<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- - ----- Exchange Act of 1934
For the quarterly period ended September 30, 1998
------------------
Transition report pursuant to Section 13 or 15(d) of the Securities
- - ----- Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 1-7120
------
HARTE-HANKS, INC. (formerly HARTE-HANKS COMMUNICATIONS, INC.)
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 74-1677284
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Concord Plaza Drive, San Antonio, Texas 78216
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code -- 210/829-9000
------------
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 the number of shares outstanding of each of the issuer's classes of
common stock: $1 par value, 70,987,850 shares as of October 31, 1998.
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HARTE-HANKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
September 30, 1998
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1. Interim Condensed Consolidated Financial
Statements (Unaudited)
Condensed Consolidated Balance Sheets - 3
September 30, 1998 and December 31, 1997
Consolidated Statements of Operations - 4
Three months ended September 30, 1998 and 1997
Consolidated Statements of Operations - 5
Nine months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows - 6
Nine months ended September 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity - 7
Nine months ended September 30, 1998 and 1997
Notes to Interim Condensed Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
(a) Exhibits
(b) Reports on Form 8-K
Signature 19
</TABLE>
<PAGE> 3
3
Harte-Hanks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (in thousands, except per
share and share amounts)
- - --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents ..................... $ 59,285 $ 83,675
Short-term investments ........................ 128,865 388,145
Accounts receivable, net ...................... 114,207 109,340
Inventory ..................................... 5,436 7,703
Prepaid expenses .............................. 8,963 8,473
Current deferred income tax benefit ........... 12,050 12,518
Other current assets .......................... 4,167 3,285
--------- ---------
Total current assets ........................ 332,973 613,139
Property, plant and equipment, net ............... 92,690 89,351
Goodwill, net .................................... 254,851 250,363
Other assets ..................................... 2,266 2,070
--------- ---------
Total assets ................................ $ 682,780 $ 954,923
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable .............................. $ 52,914 $ 49,918
Accrued payroll and related expenses .......... 21,565 23,097
Customer deposits and unearned revenue ........ 22,439 17,944
Income taxes payable .......................... 4,255 270,440
Other current liabilities ..................... 7,596 9,950
--------- ---------
Total current liabilities ................... 108,769 371,349
Other long term liabilities ...................... 20,588 17,337
--------- ---------
Total liabilities ........................... 129,357 388,686
--------- ---------
Stockholders' equity
Common stock, $1 par value, 250,000,000 shares
authorized. 75,636,889 and 74,842,982 shares
issued at September 30, 1998 and December 31,
1997, respectively .......................... 75,638 74,843
Additional paid-in capital .................... 185,057 177,238
Accumulated other comprehensive income ........ (262) (577)
Retained earnings ............................. 406,731 362,000
--------- ---------
667,164 613,504
Less treasury stock: 4,545,508 and 1,648,608
shares at cost at September 30, 1998 and
December 31, 1997, respectively ............. (113,741) (47,267)
--------- ---------
Total stockholders' equity .................. 553,423 566,237
--------- ---------
Total liabilities and stockholders' equity .. $ 682,780 $ 954,923
========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
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4
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
- - --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------
1998 1997
---- ----
<S> <C> <C>
Operating revenues ............................... $ 183,409 $ 155,061
--------- ---------
Operating expenses
Payroll ........................................ 66,057 56,648
Production and distribution .................... 68,644 58,447
Advertising, selling, general and administrative 15,179 14,268
Depreciation ................................... 5,135 4,374
Goodwill amortization .......................... 1,931 1,100
--------- ---------
156,946 134,837
--------- ---------
Operating income ................................. 26,463 20,224
--------- ---------
Other expenses (income)
Interest expense ............................... 22 1,854
Interest income ................................ (2,772) (12)
Other, net ..................................... 139 239
--------- ---------
(2,611) 2,081
--------- ---------
Income from continuing operations before income
