolidated financial statements, which is as of February 4, 1996, we reported on the consolidated balance sheets of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1995 and 1994 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, 1995, as contained in the 1995 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 1995. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
San Antonio, Texas January 24, 1996
26 26
Harte-Hanks Communications, Inc. and Subsidiaries Financial Statement Schedules
Schedule VIII Valuation and Qualifying Accounts
(in thousands)
Additions Balance at Charged to Balance Beginning Costs and at End Description of Year Expenses Deductions of Year ------
Allowance for doubtful accounts:
Year ended December 31, 1995... $2,910 $3,362 $3,988 $2,284 ======
Year ended December 31, 1994... $2,025 $4,839 $3,954 $2,910 ======
Year ended December 31, 1993... $2,512 $4,160 $4,647 $2,025 ======
27 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------
11 - Statement Regarding Computation of Net Income (Loss) Per Common Share.
13 - Annual Report to Securityholders.
21 - Subsidiaries of the Company.
23 - Consent of KPMG Peat Marwick.
27 - Financial Data Schedule 1 EXHIBIT 11
HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES EARNINGS PER SHARE COMPUTATIONS (in thousands, except per share data)
PRIMARY
Year Ended December 31, ------1995 1994 1993 ------
Income before extraordinary item...... $33,985 $23,822 $(45,472) Extraordinary item...... -- -- (7,393) ------Net income (loss)...... $33,985 $23,822 $(52,865) ======
Shares used in net earnings per share computations...... 30,280 28,569 19,557 ======
Per share: Income before extraordinary item...... $ 1.12 $ 0.83 $ (2.33) Extraordinary item...... -- -- (.37) ------Net income (loss)...... $ 1.12 $ 0.83 $ (2.70) ======
COMPUTATION OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
Year Ended December 31, ------1995 1994 1993 ------
Average outstanding common shares...... 28,928 27,335 19,310 Average common equivalent shares -- dilutive effect of option shares...... 1,352 1,234 -- Dilutive effect of options issued in the preceding twelve months prior to the initial public offering...... -- -- 247 ------Shares used in net earnings per share computations...... 30,280 28,569 19,557 ======
FULLY DILUTED
Year Ended December 31, ------1995 1994 1993 ------
Income before extraordinary item...... $33,985 $23,822 $(45,472) Extraordinary item...... -- -- (7,393) ------Net income (loss)...... $33,985 $23,822 $(52,865) ======
Adjusted net income (loss) for interest on convertible note...... $34,297 $24,572 $(52,865) ======
Shares used in net earnings per share computations...... 31,197 30,732 19,557 ======
Per share: Income before extraordinary item...... $ 1.10 $ 0.80 $ (2.33) Extraordinary item...... -- -- (.37) ------Net income (loss)...... $ 1.10 $ 0.80 $ (2.70) ======
COMPUTATION OF SHARES USED IN NET EARNINGS PER SHARE COMPUTATIONS
Year Ended December 31, ------1995 1994 1993 ------
Average outstanding common shares...... 28,928 27,335 19,310 Average common equivalent shares -- dilutive effect of option shares...... 1,405 1,254 -- Dilutive effect of convertible note...... 864 2,143 -- Dilutive effect of options issued in the preceding twelve months prior to the initial public offering...... -- -- 247 ------Shares used in net earnings per share computations...... 31,197 30,732 19,557 ======
Note: All share and per share amounts have been restated retroactively to reflect a 3 for 2 stock split effected as a 50% stock dividend on December 15, 1995.
27 1 EXHIBIT 13
[FINANCIAL CONTENTS]
Management's Discussion and Analysis ...... 13 Consolidated Balance Sheets ...... 19 Consolidated Statements of Operations ...... 20 Consolidated Statements of Cash Flows ...... 21 Consolidated Statements of Stockholders' Equity . . . . 22 Notes to Consolidated Financial Statements ...... 23 Five-Year Financial Summary ...... 30 Independent Auditors' Report ...... 31 Directors, Officers and Corporate Information . . . . . 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW The Company's overall performance reflects 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 growth strategy was accelerated in 1993 when the Company issued shares of its common stock in an initial public offering. Proceeds from the offering enabled the Company to increase its financial flexibility and reduce debt levels. As a result of this growth strategy, the Company's revenues have grown 37% since December 31, 1992, excluding the results of the units sold by the Company during that time. On the same basis, operating income increased 56%. In 1993, the Company redeemed all of its $200 million principal amount 11 7/8% Subordinated Debentures. Half of this redemption was funded in August 1993 with borrowings under the Company's credit facility. The remaining $100 million redemption in December 1993 was funded primarily with proceeds from the Company's initial public offering in November 1993, which generated net proceeds of $95.3 million. In 1994, the Company further reduced its debt and funded capital expenditures and an acquisition with cash flow generated from operating activities. In addition, in May 1995, the Company's 61C4% Convertible Notes due 2002 in the principal amount of $20 million were converted into 2,142,857 shares of common stock, resulting in annual interest expense savings of $1.3 million. As a result of these redemptions, cash flow generated from operations and the net proceeds from the sale of the Boston community newspapers, the Company reduced its total borrowings from $394.0 million at December 31, 1992 to $220.4 million at December 31, 1995, while funding $77.6 million of capital investments and acquisitions. On February 4, 1996 the Company entered into a definitive agreement providing for the merger with DiMark, Inc. with a wholly owned subsidiary of Harte-Hanks in a stock-for-stock transaction. DiMark had net sales and net income of $73.4 million and $5.1 million, respectively, for the year ended February 28, 1995. For the nine months ended November 30, 1995, DiMark had net sales of $56.6 million and net income of $3.6 million. The merger is expected to be consummated in late spring 1996, subject to approval by the stockholders of both companies. Harte-Hanks derives the majority of its revenues from the sale of advertising and direct marketing services. In addition, the Company's newspapers generate revenues from paid circulation. The Company's newspapers, shoppers and television station operate in local markets and are affected by the strength of the local economies. As a national business, direct marketing is affected to a greater extent by general national economic trends and developments in national markets for its services and products and, to a lesser extent, in the industries that it serves. The Company's principal expense items are payroll, postage and paper. Paper prices increased in both 1994 and 1995, and the Company will experience the effects of those increases and possibly others in 1996. Postal rates, which typically increase every three to four years, increased 14% in January 1995.
28
2 RESULTS OF OPERATIONS
Operating results, excluding the effect of the 1993 goodwill write-down and extraordinary items, were as follows:
------IN THOUSANDS 1995 CHANGE 1994 CHANGE 1993 ------
Revenues $ 532,852 3.7% $ 513,630 10.8% $ 463,510 Operating expenses 458,818 2.0% 449,616 9.2% 411,587 ------Operating income $ 74,034 15.7% $ 64,014 23.3% $ 51,923 ======Net income $ 33,985 42.7% $ 23,822 138.4% $ 9,991 ======Earnings per share - fully diluted $ 1.10 37.5% $ .80 70.2% $ .47 ======
Overall growth in the Company's 1995 revenues and operating income resulted from increased business with both new and existing customers, new products and services as well as advertising and circulation rate increases. The most dramatic growth occurred in the direct marketing business segment with revenue and operating income increases of 17.8% and 44.0%, respectively. Included in 1995 results is the effect of the sales of the Company's suburban Boston newspapers and a local hand distribution advertising business in the first and third quarters of 1995, respectively. The divestitures resulted in gains of $3.1 million, net of $10.6 million in income taxes. Excluding these net gains on divestitures, net income was $30.9 million, or $1.00 per share in 1995. All earnings per share and share information have been restated to reflect the three-for-two stock split effected December 15, 1995 in the form of a dividend. Excluding the results of the Boston community newspapers sold on March 31, 1995 (See Note B - Divestitures in Notes to Consolidated Financial Statements), 1995 consolidated revenues grew 8.6% and operating income grew 18.2%. Operating expenses, excluding the results of the Boston newspapers, rose correspondingly with the growth in overall business as well as due to higher paper prices and postal rates experienced throughout the year. Each business segment contributed to the Company's revenue and operating income growth in 1994 as compared to 1993. In particular, the direct marketing business contributed significantly with revenue growth of 29.4% and operating income growth of 51.0%. Overall growth resulted from development of new products and services, new customers, acquisitions, shopper circulation expansion and generally improving economic conditions. The same growth factors also caused operating expenses to increase in 1994. Revenue and expense growth also were affected by the February 1994 divestiture of the Company's smallest shopper, located in Tucson.