taxes .......................................... 29,074 18,143
Income tax expense ............................... 12,154 7,673
--------- ---------
Income from continuing operations ................ 16,920 10,470
Income from discontinued operations,
net of income taxes ............................ -- 5,079
--------- ---------
Net income ....................................... $ 16,920 $ 15,549
========= =========
Basic earnings per common share:
Continuing operations ....................... $ 0.23 $ 0.14
Discontinued operations ..................... -- 0.07
--------- ---------
Basic earnings per common share .......... $ 0.23 $ 0.21
========= =========
Weighted-average common shares outstanding ..... 72,667 74,058
========= =========
Diluted earnings per common share:
Continuing operations ....................... $ 0.22 $ 0.13
Discontinued operations ..................... -- 0.07
--------- ---------
Diluted earnings per common share ........ $ 0.22 $ 0.20
========= =========
Weighted-average common and common equivalent
shares outstanding .......................... 76,192 77,184
========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 5
5
Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
- - --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Operating revenues ............................... $ 547,888 $ 444,449
--------- ---------
Operating expenses
Payroll ........................................ 198,313 166,469
Production and distribution .................... 207,721 167,857
Advertising, selling, general and administrative 48,091 41,921
Depreciation ................................... 15,727 12,415
Goodwill amortization .......................... 5,760 3,305
--------- ---------
475,612 391,967
--------- ---------
Operating income ................................. 72,276 52,482
--------- ---------
Other expenses (income)
Interest expense ............................... 151 5,619
Interest income ................................ (11,153) (62)
Other, net ..................................... 1,000 (82)
--------- ---------
(10,002) 5,475
--------- ---------
Income from continuing operations before income
taxes .......................................... 82,278 47,007
Income tax expense ............................... 34,243 19,929
--------- ---------
Income from continuing operations ................ 48,035 27,078
Income from discontinued operations,
net of income taxes ............................ -- 14,833
--------- ---------
Net income ....................................... $ 48,035 $ 41,911
========= =========
Basic earnings per common share:
Continuing operations ........................ $ 0.66 $ 0.36
Discontinued operations ...................... -- 0.20
--------- ---------
Basic earnings per common share ........... $ 0.66 $ 0.56
========= =========
Weighted-average common shares outstanding ..... 73,230 74,293
========= =========
Diluted earnings per common share:
Continuing operations ........................ $ 0.63 $ 0.35
Discontinued operations ...................... -- 0.19
--------- ---------
Diluted earnings per common share ......... $ 0.63 $ 0.54
========= =========
Weighted-average common and common equivalent
shares outstanding ............................. 76,844 77,438
========= =========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 6
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Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
- - -------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Operating Activities
Net income ........................................... $ 48,035 $ 41,911
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Income from discontinued operations................. -- (14,833)
Depreciation........................................ 15,727 12,415
Goodwill amortization............................... 5,760 3,305
Amortization of option related compensation......... 441 551
Deferred income taxes............................... 1,408 634
Other, net.......................................... (33) 593
Changes in operating assets and liabilities, net of
acquisitions:
(Increase) decrease in accounts receivable, net..... (3,424) 28
Decrease in inventory............................... 2,267 1,914
Increase in prepaid expenses and other
current assets.................................... (1,342) (5,253)
Decrease in accounts payable........................ 2,797 6,347
Decrease in other accrued expenses
and other liabilities............................. (864) (3,695)
Other, net.......................................... 3,784 6,247
-------- --------
Net cash provided by continuing operations........ 74,556 50,164
-------- --------
Net cash (used in) provided by discontinued
operating activities.............................. (265,650) 25,682
--------- --------
Net cash (used in) provided by operating
activities...................................... (191,094) 75,846
-------- --------
Investing Activities
Acquisitions.......................................... (15,695) (110,351)
Purchases of property, plant and equipment............ (18,982) (21,721)
Proceeds from sale of property, plant and equipment... 214 1,926