======
DIRECT MARKETING
Direct marketing operating results were as follows:
------IN THOUSANDS 1995 CHANGE 1994 CHANGE 1993 ------
Revenues $ 197,598 17.8% $ 167,779 29.4% $ 129,626 Operating expenses 169,726 14.4% 148,418 27.1% 116,806 ------Operating income $ 27,872 44.0% $ 19,361 51.0% $ 12,820 ======
Direct marketing's revenue growth of $29.8 million, or 17.8%, was generated primarily through the sale of database and response management products and services along with other services to customers in the financial services, high technology and retail industries. Management and coordination of mailings outsourced for certain clients also contributed to revenue growth. The addition of new customers, increased business with existing customers through new products and services, cross-selling of services and the leveraging of the Company's expertise in the international arena were also factors in 1995's growth performance. Although the majority of direct marketing's revenue growth came from existing operations, a portion of the increase was attributable to the acquisitions of Select Marketing, Inc., an Austin, Texas response management company that serves the high technology industry, and Steinert & Associates, a New York City advertising and marketing communications firm, in October 1994 and January 1995, respectively. The increase was partially offset by the absence of a local hand distribution advertising business sold in July 1995. Operating expenses rose $21.3 million, or 14.4%, during 1995 due primarily to revenue growth. Payroll costs were up $11.4 million, or 17.5%, as a result of increased hiring. In addition, production and distribution costs increased $5.2 million, or 8.3%, due to increased production levels. Also contributing to higher operating expenses were $3.2 million of additional general and administrative costs and increased depre-
29
3 ciation expense of $1.2 million, supporting direct marketing's growth. Expanded facilities and upgraded technology to support current and anticipated growth also contributed to increased expenses. The acquisitions noted above were another contributing factor. Slightly offsetting these cost increases were decreased costs related to the July 1995 divestiture. Direct marketing revenues increased $38.2 million, or 29.4%, in 1994 when compared to 1993. Revenue growth resulted from increased business with both new and existing customers, particularly in services and products provided to the retail, financial services and high technology industries. Revenue growth was also enhanced by the acquisition of Direct Market Concepts, Inc. in Jacksonville, Florida in April 1993 and the October 1994 response management acquisition previously noted. Direct Market Concepts provides various direct marketing services, primarily to financial institutions. Direct marketing operating expenses grew $31.6 million, or 27.1%, in 1994 when compared to 1993. Payroll costs and production and distribution costs increased to support revenue growth. Depreciation increased primarily as a result of increased capital investments made during late 1993 and 1994. Operating expenses were also impacted by the acquisitions. On February 4, 1996 the Company entered into a definitive agreement providing for the merger with DiMark, Inc. DiMark, Inc. provides a full range of outsource marketing and database services to clients in the insurance, healthcare, pharmaceutical, financial services and telecommunications industries, as well as direct response printing services.
SHOPPERS
Shopper operating results, excluding the effect of the 1993 goodwill write-down discussed below, were as follows:
------IN THOUSANDS 1995 CHANGE 1994 CHANGE 1993 ------
Revenues $ 185,045 4.9% $ 176,461 1.1 % $ 174,521 Operating expenses 165,025 4.0% 158,718 (0.2)% 159,080 ------Operating income $ 20,020 12.8% $ 17,743 14.9 % $ 15,441 ======
Revenues for the shopper business segment grew $8.6 million, or 4.9%, in 1995 when compared to 1994. Excluding revenues from the Company's small Tucson shopper that was sold in February 1994, revenues increased $9.5 million, or 5.4%, as compared to 1994. Revenue growth was primarily attributable to increased advertising rates in existing circulation zones, and, to a lesser degree, increased volumes of the newsstand products now being produced in portions of the Southern California, Northern California and Miami/Ft. Lauderdale markets. At December 31, 1995, total weekly shopper household circulation was 6.9 million. Excluding operating expenses from the divested Tucson shopper, 1995 operating costs increased $7.1 million, or 4.5%. Postage costs rose $4.5 million due primarily to a 14% postage rate increase in January 1995. In addition, higher paper and color printing costs contributed to higher operating expenses. Paper costs increased $2.6 million due to price increases partially offset by reduced volumes due to new pagination technology used by the Company's Southern California and Miami shoppers. Pagination technology permits a more efficient publication design, reducing the overall number of pages. Color printing costs increased $1.5 million due to higher rates and increased color volumes. Partially offsetting the increased operating costs was a reduction in payroll costs of $1.7 million due to reduced headcount, primarily as a result of investments in technology and changes in commission plans. Excluding revenues from the divested Tucson shopper, 1994 revenues grew $7.0 million, or 4.1%, over 1993. Revenue growth was primarily due to circulation expansion and, to a lesser extent, increased advertising in existing circulation zones and increased newsstand product volumes. Circulation expansion in all four shopper markets brought total weekly circulation to 6.9 million households at December 31, 1994. Excluding operating expenses from the divested shopper, operating expenses increased $5.3 million, or 3.5%. Payroll costs increased $2.2 million, or 3.9%, while general and administrative costs rose $0.4 million, or 2.7%. Postage costs grew $1.5 million, or 3.5%, due to higher circulation. Newsprint costs increased $0.3 million, or 2.5%, due to higher volumes as a result of circulation growth offset by average price declines.
30
4 NEWSPAPERS Newspaper operating results, excluding the effect of the 1993 goodwill write-down discussed below, were as follows:
------IN THOUSANDS 1995 CHANGE 1994 CHANGE 1993 ------
Revenues $ 125,077 (11.1)% $ 140,761 7.0% $ 131,545 Operating expenses 97,796 (14.5)% 114,398 4.2% 109,812 ------Operating income $ 27,281 3.5 % $ 26,363 21.3% $ 21,733 ======
Newspaper revenues decreased $15.7 million, or 11.1%, in 1995 when compared to 1994. This decrease was due to the March 1995 divestiture of the Company's Boston community newspapers. Excluding the results of the Boston newspapers, 1995 revenues increased $6.8 million, or 6.1%, as compared to 1994. Classified advertising revenues grew 8.4% as a result of increases both in volumes and rates. The classified revenue growth was fueled by increases in display advertising, particularly in the help wanted and automotive categories. Retail advertising revenues were flat. Insert revenues increased 5.5% as a result of higher volumes. In addition, niche and specialty product revenues grew primarily due to a direct mail initiative into the Rio Grande Valley, begun in 1994, and, to a lesser extent, audiotext services which represented a new revenue stream for the newspapers in 1994. Circulation revenues increased 9.8% in 1995, reflecting home-delivery price increases implemented in the fall of 1994 and, to a lesser degree, home-delivery price increases in the fall of 1995. Newspaper operating expenses decreased $16.6 million, or 14.5%, for 1995 as compared to 1994. Excluding the divested Boston newspapers, operating expenses increased $4.4 million, or 5.2%, over comparable 1994 levels. Newsprint costs increased $3.1 million, or 22.8%, over 1994 as a result of higher average newsprint prices offset slightly by reduced volumes. The reduction in volumes was attributable to reduced commercial printing volumes as well as to newsprint savings from a new press installed in July 1994 at the Corpus Christi Caller-Times and various operating initiatives to control newsprint consumption. In addition, costs associated with the direct mail program rose due to increased volumes as well as higher postage costs resulting from the January 1995 postal rate increase. Newspaper revenues increased $9.2 million, or 7.0%, in 1994 when compared to 1993. Classified advertising revenues increased 13.6% as a result of both higher volumes and rates. In particular, classified revenue growth was led by strong automotive volumes and, to a lesser extent, help wanted volumes in the Company's suburban markets. Retail advertising revenues increased 4.1%, while insert revenues rose 1.4%. In addition, niche and specialty product revenues grew, in part due to higher revenues from the direct mail program in the Rio Grande Valley established in 1994. Circulation revenues grew 5.8% primarily reflecting home-delivery price increases in the fall of 1993 and, to a lesser degree, home-delivery price increases in the fall of 1994. Newspaper operating expenses grew $4.6 million, or 4.2%, in 1994 when compared to 1993. Payroll costs rose $3.2 million, or 6.1%, due to increased sales commissions on higher advertising volumes, normal payroll increases and higher incentive compensation. In addition, general and administrative costs rose $1.5 million, or 10.9%, primarily due to increased promotional activity and other costs associated with producing higher revenues. Production and distribution costs rose $0.7 million, or 2.0%, due to higher production costs caused by increased volumes offset by decreased newsprint costs of $0.1 million. Newsprint expense was flat as a result of lower average newsprint prices offset by higher volumes. Goodwill amortization decreased $0.8 million due to the second quarter 1993 goodwill write-down relating to the Company's suburban newspapers in Boston and Dallas.