Proceeds from divestiture............................. 5,000 --
Net proceeds from sale of and maturities of
available-for-sale short-term investments .......... 259,765 --
Discontinued operations:
Purchases of property, plant and equipment.......... -- (4,371)
Proceeds from sale of property, plant and equipment. -- 19
Payments on film contracts.......................... -- (1,481)
-------- --------
Net cash provided by (used in) investing
activities...................................... 230,302 (135,979)
-------- --------
Financing Activities
Long-term borrowings.................................. -- 488,000
Payments on debt, including current maturities ...... -- (393,365)
Issuance of common stock.............................. 6,180 12,248
Purchase of treasury stock............................ (66,474) (42,467)
Dividends paid........................................ (3,304) (2,226)
-------- --------
Net cash (used in) provided by financing
activities...................................... (63,598) 62,190
--------- --------
Net (decrease) increase in cash....................... (24,390) 2,057
Cash and cash equivalents at beginning of year........ 83,675 12,017
-------- --------
Cash and cash equivalents at end of period............ $ 59,285 $ 14,074
======== ========
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 7
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Harte-Hanks, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
- - --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
In thousands Stock Capital Earnings Stock Income Equity
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ....... $ 73,604 $ 149,875 $ 29,213 $ -- $ -- $ 252,692
Common stock issued - employee
benefit plans ................ 218 2,515 -- -- -- 2,733
Exercise of stock options ........ 2,074 7,588 -- -- -- 9,662
Tax benefit of options
exercised .................... -- 5,888 -- -- -- 5,888
Dividends paid ($0.02 per
share) ....................... -- -- (2,226) -- -- (2,226)
Net income ....................... -- -- 41,911 -- -- 41,911
Treasury stock repurchase ........ (1,509) 1,509 -- (42,467) -- (42,467)
-----------------------------------------------------------------------------------
Balance at September 30,
1997 ......................... $ 74,387 $ 167,375 $ 68,898 $ (42,467) $ -- $ 268,193
===================================================================================
Balance at January 1, 1998 ....... $ 74,843 $ 177,238 $ 362,000 $ (47,267) $ (577) $ 566,237
Common stock issued - employee
benefit plans ................ 162 2,908 -- -- -- 3,070
Exercise of stock options ........ 633 2,477 -- -- -- 3,110
Tax benefit of options
exercised .................... -- 2,434 -- -- -- 2,434
Dividends paid ($0.03 per
share) ....................... -- -- (3,304) -- -- (3,304)
Net income ....................... -- -- 48,035 -- -- 48,035
Treasury stock repurchase ........ -- -- -- (66,474) -- (66,474)
Change in unrealized loss on
short-term investments
(net of tax) ................. -- -- -- -- 315 315
-----------------------------------------------------------------------------------
Balance at September 30,
1998 ......................... $ 75,638 $ 185,057 $ 406,731 $(113,741) $ (262) $ 553,423
===================================================================================
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE> 8
8
Harte-Hanks, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited Interim Condensed Consolidated Financial Statements
include the accounts of Harte-Hanks, Inc. and subsidiaries (the "Company").
The statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three months and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31. For further information, refer to the consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K
for the year ended December 31, 1997.
Certain prior period amounts have been reclassified for comparative purposes.
NOTE B - DISCONTINUED NEWSPAPER AND TELEVISION OPERATIONS
On October 15, 1997, the Company sold its newspaper operations, KENS-TV, the CBS
affiliate in San Antonio, and KENS-AM radio to the E.W. Scripps Company (NYSE:
SSP) for a cash price of $775 million plus approximately $15 million for working
capital.
Because the newspaper and television operations represent entire business
segments that were divested, their results are reported as "discontinued
operations" for January 1, 1997 through October 15, 1997.
NOTE C - INCOME TAXES
The Company's quarterly and nine month income tax provision of $12.2 million and
$34.2 million, respectively, was calculated using an effective income tax rate
of approximately 42%. The Company's effective income tax rate is derived by
estimating pretax income and income tax expense for the year ending December 31,
1998. The effective income tax rate calculated is higher than the federal
statutory rate of 35% due to the addition of state taxes and to certain expenses
recorded for financial reporting purposes (primarily goodwill amortization)
which are not deductible for federal income tax purposes.
NOTE D - EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." This statement requires the
presentation of basic earnings per share (EPS) and diluted EPS for reporting
periods of all public companies ending after December 15, 1997, instead of the
primary and fully diluted EPS previously reported. The new standard requires the
<PAGE> 9
9
restatement of EPS for all periods presented. EPS is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
In thousands, except per share amount 1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EPS
Income from continuing operations ................................ $16,920 $10,470
Income from discontinued operations .............................. -- 5,079
------- -------
Net Income ....................................................... $16,920 $15,549
======= =======
Weighted-average common shares outstanding
used in net earnings per share computations ................. 72,667 74,058
======= =======
Basic earnings per common share:
Continuing operations ....................................... $ 0.23 $ 0.14
Discontinued operations ..................................... -- 0.07
------- -------
Net income .................................................. $ 0.23 $ 0.21
======= =======
DILUTED EPS
Income from continuing operations ................................ $16,920 $10,470
Income from discontinued operations .............................. -- 5,079
------- -------
Net Income ....................................................... $16,920 $15,549
======= =======
Shares used in net earnings per share computations ............... 76,192 77,184
======= =======
Diluted earnings per common share:
Continuing operations ....................................... $ 0.22 $ 0.13
Discontinued operations ..................................... -- 0.07
------- -------
Net income .................................................. $ 0.22 $ 0.20
======= =======
Computation of shares used in net earnings per share computations:
Average outstanding common shares ................................ 72,667 74,058
Average common equivalent shares -
dilutive effect of option shares ............................ 3,525 3,126
------- -------
Shares used in net earnings per share computations ............... 76,192 77,184
======= =======
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
In thousands, except per share amount 1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EPS
Income from continuing operations ................................ $48,035 $27,078
Income from discontinued operations .............................. -- 14,833
------- -------
Net Income ....................................................... $48,035 $41,911
======= =======
Weighted-average common shares outstanding
used in net earnings per share computations ................. 73,230 74,293
======= =======
Basic earnings per common share:
Continuing operations ....................................... $ 0.66 $ 0.36
Discontinued operations ..................................... -- 0.20
------- -------
Net income .................................................. $ 0.66 $ 0.56
======= =======
DILUTED EPS
Income from continuing operations ................................ $48,035 $27,078
Income from discontinued operations .............................. -- 14,833
------- -------
Net Income ....................................................... $48,035 $41,911
======= =======
Shares used in net earnings per share computations .............. 76,844 77,438
======= =======
Diluted earnings per common share:
Continuing operations ....................................... $ 0.63 $ 0.35
Discontinued operations ..................................... -- 0.19
------- -------
Net income .................................................. $ 0.63 $ 0.54
======= =======
Computation of shares used in net earnings per share computations:
Average outstanding common shares ................................ 73,230 74,293
Average common equivalent shares -
dilutive effect of option shares ............................ 3,614 3,145
------- -------
Shares used in net earnings per share computations ............... 76,844 77,438
======= =======
</TABLE>
<PAGE> 10
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NOTE E - COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income." This statement requires the reporting of comprehensive income and its
components in the financial statements, or in the notes to interim financial
statements, for reporting periods ending after December 15, 1997. Comprehensive
income is defined as the total non-owner changes in equity, which includes net
income and all revenues, expenses, gains and losses that are excluded from net
income under generally accepted accounting principles, but do not result from
investments by owners or distributions to owners. The Company's total
comprehensive income for the third quarter 1998 was $0.3 million less than net
income, whereas comprehensive income for the third quarter 1997 was equal to net
income. Total comprehensive income for the nine months ended September 30 of
1998 was $0.3 million greater than net income, whereas comprehensive income was
equal to net income for the same period of 1997.
NOTE F - STOCKHOLDERS' EQUITY
On March 16, 1998, the Company effected a two-for-one split of its common stock
in the form of a 100% stock dividend paid to holders of record on March 2, 1998.
All share, per share and common stock amounts have been restated to
retroactively reflect the stock split.
In May 1998, the Company amended its Certificate of Incorporation to increase
its total authorized common stock to 250,000,000 shares. The financial
statements reflect this increase in authorized shares of common stock.
In September 1998, the Company's board of directors authorized an increase of
3,000,000 shares in the Company's stock repurchase program, representing
approximately 4% of its outstanding shares.
NOTE G - RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on the
timing and amount of revenue recognition when licensing, selling, leasing or
otherwise marketing computer software and is effective for transactions entered
into during fiscal years beginning after December 15, 1997. The adoption of the
provisions of SOP 97-2, which were effective as of January 1, 1998, have not
materially affected the Company's financial condition or results of operations.