31
5 TELEVISION Television operating results were as follows:
------IN THOUSANDS 1995 CHANGE 1994 CHANGE 1993 ------
Revenues $ 25,132 (12.2)% $ 28,629 2.9% $ 27,818 Operating expenses 17,753 (9.8)% 19,683 0.2% 19,654 ------Operating income $ 7,379 (17.5)% $ 8,946 9.6% $ 8,164 ======
Television revenues decreased $3.5 million, or 12.2%, in 1995 when compared to 1994. Contributing to these results were lower national advertising revenues and the effects of weak CBS network performance. In addition, the first quarter of 1994 benefitted from CBS coverage of the National Football League playoffs and winter Olympics, while the full year 1994 benefitted from political advertising. Television revenues were also affected by the absence of a direct mail publication in 1995. Slightly offsetting the decreases were increased network revenues resulting from a newly negotiated network affiliation agreement. Operating expenses decreased $1.9 million, or 9.8%, when compared to 1994. The decrease was attributable to lower revenue related payroll costs and direct mail publication production costs. Also contributing to the decrease were lower film costs. Revenues for the television segment increased $0.8 million, or 2.9%, in 1994 when compared to 1993. Revenues from the television station operation increased $1.0 million, or 3.9%, primarily due to increased political advertising. Increased production activity as well as a direct mail product and radio station introduced in 1993 also generated additional revenue in 1994. These increases were offset by a revenue decline from the segment's print graphics operation, which was restructured during the year. Television operating expenses remained flat during 1994 when compared to 1993. Film programming cost decreases during 1994 were offset by slight increases in other expense categories.
======
GAINS ON DIVESTITURES In March and July 1995, respectively, the Company sold its suburban Boston community newspapers and a small local hand distribution advertising business. As a result of these transactions, the Company recognized gains on divestitures of $3.1 million, or 10 cents per share, net of $10.6 million of income taxes. See Note B of Notes to Consolidated Financial Statements.
INTEREST EXPENSE Interest expense decreased $0.7 million in 1995 as compared to 1994 due primarily to lower debt levels partially offset by higher interest rates experienced during 1995. In May 1995, the Company's 6-1/4% Convertible Notes due 2002 in the principal amount of $20 million were converted into 2,142,857 shares of common stock, resulting in annual interest savings of $1.3 million. Interest expense decreased $13.5 million in 1994 primarily as a result of 1993 redemptions of the Company's 11-7/8% Subordinated Debentures. In August 1993, $100 million of the Debentures were redeemed with borrowings under the Company's credit facility. The remaining $100 million redemption in December 1993 was funded primarily with proceeds from the Company's initial public offering.
INCOME TAXES The Company's income tax expense increased $14.5 million in 1995 when compared to 1994. Income tax expense for 1995 included $10.6 million of income taxes relating to the gains on divestitures. The remaining increase in income tax expense during 1995 and the increase of $11.5 million in income tax expense relating to income before extraordinary items in 1994 were due to increased income levels experienced during each of those periods.
GOODWILL WRITE-DOWN In connection with the Company's review of the carrying amount of its investments, including assigned goodwill, during the second quarter of 1993, the Company determined that goodwill associated with certain of its investments should be written down. That decision resulted in a charge of $55.5 million. The write-down was solely related to daily, semi-weekly and weekly newspapers in suburban markets in Boston, Massachusetts ($43.9 million) and in Dallas, Texas ($8.8 million) and to the Company's shopper publication in Tucson, Arizona ($2.8 million). In connection with its review, the Company projected undiscounted cash flows for each of its investments over the investment's associated remaining goodwill amortization period. These projections were compared to corresponding net book values of fixed assets and unamortized goodwill balances. For investments with projected undiscounted cash flows less than net book values of fixed assets and unamortized goodwill balances, the net goodwill balances were reduced such that the net fixed assets and unamortized goodwill values assigned to these investments were equal to the projected future cash flows discounted at the Company's incremental borrowing rate. The cash flow projections were based on trends of historical performance and management's estimate of future performance of the
32
6 investments, as well as existing and anticipated competitive and economic conditions. See Note K of Notes to Consolidated Financial Statements.
EXTRAORDINARY ITEMS As a result of the 1993 redemptions discussed under "Interest Expense," the Company incurred extraordinary losses totaling $7.4 million, net of income tax benefits of $4.3 million, from the payment of redemption premiums and the write-off of related unamortized financing costs and issuance costs.
CAPITAL INVESTMENTS Investing activities for 1995 included $23.2 million for capital expenditures and an acquisition. The capital expenditures consisted primarily of new computer systems for the direct marketing business to increase capacity to support a growing customer base. The Company also invested in laser printing equipment as well as the expansion of its database and response management facilities and other locations. Other expenditures included investments in pagination technology and order-entry systems at its shopper in Miami/Ft. Lauderdale and classified advertising systems and distribution center expansions in its newspaper business. The investments in 1994 included $21.8 million for capital expenditures and an acquisition. In the direct marketing business, the capital expenditures consisted of new computer systems to increase capacity and new equipment to support its growing customer base. The Company's other expenditures included shopper inserting equipment and imagesetter technology; the final expenditures to complete the purchase of a nine-unit offset printing press and related building for the Company's newspaper in Corpus Christi, Texas; newspaper imagesetter technology and investments in television production equipment.
LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities for 1995 was $36.5 million. Net cash inflows for investing activities were $17.9 million for 1995. Investing activities consist primarily of capital expenditures, acquisitions and divestitures. Included in investing activities was $42.9 million in proceeds from the sale of property, plant and equipment and divested assets. See above discussion of capital expenditures under "Capital Investments." Cash provided from operating activities and the sale of the Boston community newspapers was used to reduce borrowing under the Company's credit facility and to make capital investments. Cash provided by operating activities for 1994 and 1993 was $49.0 million and $26.4 million, respectively. Net cash outflows for investing activities in 1994 and 1993 were $23.6 million and $34.7 million, respectively, and consisted principally of the purchase of equipment and acquisitions. Capital resources are also available for and provided through the Company's unsecured credit facility. On February 2, 1995, the Company entered into a $320 million variable rate revolving loan commitment that decreases by $70.4 million in 1998, $76.8 million in 1999, $83.2 million in 2000 and $89.6 million in 2001. The February 1995 agreement amended the $320 million credit facility consisting of a $220 million revolving loan commitment that was to expire December 31, 1999 and a $100 million term loan. The Company realized savings both in interest and commitment fees due to more favorable terms in the amended credit facility agreement. Management believes that its credit facility, together with cash provided by operating activities, will be sufficient to fund operations, anticipated capital expenditures and debt service requirements for the foreseeable future. As of December 31, 1995, the Company had $106 million of unused borrowing capacity under its credit facility, of which $4.7 million was reserved to serve as backup for the Company's other short-term borrowing facilities.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than fiscal years beginning after December 15, 1995. Companies are permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but will be required to disclose in a note to the financial statements pro forma net income and, if presented, earnings per share as if the company had applied the new method of accounting, as outlined in SFAS No. 123. The Company has not yet determined the effect the new standard will have on net income and earnings per share should it elect to make such a change. Adoption of the new standard will have no effect on the Company's cash flows.
SEASONALITY AND CYCLICALITY The Company's businesses tend to be seasonal, with higher revenues and profits occurring in the second through the fourth quarters due to the increased advertising during these periods. In addition, the Company's television operation experiences higher revenues and profits during those years when political elections are held. See Note N to Consolidated Financial Statements.