<PAGE> 11
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2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
- - -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
As described in Note B of the Notes to Interim Condensed Consolidated Financial
Statements included herein, on October 15, 1997, the Company sold its newspaper
and television operations. Therefore, the newspaper and television operations
results are excluded from management's discussion and analysis of financial
condition and results of operations below.
Operating results from continuing operations -- direct marketing and shoppers --
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 1998 SEPT. 30, 1997 CHANGE SEPT. 30, 1998 SEPT. 30, 1997 CHANGE
- - ------------ -------------- -------------- ------ -------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $183,409 $155,061 18.3% $547,888 $444,449 23.3%
Operating expenses 156,946 134,837 16.4% 475,612 391,967 21.3%
-------- -------- -------- --------
Operating income $ 26,463 $ 20,224 30.8% $ 72,276 $ 52,482 37.7%
======== ======== ======== ========
Net income $ 16,920 $ 10,470 61.6% $ 48,035 $ 26,638 80.3%
======== ======== ======== ========
Diluted earnings
per share $ 0.22 $ 0.14 57.1% $ 0.63 $ 0.34 85.3%
======== ======== ======== ========
</TABLE>
(The results above exclude nine months ended September 30, 1997 non-recurring
income of $0.8 million, or $0.4 million net of income taxes. This represents a
gain on the sale of stock in another company partially offset by other
non-recurring items. Including this gain, net income for the nine months ended
September 30, 1997 was $27.1 million or 35 cents per share on a diluted basis.)
Consolidated revenues grew 18.3% to $183.4 million and operating income grew
30.8% to $26.5 million in the third quarter of 1998 when compared to the third
quarter of 1997. The Company's overall growth resulted from increased business
with both new and existing customers and from the sale of new products and
services. Overall operating expenses compared to 1997 increased 16.4% to $156.9
million.
Net income grew 61.6% to $16.9 million, or 22 cents per share, compared to 14
cents per share on a diluted basis. The net income growth resulted from the
growth in operating income as well as from $2.8 million interest income in the
third quarter of 1998 compared to $1.9 million interest expense (allocated based
upon percentage of net assets) for the same period in 1997.
DIRECT MARKETING
Direct marketing operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 1998 SEPT. 30, 1997 CHANGE SEPT. 30, 1998 SEPT. 30, 1997 CHANGE
- - ------------ -------------- -------------- ------ -------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $119,590 $105,114 13.8% $355,582 $299,317 18.8%
Operating expenses 102,869 91,446 12.5% 308,221 262,431 17.4%
-------- -------- -------- --------
Operating income $ 16,721 $ 13,668 22.3% $ 47,361 $ 36,886 28.4%
======== ======== ======== ========
</TABLE>
Direct marketing revenues increased $14.5 million, or 13.8%, in the third
quarter of 1998 when compared to 1997. Revenues were lead by database marketing,
followed by response management and marketing services, all of which experienced
good internal revenue growth for the quarter. Database marketing revenues
increased primarily due to the growth in database processing, in software sales,
in hardware sales and in other revenues, which consists primarily of consultive
integration work. Database marketing revenues were also impacted by the November
1997 acquisition of Mercantile Software Systems, which contributed significantly
to the increased hardware sales and consultive integration work. Response
<PAGE> 12
12
management revenues increased due to increased telemarketing and internet
business with existing customers, new customer gains, the August 1998
acquisition of Cornerstone Integrated Services, the November 1997 acquisition of
Tele Support Services and to a lesser extent the May 1997 opening of the
Langhorne, PA call center. Marketing services' revenues, led by its logistics
operations, increased due to increased product sales as well as new product
sales to new and existing customers, primarily in the retail industry.
Operating expenses increased $11.4 million, or 12.5%, in the third quarter of
1998 when compared to 1997. Payroll costs increased $5.0 million due to expanded
hiring to support revenue growth. Also contributing to the increased operating
expenses were additional production costs of $4.5 million due to increased
volumes. General and administrative expense increased $1.1 million due to
increased professional and outside services fees and increased employee expenses
related to growth offset by a decrease in bad debt expense. Depreciation expense
increased $.6 million due to higher levels of capital investment to support
growth. Operating expenses were also impacted by the acquisitions noted above.