PENDING MERGER On February 4, 1996 the Company entered into a definitive agreement with DiMark, Inc. providing for the merger of DiMark with a wholly owned subsidiary of the Company in a stock-for-stock transaction to be accounted for as pooling of interests. DiMark stockholders will receive, in a fixed exchange ratio, .656 of a share of Harte-Hanks common stock for each share of DiMark common stock.
33
7 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
------DECEMBER 31, IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS 1995 1994 ------
ASSETS Current assets Cash ...... $ 6,710 $ 4,391 Accounts receivable (less allowance for doubtful accounts of $2,284 in 1995 and $2,910 in 1994) ...... 69,995 70,929 Inventory ...... 21,285 13,454 Prepaid expenses ...... 4,973 5,904 Current deferred income tax benefit ...... 6,809 6,808 Other current assets ...... 3,423 4,143 ------Total current assets ...... 113,195 105,629 ------Property, plant and equipment Land ...... 8,260 10,352 Buildings and improvements ...... 38,618 42,701 Equipment and furniture ...... 138,119 140,175 ------184,997 193,228 Less accumulated depreciation ...... 98,263 104,283 ------86,734 88,945 Construction and equipment installations in progress ...... 1,174 2,333 ------Net property, plant and equipment ...... 87,908 91,278 ------Intangible and other assets Goodwill (less accumulated amortization of $98,201 in 1995 and $104,557 in 1994) ...... 271,511 290,335 Other assets ...... 5,101 9,656 ------Total intangible and other assets ...... 276,612 299,991 ------Total assets ...... $ 477,715 $ 496,898 ======
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ...... $ 32,029 $ 31,229 Accrued payroll and related expenses ...... 19,057 17,996 Customer deposits and unearned revenue ...... 11,585 12,527 Income taxes payable ...... 762 1,867 Other current liabilities ...... 6,947 7,533 ------Total current liabilities ...... 70,380 71,152 Long term debt ...... 220,040 292,858 Other long term liabilities (including deferred income taxes of $9,914 in 1995 and $8,901 in 1994) ...... 22,201 25,248 ------Total liabilities ...... 312,621 389,258 ------
Stockholders' equity Common stock, $1 par value, authorized 50,000,000 shares. Issued and outstanding 1995: 29,991,709 shares; 1994: 18,342,503 shares ...... 29,992 18,342 Additional paid-in capital ...... 156,192 144,350 Accumulated deficit ...... (21,090) (53,107) Minimum pension liability adjustment ...... - (1,945) ------Total stockholders' equity ...... 165,094 107,640 ------Total liabilities and stockholders' equity ...... $ 477,715 $ 496,898 ======
See Notes to Consolidated Financial Statements.
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8 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
------YEAR ENDED DECEMBER 31, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1995 1994 1993 ------
Revenues ...... $ 532,852 $ 513,630 $ 463,510 Operating expenses Payroll ...... 191,843 193,874 174,557 Production and distribution ...... 189,692 179,699 165,993 Advertising, selling, general and administrative ...... 54,317 54,083 49,355 Depreciation ...... 13,645 12,508 11,506 Goodwill amortization ...... 9,321 9,452 10,176 Goodwill write-down ...... - - 55,463 ------458,818 449,616 467,050 ------Operating income (loss) ...... 74,034 64,014 (3,540) ------Other expenses (income) Interest expense ...... 16,675 17,364 30,872 Interest income ...... (246) (154) (160) Gains on divestitures ...... (13,747) - - Other, net ...... 1,044 1,142 865 ------3,726 18,352 31,577 ------Income (loss) before income taxes ...... 70,308 45,662 (35,117) Income tax expense ...... 36,323 21,840 10,355 ------Income (loss) before extraordinary item ...... 33,985 23,822 (45,472) Extraordinary item - Loss due to early extinguishment of debt, net of income tax benefit of $4,319 ...... - - (7,393) ------Net income (loss) ...... $ 33,985 $ 23,822 $ (52,865) ======
Earnings (loss) per common share - primary Income (loss) before extraordinary item ...... $ 1.12 $ .83 $ (2.33) Extraordinary item ...... - - (.37) ------Net income (loss) ...... $ 1.12 $ .83 $ (2.70) ======Weighted average common and common equivalent shares outstanding ...... 30,280 28,569 19,557 ======
Earnings (loss) per common share - fully diluted Income (loss) before extraordinary item ...... $ 1.10 $ .80 $ (2.33) Extraordinary item ...... - - (.37) ------Net income (loss) ...... $ 1.10 $ .80 $ (2.70) ======Weighted average common and common equivalent shares outstanding ...... 31,197 30,732 19,557 ======
See Notes to Consolidated Financial Statements.
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9 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
------YEAR ENDED DECEMBER 31, IN THOUSANDS 1995 1994 1993 ------
Cash Flows from Operating Activities Net income (loss) ...... $ 33,985 $ 23,822 $ (52,865) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation ...... 13,645 12,508 11,506 Goodwill amortization ...... 9,321 9,452 10,176 Amortization of option related compensation ...... 1,786 1,605 1,228 Film amortization ...... 2,188 2,746 3,293 Deferred income taxes ...... (285) (2,219) (585) Other, net ...... 355 728 (223) Gains on divestitures ...... (13,747) - - Goodwill write-down ...... - - 55,463 Extraordinary loss due to early extinguishment of debt ...... - - 11,712 Changes in operating assets and liabilities, net of effects from acquisitions and divestitures: Increase in accounts receivable, net ...... (2,570) (7,898) (5,043) Increase in inventory ...... (9,095) (5,543) (46) Increase in prepaid expenses and other current assets ...... (917) (648) (346) Increase in accounts payable ...... 262 6,010 1,784 Increase (decrease) in other accrued expenses and other liabilities ...... (562) 8,129 (8,500) Other, net ...... 2,107 262 (1,125) ------Net cash provided by operating activities ...... 36,473 48,954 26,429 ------
Cash Flows from Investing Activities Acquisitions ...... (5,760) (7,800) (10,896) Purchases of property, plant and equipment ...... (17,424) (13,985) (21,689) Proceeds from the sale of property, plant and equipment and divested assets ...... 42,946 357 1,101 Payments on film contracts ...... (1,817) (2,122) (3,182) ------Net cash provided by (used in) investing activities ...... 17,945 (23,550) (34,666) ------
Cash Flows from Financing Activities Long term debt borrowings ...... 895,464 657,695 580,615 Payments on debt, including current maturities and financing costs ...... (948,371) (684,675) (659,663) Issuance of common stock ...... 2,776 1,575 95,305 Dividends paid ...... (1,968) - - Payment of premium on early extinguishment of debt ...... - - (6,892) Purchase of treasury stock ...... - - (15) ------Net cash provided by (used in) financing activities ...... (52,099) (25,405) 9,350 ------
Net increase (decrease) in cash ...... 2,319 (1) 1,113 Cash at beginning of period ...... 4,391 4,392 3,279 ------Cash at end of period ...... $ 6,710 $ 4,391 $ 4,392 ======See Notes to Consolidated Financial Statements.
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10 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
------ADDITIONAL MINIMUM TOTAL COMMON PAID-IN ACCUMULATED PENSION LIABILITY STOCKHOLDERS' IN THOUSANDS STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY ------
Balance at January 1, 1993 ...... $ 11,881 $ 53,615 $(24,057) $ - $ 41,439 Common stock issuance ...... 6,250 89,055 - - 95,305 Purchase of treasury stock ...... (2) (6) (7) - (15) Net loss ...... - - (52,865) - (52,865) ------
Balance at December 31, 1993 ...... 18,129 142,664 (76,929) - 83,864 Common stock issued -- employee benefit plans ...... 33 502 - - 535 Exercise of stock options ...... 180 1,184 - - 1,364 Adjustment for minimum pension liability, net of income taxes of $1.3 million . . - - - (1,945) (1,945) Net income ...... - - 23,822 - 23,822 ------
Balance at December 31, 1994 ...... 18,342 144,350 (53,107) (1,945) 107,640 Common stock issued -- employee benefit plans ...... 94 1,836 - - 1,930 Exercise of stock options ...... 133 1,475 - - 1,608 Conversion of 6 1/4% convertible notes . . 1,429 18,525 - - 19,954 Dividends paid ($.067 per share) . . . . . - - (1,968) - (1,968) Net income ...... - - 33,985 - 33,985 Reduction of minimum pension liability . . - - - 1,945 1,945 Three-for-two stock split ...... 9,994 (9,994) ------
Balance at December 31, 1995 ...... $ 29,992 $ 156,192 $(21,090) $ - $ 165,094 ======
See Notes to Consolidated Financial Statements.
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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"). Harte-Hanks Communications, Inc. is the successor of HHC Holding Inc., the former parent company of Harte-Hanks Communications, Inc., which was merged into Harte-Hanks Communications, Inc. on October 7, 1993. All stock of HHC Holding Inc. was converted, on a share-for-share basis, into stock of Harte-Hanks Communications, Inc.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified for comparative purposes.
TELEVISION REVENUES Television revenues are presented net of advertising agency commissions.
INVENTORY Inventory, consisting primarily of newsprint and operating supplies, is stated at the lower of cost (first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated on the basis of cost. Depreciation of buildings and equipment is computed generally on the straight-line method at rates calculated to amortize the cost of the assets over their useful lives. The general ranges of estimated useful lives are:
Buildings and improvements . . . . 10 to 40 years Equipment and furniture . . . . . 4 to 20 years
GOODWILL Goodwill is stated on the basis of cost, adjusted as discussed below, and is amortized on a straight-line basis over 40- year periods.
For each of its investments, the Company assesses the recoverability of its goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows over the remaining amortization period. If projected undiscounted future cash flows indicate that unamortized goodwill and the net book value of long-lived assets will not be recovered, net goodwill is adjusted to an amount consistent with projected discounted future cash flows. Cash flow projections are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions.
FILM CONTRACTS Film contract rights represent agreements with film syndicators for television program material. The capitalized costs of film rights are recorded when the licensed period begins and the film rights are available for use. The cost is amortized over the expected number of telecasts. The portions of the cost to be amortized within one year and after one year are reflected in the consolidated balance sheets as current and noncurrent other assets, respectively. The payments under these contracts due within one year and after one year are classified as current and noncurrent liabilities.
INCOME TAXES Income taxes are calculated using the asset and liability method required by Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred income taxes are recognized for the tax consequences resulting from "temporary differences" by applying enacted statutory tax rates applicable to future years. These "temporary differences" are associated with differences between the financial and the tax basis of existing assets and liabilities. Under SFAS No. 109, a statutory change in tax rates will be recognized immediately in deferred taxes and income.
EARNINGS (LOSS) PER SHARE Primary earnings (loss) per common share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents from the assumed exercise of stock options using the treasury stock method. Fully diluted earnings (loss) per common share is based upon the weighted average number of common shares outstanding, dilutive common stock equivalents from the assumed exercise of stock options and assumed conversion of the 61C4% Convertible Notes due 2002 until May 1995, at which time the Company issued shares of its common stock upon conversion of the notes. For 1993, fully diluted and primary earnings (loss) per common share are the same because the effect of the convertible notes was antidilutive.
STOCK SPLIT In December 1995 the Company effected a three-for-two stock split in the form of a dividend. All share, per share and average share information in the Consolidated Financial Statements and the Notes thereto have been restated to reflect the stock split.
38
12 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE B - DIVESTITURES
In March and July 1995, respectively, the Company sold its suburban Boston community newspapers and a small local hand distribution advertising business. These sales resulted in gains on divestitures of $3.1 million, or 10 cents per share, net of $10.6 million of income taxes.
NOTE C - LONG TERM DEBT
Long term debt consists of the following:
------DECEMBER 31, IN THOUSANDS 1995 1994 ------
Revolving loan commitment, various interest rates (effective rate of 6.2% at December 31, 1995), due in mandatory reductions beginning June 30, 1998 through December 31, 2001 ...... $214,000 $ 34,600 Term loan, various interest rates ...... - 100,000 Bank lines, various interest rates (effective rates of 6.3% at December 31, 1995) ...... 4,700 95,000 Commercial paper ...... - 41,538 61C4% Convertible Notes ...... - 20,000 Miscellaneous notes payable, interest rates ranging from 7.3% to 8%, due on various dates through 1998 ...... 1,720 2,189 ------220,420 293,327 Less current maturities ...... 380 469 ------$220,040 $ 292,858 ======
CREDIT FACILITY On February 2, 1995, the Company amended its $320 million credit facility. The credit facility consisted of a $220 million revolving loan commitment that would have expired December 31, 1999. It also consisted of a $100 million term loan that required repayments of $10 million in 1995, $20 million in both 1996 and 1997, and $25 million in both 1998 and 1999. The amended credit facility is a $320 million revolving commitment that decreases by $70.4 million in 1998, $76.8 million in 1999, $83.2 million in 2000 and $89.6 million in 2001. The Company pays a commitment fee of .1875% on the unused portion of the commitment. As of December 31, 1995, the Company had $106 million of unused borrowing capacity under its credit facility, of which $4.7 million was reserved to serve as backup for the Company's outstanding short term borrowings.
COMMERCIAL PAPER The Company maintains unused and available credit under its credit facility in an amount equal to its outstanding commercial paper borrowings.
BANK LINES The Company has three separate short term borrowing arrangements. Under these arrangements, the Company can borrow up to a maximum of $170 million. These short term borrowings are classified as long term debt since it is the Company's intent to maintain unused and available credit under its credit facility in an amount equal to its outstanding short term borrowings.
6 1/4% CONVERTIBLE NOTES In May 1995, the Company issued 2,142,857 shares of common stock upon conversion of the $20 million principal amount of the Company's 61C4% Convertible Notes. Accordingly, the Company transferred $20 million, less $0.1 million of unamortized issue costs, to stockholders' equity.
OTHER DEBT INFORMATION As of December 31, 1995, the minimum annual maturities of long term debt (excluding the borrowings under the Company's credit facility in effect December 31, 1995) for each of the following years ending December 31 are as follows:
------IN THOUSANDS ------
1996 ...... $ 380 1997 ...... 100 1998 ...... 1,240
Cash payments for interest were $16.6 million, $17.6 million and $40.8 million for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company's credit facility contains certain restrictive covenants, including limitations on additional indebtedness and payment of dividends, and requires the Company to maintain certain financial ratios.
39
13 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE D - INCOME TAXES
The components of income tax expense are as follows:
------YEAR ENDED DECEMBER 31, IN THOUSANDS 1995 1994 1993 ------
Current Federal ...... $ 31,677 $ 20,719 $ 9,438 State and local ...... 4,931 3,413 1,210 ------Total current ...... $ 36,608 $ 24,132 $ 10,648 ======Deferred Federal ...... $ (1,901) $ (2,377) $ 1,395 State and local ...... 1,616 85 (1,688) ------Total deferred ...... $ (285) $ (2,292) $ (293) ======
Included in income tax expense for 1995 is $10.6 million related to the gains on divestitures. Included in 1993 income tax expense is an adjustment for changes in federal tax laws of $0.1 million. Of the $1.7 million recognized as a deferred state income tax benefit in 1993, $1.0 million represents an adjustment to the beginning of the year valuation allowance due to the realization of benefits from state operating loss carryforwards. The Company also recognized $4.1 million of current income tax benefits and $0.2 million of deferred income tax benefits related to the extraordinary loss resulting from the redemption of all of its 117C8% Subordinated Debentures in 1993.
The differences between total income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows:
------YEAR ENDED DECEMBER 31, IN THOUSANDS 1995 1994 1993 ------
Computed expected income tax expense ...... $24,608 35% $15,982 35% $(12,291) 35% Effect of goodwill amortization ...... 3,165 5% 3,262 7% 3,528 (10)% Net effect of state income taxes ...... 4,178 6% 2,303 5% 656 (2)% Effect of goodwill related to divestiture . . . . 4,307 6% - - - - Change in the beginning of the year balance of the valuation allowance ...... 119 - (30) - (967) 3% Effect of goodwill write-down ...... - - - - 19,412 (55)% Other, net ...... (54) - 323 1% 17 ------Income tax expense for the period ...... $36,323 52% $21,840 48% $ 10,355 (29)% ======
Excluding the effects of the gains on divestitures, the effective income tax rate for 1995 was 45.4%.