Direct marketing revenues increased $56.3 million, or 18.8%, in the first nine
months of 1998 compared to the first nine months of 1997. Database marketing,
response management and marketing services all experienced good revenue growth.
Overall, revenue growth resulted from increased business with both new and
existing customers, particularly in services provided to the retail, financial
services, high technology and insurance industries.
Operating expenses rose $45.8 million, or 17.4%, in the first nine months of
1998 when compared to the first nine months of 1997. Payroll costs increased
$17.3 million due to expanded hiring to support revenue growth. In addition,
production costs increased $19.0 million due to increased volumes. General and
administrative expense increased $6.0 million due to increased professional and
outside services fees and increased employee expenses related to growth.
Depreciation expense increased $2.7 million due to the higher levels of capital
investment. The acquisitions mentioned above also contributed to the increased
operating expenses.
SHOPPERS
Shopper operating results were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands SEPT. 30, 1998 SEPT. 30, 1997 CHANGE SEPT. 30, 1998 SEPT. 30, 1997 CHANGE
- - ------------ -------------- -------------- ------ -------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 63,819 $ 49,947 27.8% $192,306 $145,132 32.5%
Operating expenses 52,112 41,568 25.4% 160,836 123,490 30.2%
-------- -------- -------- --------
Operating income $ 11,707 $ 8,379 39.7% $ 31,470 $ 21,642 45.4%
======== ======== ======== ========
</TABLE>
Shopper revenues increased $13.9 million, or 27.8%, in the third quarter of 1998
as compared to 1997. The increase was primarily due to the September 1997
acquisition of the ABC Shopper Group, which accounted for $15.6 million of the
revenue increase, partially offset by the sale of the Dallas-Fort Worth Shoppers
Guide in April 1998 which resulted in a $2.0 million revenue decrease. Excluding
the effects of the acquisition and the divestiture discussed above, revenue
declines in real estate and automotive in-book advertising were partially offset
by positive revenue growth in employment-related in-book advertising.
Distribution product revenues remained flat due to decreases in standard print
and delivery products revenues, partially offset by increased revenue from
inserts.
Operating expenses increased $10.5 million, or 25.4%, in the third quarter of
1998 when compared to 1997. The acquisition of the ABC Shopper Group accounted
for a $13.4 million increase in operating expenses. The sale of the Dallas-Fort
Worth Shoppers Guide resulted in a $2.1 million reduction in operating expenses.
<PAGE> 13
13
Excluding the acquisition and divestiture mentioned above, operating costs
declined primarily due to decreased bad debt expense of $1.1 million partially
offset by increases in postage.
Shopper revenues increased $47.2 million, or 32.5%, in the first nine months of
1998 compared to the first nine months of 1997. The ABC Shopper Group
acquisition accounted for $47.6 million of this increase while the sale of the
Dallas-Fort Worth Shoppers Guide in April 1998 resulted in a $3.2 million
revenue decrease. Excluding the effects of the acquisition and the divestiture
discussed above, revenues grew 2.0% due to growth in preprinted inserts,
four-color glossy print and deliver products, in-book employment related
advertising and improved trade sales. Gains in these categories were partially
offset by declines in standard print and deliver products and in automotive and
real estate related in-book advertising.
Operating expenses rose $37.3 million, or 30.2%, in the first nine months of
1998 when compared to the first nine months of 1997. The acquisition of the ABC
Shopper Group accounted for a $41.9 million increase in operating costs. The
sale of the Dallas-Fort Worth Shoppers Guide resulted in a $3.3 million
reduction in operating expenses. Excluding the acquisition and divestiture
mentioned above, operating costs declined primarily due to decreased labor costs
of $1.7 million which were influenced by improved production efficiencies, staff
reductions and lower fringe benefit costs, as well as decreased bad debt expense
of $1.6 million.
Other Income and Expense
The Company realized a loss of approximately $0.4 million in the first quarter
1998 on the sale of equity securities that were held in its short-term
investment portfolio. In the third quarter of 1998, the Company recognized
income of approximately $0.6 million for an insurance settlement. This income
was partially offset by approximately $0.5 million of non-operating costs.
Interest Expense/Interest Income
Total Company interest income and expense were allocated to continuing and
discontinued operations based on percentage of net assets through October 15,
1997. The percentage allocated to continuing operations was approximately 58%
for the third quarter and first nine months of 1997.
Interest expense decreased $1.8 million in the third quarter of 1998 and $5.5
million in the first nine months of 1998 over the same periods in 1997 due to
the extinguishment of debt with the proceeds from the October 15, 1997 sale of
the Company's newspaper and television operations.
Interest income increased $2.8 million in the third quarter of 1998 and $11.1
million in the first nine months of 1998 over the same periods in 1997 due to
the short-term investment of the proceeds from the sale of newspaper and
television operations, after debt extinguishment, operational fundings and
income tax payments.
Income Taxes
The Company's income tax expense increased $4.5 million in the third quarter and
$14.3 million in first nine months of 1998, when compared to the third quarter
and first nine months of 1997. This increase was due primarily to the higher
pre-tax income levels. The effective tax rate was 41.8% for the third quarter
and 41.6% for the first nine months of 1998 compared to 42.3% and 42.4%,
respectively for the same periods of 1997.
<PAGE> 14
14
Liquidity and Capital Resources
Cash used in operating activities for the nine months ended September 30, 1998
was $191.1 million. The cash outflow from operating activities related primarily
to the first quarter 1998 payment of $265.7 million in income taxes, resulting
from the gain on the October 15, 1997 sale of newspaper and television
operations. Net cash inflows from investing activities were $230.3 million for
the first nine months of 1998 compared to net cash outflows of $136.0 million
for the first nine months of 1997. The cash inflows from investing activities in
1998 was primarily attributable to sales and maturities of marketable securities
totaling $259.8 million, the proceeds of which were used to help fund the
Company's tax payments made in the first quarter of 1998, while the cash
outflows from investing activities in 1997 is attributable to the acquisition of
the ABC Shoppers Group in September 1997. Net cash outflows from financing
activities were $63.6 million compared to net cash inflows of $62.2 million in
1997. The cash outflow from financing activities in 1998 is attributable
primarily to the repurchase of treasury stock in the second and third quarters
of 1998, while the cash inflow from financing activities in 1997 is attributable
primarily to additional borrowings to fund the ABC Shoppers Group acquisition in
September 1997.
Capital resources were available from and provided through the Company's
unsecured credit facility through October 15, 1997. All borrowings under the
revolving credit facility were to be repaid by December 31, 2001. However, these
outstanding borrowings ($306.3 million) were retired on October 15, 1997, funded
primarily through the proceeds received from the sale of the Company's newspaper
and television operations as described in Note B of the Notes to Interim
Condensed Consolidated Financial Statements included herein.
Management believes that the proceeds from the Company's sale of newspaper and
television operations remaining after the retirement of debt and the payment of
income taxes related to the sale, together with cash provided from operating
activities, will be sufficient to fund operations and anticipated capital
service needs for the foreseeable future.
Divestiture
On May 1, 1998, the Company sold three of its smallest shopper publications,
located in Dallas, TX, Wichita, KS and Springfield, MO, to Central States
Publishing, LLC.
Acquisition
On August 3, 1998, the Company acquired Cornerstone Integrated Services of
Austin, TX, a leading provider of technical and marketing support services to
major computer hardware and software manufacturers.
Recent Developments
On November 13, 1998, the Company acquired Printing Management Systems, Inc. of
Bellmawr, New Jersey, a leading provider of integrated direct marketing
services.
Factors That May Affect Future Results and Financial Condition
From time to time, in both written reports and oral statements by senior
management, the Company may express its expectations regarding its future
performance. These "forward-looking statements" are inherently uncertain, and
investors should realize that events could turn out to be other than what senior
management expected. Set forth below are some key factors which could affect the
Company's future performance.
Acquisitions -- In recent years the Company has made a number of acquisitions in
its direct marketing and shopper businesses, and it expects to pursue additional
acquisition opportunities. Acquisition activities, even if not consummated,
require substantial amounts of management time and can distract from normal
operations. In addition, there can be no assurance that the synergies and other
<PAGE> 15
15
objectives sought in acquisitions will be achieved.