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 1995 1994 ------
Deferred tax assets: State net operating losses ...... $ 85 $ 2,736 Accrued benefit costs, primarily pension and vacation pay ...... 4,612 6,095 Accrued casualty and health insurance expense ...... 2,830 2,302 Accounts receivable, net ...... 793 1,018 State income tax ...... 849 656 Other, net ...... 519 315 Total gross deferred tax assets ...... 9,688 13,122 ------Less valuation allowance ...... (60) (1,592) ------Net deferred tax assets ...... 9,628 11,530 ------
Deferred tax liabilities: Property, plant and equipment ...... (12,484) (13,100) Other, net ...... (249) (523) ------Total gross deferred tax liabilities ...... (12,733) (13,623) ------
Net deferred tax liability ...... $ (3,105) $ (2,093) ======
The valuation allowance for deferred tax assets as of January 1, 1994 was $2.5 million. The valuation allowance at December 31, 1995 and 1994 related to state net operating losses, which are not expected to be realized.
The net deferred tax liability is recorded both as a current deferred income tax benefit and as other long term liabilities based upon the classification of the related temporary difference.
Cash payments for income taxes were $37.3 million, $22.2 million and $8.4 million in 1995, 1994 and 1993, respectively.
40
14 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE E - EMPLOYEE BENEFIT PLANS
Under the Company's defined benefit pension plans, 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 plans if it were not for limitations imposed by income tax regulations.
Net pension cost for all plans included the following components:
------YEAR ENDED DECEMBER 31, IN THOUSANDS 1995 1994 1993 ------
Service cost - benefits earned during the period ...... $ 3,282 $ 3,572 $ 2,861
Interest cost on projected benefit obligation ...... 4,801 4,608 4,283
Actual return on plan assets ...... (10,786) 1,493 (3,700)
Net deferrals and amortization ...... 6,171 (5,872) (685) ------
Net periodic pension cost ...... $ 3,468 $ 3,801 $ 2,759 ======
In determining the 1995, 1994 and 1993 actuarial present value of benefit obligations, discount rates of 71C4%, 8% and 71C2% were used, respectively. The assumed annual rates 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:
------DECEMBER 31, IN THOUSANDS 1995 1994 ------QUALIFIED NON-QUALIFIED QUALIFIED NON-QUALIFIED PLAN PLAN PLAN PLAN ------
Actuarial present value of benefit obligations: Vested ...... $ 49,673 $ - $ 49,722 $ - Non-vested ...... 4,945 871 4,376 1,204 ------Total accumulated benefit obligations ...... 54,618 871 54,098 1,204
Additional obligation related to projected salary increases ...... 16,260 977 7,330 345 ------
Projected benefit obligations for service rendered to date ...... 70,878 1,848 61,428 1,549
Fair value of plan assets, primarily listed stocks and government securities ...... (56,763) - (45,331) ------
Projected benefit obligation in excess of plan assets . . 14,115 1,848 16,097 1,549
Unrecognized net loss from past experience different from that assumed ...... (10,211) (238) (11,702) 131
Unrecognized prior service costs ...... (52) (1,000) - (1,358) Unrecognized net assets at January 1, 1987 being recognized over average expected remaining service period of employees ...... 950 - 1,075 -
Adjustment to recognize minimum liability ...... - 261 3,299 880 ------
Recorded pension liability ...... $ 4,802 $ 871 $ 8,769 $ 1,202 ======
The Company also sponsors a 401(k) plan to provide employees with additional income upon retirement. The Company matches a portion of employees' voluntary before-tax contributions. Employees are fully vested in their own contributions and vest in the Company's matching contributions upon three years of service.
In 1994, the Company adopted the 1994 Employee Stock Purchase Plan, which provides for a total of 450,000 shares to be sold to participating employees at 85% of the fair market value at specified quarterly investment dates. Shares available for sale totaled 259,803 at December 31, 1995.
41
15 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE F - STOCKHOLDERS' EQUITY
On December 15, 1995, the Company effected a three-for-two stock split, in the form of a stock dividend, payable to shareholders of record on December 1, 1995. A total of 9,994,490 shares of common stock were issued in connection with the split. The shares issued were reclassified from the Company's additional paid-in-capital account to the Company's common stock account. All share and per share amounts have been restated to retroactively reflect the stock split.
On May 26, 1995, the Company issued 2,142,857 shares of common stock upon conversion of the $20 million principal amount of the Company's 6-1/4% Convertible Notes. Accordingly, the Company transferred $20 million, less $0.1 million of unamortized issue costs, to stockholders' equity. On November 3, 1993, the Company issued 9,375,000 shares of its common stock in an initial public offering for net cash proceeds of approximately $95.3 million. These proceeds were used to redeem the remainder of its outstanding 11-7/8% Subordinated Debentures in the aggregate principal amount of $100 million, at the redemption price of 103.446% of principal plus accrued interest.
On October 4, 1993, the Company amended its Certificate of Incorporation to increase its total authorized capitalization to 50,000,000 shares of common stock and 1,000,000 shares of preferred stock.
NOTE G - STOCK OPTION PLANS 1984 PLAN In 1984, the Company adopted a Stock Option Plan ("1984 Plan") pursuant to which it issued to officers and key employees options to purchase shares of common stock at prices equal to the market price on the grant date. Market price was determined by the Board of Directors for purposes of granting stock options and making repurchase offers. Options granted under the 1984 Plan become exercisable five years after date of grant. At December 31, 1995, 1994 and 1993, options to purchase 657,900 shares, 810,300 shares and 1,083,450 shares, respectively, were outstanding under the 1984 Plan, with exercise prices ranging from $3.33 to $6.67 per share. No additional options will be granted under the 1984 Plan.
1991 PLAN The Company adopted the 1991 Stock Option Plan ("1991 Plan") pursuant to which it may issue to officers and key employees options to purchase up to 3,000,000 shares of common stock. Options have been granted at prices equal to the market price on the grant date ("market price options") and at $0.67 per share ("performance options"). As of December 31, 1995, 1994 and 1993, market price options to purchase 1,678,275 shares, 1,394,400 shares and 1,239,000 shares, respectively, were outstanding with exercise prices ranging from $6.67 to $17.08 per share. Market price options become exercisable after the fifth anniversary of their date of grant.
At December 31, 1995, performance options to purchase 557,775 shares, 544,050 shares and 481,500 shares, respectively, were outstanding with an exercise price of $0.67 per share. The performance options become exercisable after the third anniversary of their date of grant, and the extent to which they become exercisable at that time depends upon the extent to which the Company achieves certain goals which are established at the time the options are granted. That portion of the performance options which does not become exercisable on the third anniversary of the date of grant becomes exercisable after the ninth anniversary of the date of grant. Compensation expense of $1.8 million, $1.6 million and $1.2 million was recognized for the performance options for the years ended December 31, 1995, 1994 and 1993, respectively.
The following summarizes stock option plans activity during 1995, 1994 and 1993:
------NUMBER RANGE OF IN THOUSANDS OF SHARES OPTION PRICE ------
Options outstanding at January 1, 1993 . . . . 1,907,475 Granted ...... 933,225 $0.67 - $ 6.67 Cancelled ...... (36,750) $0.67 - $ 6.67 ------Options outstanding at December 31, 1993 . . . 2,803,950 Granted ...... 282,300 $0.67 - $13.42 Exercised ...... (270,150) $0.67 - $ 5.83 Cancelled ...... (67,350) $0.67 - $12.83 ------Options outstanding at December 31, 1994 . . . 2,748,750 Granted ...... 450,225 $0.67 - $17.08 Exercised ...... (194,775) $0.67 - $ 6.67 Cancelled ...... (110,250) $0.67 - $12.83 ------Options outstanding at December 31, 1995 . . . 2,893,950 ======Exercisable at December 31, 1995 ...... 715,650 ======NOTE H - 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 accounts receivable, revolving credit borrowings, commercial paper, trade and film payables, and miscellaneous notes receivable and payable.
42
16 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE I - COMMITMENTS AND CONTINGENCIES At December 31, 1995, the Company had outstanding letters of credit in the amount of $4.5 million. These letters of credit exist to support the Company's insurance programs relating to worker's compensation, automobile and general liability.
NOTE J - LEASES The Company leases certain real estate and equipment under various operating leases. Most of the leases contain renewal options for varying periods of time. The total rent expense under all operating leases was $10.8 million, $10.4 million and $9.7 million for the years ended December 31, 1995, 1994 and 1993, respectively.
The future minimum rental commitments for all non-cancellable operating leases with terms in excess of one year as of December 31, 1995 are as follows:
------In thousands ------
1996 ...... $ 7,828 1997 ...... 5,473 1998 ...... 3,726 1999 ...... 3,098 2000 ...... 2,345 After 2000 ...... 8,523 ------Total future minimum rental payments . . . $30,993 ======
NOTE K - GOODWILL WRITE-DOWN In connection with its review of the carrying amount, including assigned goodwill, of its investments, the Company determined, based on management's estimate of future cash flows from its properties, that goodwill associated with certain of its investments should be written down. This resulted in a charge of $55.5 million in the second quarter of 1993. The write-down was solely related to daily, semi-weekly and weekly newspapers in suburban markets in Boston, Massachusetts ($43.9 million), Dallas, Texas ($8.8 million) and a shopper publication in Tucson, Arizona ($2.8 million). See Note A of Notes to Consolidated Financial Statements.
NOTE L - EXTRAORDINARY LOSS During 1993, the Company redeemed all of its $200 million principal amount Subordinated Debentures at the redemption percentage of 103.446% plus accrued interest, which resulted in an extraordinary loss of $7.4 million, net of $4.3 million of income tax benefits, from the payment of premiums and the write-off of related unamortized financing costs and original issue discount.
NOTE M - PENDING MERGER On February 4, 1996, the Company entered into a definitive agreement with DiMark, Inc. providing for the merger of DiMark with a wholly owned subsidiary of the Company in a stock-for-stock transaction to be accounted for as a pooling of interests. DiMark stockholders will receive, in a fixed exchange ratio, .656 of a share of Harte-Hanks common stock for each share of DiMark common stock. DiMark had net sales and net income of $73.4 million and $5.1 million, respectively, for the year ended February 28, 1995. For the nine months ended November 30, 1995, DiMark had net sales of $56.6 million and net income of $3.6 million.
NOTE - N SELECTED QUARTERLY DATA (UNAUDITED)
------QUARTER ENDED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ------
1995 Revenues ...... $138,688 $130,178 $133,808 $130,178 Operating income ...... 21,849 18,766 20,821 12,598 Net income ...... 10,224 8,923(1) 8,728 6,110(2) Earnings per common share - primary ...... 33 .29(1) .29 .21(2) Earnings per common share - fully diluted . . . . .33 .29(1) .28 .20(2)
1994 Revenues ...... $143,216 $128,433 $126,866 $115,115 Operating income ...... 20,972 16,843 17,760 8,439 Net income ...... 8,367 6,249 6,939 2,267 Earnings per common share - primary ...... 29 .22 .24 .08 Earnings per common share - fully diluted . . . . .28 .21 .23 .08
(1) Includes a net gain on divestiture of $0.8 million, or 3 cents per share. (2) Includes a net gain on divestiture of $2.3 million, or 7 cents per share.
43
17 HARTE-HANKS COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE O - BUSINESS SEGMENTS Harte-Hanks Communications, Inc. is a diversified communications company with operations throughout the United States in four principal businesses - direct marketing, shoppers, newspapers and television. Harte-Hanks Direct Marketing is a nationwide business that serves customers primarily in the retail, financial services, insurance and high technology industries. The Company's other businesses operate in local markets and serve the retail, automotive, real estate and other service industries.
------DECEMBER 31, IN THOUSANDS 1995 1994 1993 ------
Operating revenues Direct marketing ...... $ 197,598 $ 167,779 $ 129,626 Shoppers ...... 185,045 176,461 174,521 Newspapers1 ...... 125,077 140,761 131,545 Television ...... 25,132 28,629 27,818 ------Total operating revenues ...... $ 532,852 $ 513,630 $ 463,510 ======Operating income (loss)2 Direct marketing ...... $ 27,872 $ 19,361 $ 12,820 Shoppers2 ...... 20,020 17,743 12,685 Newspapers1,2 ...... 27,281 26,363 (30,974) Television ...... 7,379 8,946 8,164 General corporate expense, net ...... (8,518) (8,399) (6,235) ------Total operating income (loss) ...... $ 74,034 $ 64,014 $ (3,540) ======Identifiable assets Direct marketing ...... $ 98,291 $ 84,965 $ 66,164 Shoppers ...... 108,743 104,528 107,617 Newspapers1 ...... 192,607 223,632 224,280 Television ...... 66,754 70,333 71,729 General corporate ...... 11,320 13,440 9,148 ------Total identifiable assets ...... $ 477,715 $ 496,898 $ 478,938 ======Depreciation Direct marketing ...... $ 4,127 $ 2,948 $ 2,160 Shoppers ...... 4,410 3,905 3,659 Newspapers1 ...... 4,010 4,510 4,499 Television ...... 1,066 1,041 1,041 General corporate ...... 32 104 147 ------Total depreciation ...... $ 13,645 $ 12,508 $ 11,506 ======Goodwill amortization Direct marketing ...... $ 930 $ 648 $ 537 Shoppers ...... 1,867 1,867 1,920 Newspapers1 ...... 4,776 5,189 5,990 Television ...... 1,748 1,748 1,729 ------Total goodwill amortization ...... $ 9,321 $ 9,452 $ 10,176 ======Capital expenditures Direct marketing ...... $ 9,909 $ 5,334 $ 5,498 Shoppers ...... 2,724 3,316 5,857 Newspapers1 ...... 3,609 4,409 9,744 Television...... 1,060 883 573 General corporate ...... 122 43 17 ------Total capital expenditures ...... $ 17,424 $ 13,985 $ 21,689 ======
(1) In March 1995, the Company sold its suburban Boston newspapers. See Note B of Notes to Consolidated Financial Statements. (2) Year ended December 31, 1993 includes goodwill write-down of $55.5 million. As a result of this write-down, 1993 newspaper and shopper operating income was reduced by $52.7 million and $2.8 million, respectively.
44
18 FIVE-YEAR FINANCIAL SUMMARY
------YEAR ENDED DECEMBER 31, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1995 1994 1993(1) 1992 1991 ------
Income Statement Data Revenues ...... $ 532,852 $ 513,630 $463,510 $423,296 $416,227 Operating expenses Payroll, production and distribution . . . 191,843 373,573 340,550 308,094 308,942 Selling, general and administrative . . . . 244,009 54,083 49,355 44,982 45,203 Depreciation ...... 13,645 12,508 11,506 12,184 12,969 Goodwill amortization ...... 9,321 9,452 10,176 10,788 10,785 Goodwill write-down ...... - - 55,463 ------Total operating expenses ...... 458,818 449,616 467,050 376,048 377,899 ------Operating income (loss) ...... 74,034 64,014 (3,540) 47,248 38,328 Interest expense, net ...... 16,429 17,210 30,712 36,493 40,879 Income (loss) from continuing operations(2) . 33,985 (3) 23,822 (45,472) 2,336 (7,052) Net income (loss) ...... 33,985 (3) 23,822 (52,865)(4) 2,336 (3,938)(5) Earnings (loss) from continuing operations per common share - fully diluted(2),(6) . . 1.10 (3) .80 (2.33) .13 (.38) Earnings (loss) per common share - fully diluted(6) ...... 1.10 (3) .80 (2.70)(7) .13 (.21) Cash dividends per common share(6) ...... 07 - - - - Weighted average common and common equivalent shares outstanding - fully diluted . . . . 31,197 30,732 19,557 18,321 18,515 Segment Data Revenues Direct Marketing ...... $ 197,598 $ 167,779 $129,626 $107,351 $100,930 Shoppers ...... 185,045 176,461 174,521 164,021 164,928 Newspapers(8) ...... 125,077 140,761 131,545 126,222 127,061 Television ...... 25,132 28,629 27,818 25,702 23,308 ------Total revenues ...... $ 532,852 $513,630 $463,510 $423,296 $416,227 ======Operating income (loss) Direct Marketing ...... $ 27,872 $ 19,361 $ 12,820 $ 10,912 $ 7,531 Shoppers ...... 20,020 17,743 12,685 15,517 16,234 Newspapers(8) ...... 27,281 26,363 (30,974) 20,973 16,664 Television ...... 7,379 8,946 8,164 6,140 4,419 General corporate ...... (8,518) (8,399) (6,235) (6,294) (6,520) ------Total operating income (loss) ...... $ 74,034 $ 64,014 $ (3,540) $ 47,248 $ 38,328 ======Other Data Operating Cash Flow(9) ...... $ 97,000 $ 85,974 $ 73,605 $ 70,220 $ 62,082 Capital expenditures ...... 17,424 13,985 21,689 8,140 4,453 Balance Sheet Data (at end of period) Property, plant and equipment, net ...... $ 87,908 $ 91,278 $ 90,809 $ 78,210 $ 83,114 Goodwill, net ...... 271,511 290,335 292,944 347,105 356,511 Total assets ...... 477,715 496,898 478,938 515,479 526,908 Total long term debt ...... 220,040 292,858 320,087 218,828 (10) 399,243 Total stockholders' equity ...... 165,094 107,640 83,864 (11) 41,439 41,356 (1) Includes goodwill write-down of $55.5 million. Newspaper and shopper operating income was affected by $52.7 million and $2.8 million, respectively. See Notes A and K of Notes to Consolidated Financial Statements. (2) Represents income (loss) and income (loss) per common share before extraordinary item and cumulative effect of change in accounting method. (3) Includes gains on divestitures of $3.1 million, or 10 cents per share, net of $10.6 million income tax expense. (4) Includes extraordinary loss from the early extinguishment of debt of $7.4 million, net of $4.3 million income tax benefit. (5) Includes the cumulative favorable effect of change in method of accounting for income taxes of $3.1 million. (6) Restated to reflect the three-for-two stock split effected as a stock dividend effective December 15, 1995. (7) Excluding the goodwill write-down and extraordinary items, earnings per share on a fully diluted basis were 47 cents per share. (8) In March 1995, the Company sold its suburban Boston newspapers. See Note B of Notes to Consolidated Financial Statements. (9) 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. (10) Long term debt in 1992 excludes $174.7 million of borrowings under the Company's revolving credit commitment and commercial paper borrowings classified as current maturities. (11) Includes the net proceeds from issuance of 9,375,000 shares of the Company's common stock at $11.00 per share in an initial public offering in November 1993.
45
19 INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Harte-Hanks Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas January 24, 1996 except as to Note M, which is as of February 4, 1996 46
20 DIRECTORS
Dr. Peter T. Flawn President Emeritus, The University of Texas at Austin; Chairman, Audit Committee
Larry Franklin President and Chief Executive Officer
Christopher M. Harte Private Investor
Edward H. Harte Retired Publisher, Corpus Christi Caller-Times
Houston H. Harte Chairman of the Board
James L. Johnson Chairman Emeritus, GTE Corporation; Chairman, Compensation Committee
Andrew B. Shelton Chairman of the Board, Abilene Reporter-News
OFFICERS
Larry Franklin President and Chief Executive Officer
Richard M. Hochhauser Executive Vice President, Direct Marketing
Harry J. Buckel Senior Vice President, Shoppers
Michael J. Conly Senior Vice President, Television
Donald R. Crews Senior Vice President, Legal and Secretary
Richard L. Ritchie Senior Vice President, Finance and Chief Financial Officer
Stephen W. Sullivan Senior Vice President, Newspapers
Kevin J. Barry Vice President, Newspapers
Craig Combest Vice President, Direct Marketing
Charles Dall'Acqua Vice President, Direct Marketing
Peter E. Gorman Vice President, Shoppers
Bill R. Gulledge Vice President, Newspapers
Frank Puckett, Jr. Vice President, Newspapers
CORPORATE INFORMATION Common Stock The Comany's common stock is listed on the New York Stock Exchange (symbol: HHS). The quarterly stock price ranges for 1995 and 1994 were as follows:
------1995 1994 HIGH LOW HIGH LOW ------
First Quarter 13 3/8 12 1/2 14 1/3 11 3/8 Second Quarter 16 7/8 13 1/4 13 1/4 12 1/4 Third Quarter 19 7/8 16 2/3 13 1/4 12 Fourth Quarter 22 1/4 18 1/4 13 1/4 11 1/2
Quarterly dividends were paid at the rate of 1.67 cents per share in 1995. The stock prices and dividends reflect retroactively the three-for-two stock split in the form of a 50% stock dividend on December 15, 1995.
There are approximately 1,500 holders of record.
Transfer Agent and Registrar Bank of Boston c/o Boston EquiServe, L.P. Mail Stop 45-02-64 P.O. Box 644 Boston, Massachusetts 02102-0644
Annual Meeting of Stockholders The annual meeting of stockholders will be held at 1:00 p.m. April 30, 1996, at the Harte-Hanks corporate office, 200 Concord Plaza Drive, Suite 800, San Antonio, Texas.
Form 10-K Annual Report A copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K may be obtained, without charge, upon written request to:
Donald R. Crews, Secretary Harte-Hanks Communications, Inc. P.O. Box 269 San Antonio, Texas 78291-0269
Design: Harte-Hanks Direct Marketing Production: Harte-Hanks Multimedia Graphics Illustration: Gary Nichols Photography: Mark Langford Printing: Avon Behren Printing Printed on Recycled Paper
47 1 SUBSIDIARIES EXHIBIT 21
JURISDICTION OF % OF VOTING NAME OF CORPORATION INCORPORATION SECURITIES OWNED ------
Advertising Distributors of Maryland, Inc. Maryland 100 Direct Market Concepts, Inc. Florida 100 The Flyer Publishing Corporation Florida 100 Harte-Hanks Agency, Inc. Delaware 100 HTS, Inc. Connecticut 100 Harte-Hanks Community Newspapers, Inc. Texas 100 Harte-Hanks Direct Mail/California Inc. California 100 Harte-Hanks Direct Marketing/Dallas, Inc. Delaware 100 Harte-Hanks do Brazil Consultoria e Servicos Ltda.(1) Brazil 100 Harte-Hanks Limited(1) United Kingdom 100 Harte-Hanks Pty Limited (1) Australia 100 Harte-Hanks Shoppers, Inc. California 100 Harte-Hanks Television, Inc. Delaware 100 Independent Publishing Company South Carolina 100 Jordan Dennis Company, Inc. Massachusetts 100 Mid-America CDM, Inc. Ohio 100 NSO, Inc. Ohio 100 Northern Comprint Co. California 100 Pennysaver Publications, Inc. Texas 100 Potpourri Shopper, Inc. California 100 RMH Research, Inc. New Jersey 100 Select Marketing, Inc. Texas 100 Southern Comprint Co. California 100 Urban Data Processing, Inc. Massachusetts 100
(1) Owned by Urban Data Processing, Inc.
48 1 EXHIBIT 23
Independent Auditors' Consent
The Board of Directors Harte-Hanks Communications, Inc.:
We consent to incorporation by reference in the registration statements (No. 33-51723 and No. 33-54303) on Form S-8 of Harte-Hanks Communications, Inc. of our report dated January 24, 1996, except as to Note M of the consolidated financial statements, which is as of February 4, 1996, relating to the consolidated balance sheets of Harte-Hanks Communications, Inc. and subsidiaries as of December 31, 1995 and 1994, 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, 1995, which report appears in the 1995 annual report to shareholders which is incorporated by reference in the December 31, 1995 annual report on Form 10-K of Harte-Hanks Communications, Inc. and our report dated January 24, 1996, relating to the related financial statement schedule as of and for each of the years in the three-year period ended December 31, 1995, which report appears in the December 31, 1995 annual report on Form 10-K of the Company.
KPMG Peat Marwick
San Antonio, Texas March 21, 1996
49