Competition -- Direct marketing is a rapidly evolving business, subject to
periodic technological advancements, high turnover of customer personnel who
make buying decisions, and changing customer needs and preferences.
Consequently, the Company's direct marketing business faces competition in each
of its three sectors -- response management/teleservices, database marketing,
and marketing services. The Company's shopper business competes for advertising,
as well as for readers, with other print and electronic media. Competition comes
from local and regional newspapers, magazines, radio, broadcast and cable
television, shoppers and other communications media that operate in the
Company's markets. The extent and nature of such competition are, in large part,
determined by the location and demographics of the markets targeted by a
particular advertiser, and the number of media alternatives in those markets.
Postal Rates -- The Company's shoppers are delivered by standard mail, and
postage is the second largest expense, behind payroll, in the Company's shopper
business. The present standard postage rates went into effect in July 1995, and
the next increase is expected January 1, 1999. Postal rates also influence the
demand for the Company's direct marketing services even though the cost of
mailings is borne by the Company's customers and is not directly reflected in
the Company's revenues or expenses.
Newsprint Prices -- Newsprint represents a substantial expense in the Company's
shopper operations. In recent years newsprint prices have fluctuated widely, and
such fluctuations can materially affect the results of the Company's operations.
Economic Conditions -- Changes in national economic conditions can affect levels
of advertising expenditures generally, and such changes can affect each of the
Company's businesses. In addition, revenues from the Company's shopper business
are dependent to a large extent on local advertising expenditures in the markets
in which they operate. Such expenditures are substantially affected by the
strength of the local economies in those markets. Direct marketing revenues are
dependent on national and international economics.
Year 2000 Issue - The Year 2000 Issue is a result of computer programs being
written using two digits rather than four to define the applicable year.
Accordingly, computer systems that rely on two digits to define an applicable
year may recognize a date using "00" as the year 1900, rather than the Year 2000
(the "Year 2000 Issue"). This could result in a system failure or
miscalculations causing disruptions of operations, including, but not limited
to, a temporary inability to process or transmit data or engage in normal
business activities.
The Company relies on computer hardware, information technology ("IT Systems")
and non-information technology systems ("Non-IT Systems") to operate its
business. IT Systems are used in the creation and delivery of the Company's
products and services, as well as, the Company's internal operations such as
billing and accounting. IT Systems include systems which use information
provided by third-party data suppliers to update the Company's databases. The
Company also relies on Non-IT Systems (primarily consisting of embedded
technology), such as microprocessors in tape drives, printing and inserting
equipment, and elevators, and on utilities, such as telecommunications and
power.
The Company has defined Year 2000 Compliant to mean that a process will continue
to run in the same manner when dealing with dates on or after January 1, 2000,
as it did before January 1, 2000. The Company has conducted a comprehensive
review of its IT Systems and Non-IT Systems to identify those that could be
affected by the Year 2000 Issue, and has developed a remediation plan to resolve
the issue. The most important areas of focus of the Company's Year 2000
remediation plan are the Company's products and services (including its
databases, software that
<PAGE> 16
16
manipulates these databases and software provided to customers); business
operation support systems (billing, ordering, tracking systems, payroll and
technical infrastructure (such as LANs, mail systems and websites)); and
suppliers, facilities and equipment. The Company is utilizing both internal and
external resources to correct or reprogram, and test the systems for the Year
2000 compliance.
The Company's compliance objectives include products and services the Company
has provided to customers in the past and will provide to customers in the
future; all internal operating software systems and equipment; and the services,
products, equipment and systems the Company has obtained and will obtain in the
future from outside vendors. The Company's first objective was to remediate all
products and services the Company has, or will provide, to customers. This
included informing customers of their need to make their applications Year 2000
compliant to provide or accept associated files for services provided by the
Company. This objective was deemed the top priority and was initiated in late
1997. In early 1998, the Company initiated action to remediate all internal
business operation support systems, and the associated equipment it runs on. As
part of this process, the Company developed a standard Year 2000 compliance
certification memorandum to be sent to all vendors who have or are currently
providing products or services to the Company, revised customer standard
contract language to include a Year 2000 statement, and instituted a review
process for formally responding to customer inquiries on the Company's Year 2000
compliance plans and status. The Company is also in the process of contacting
its critical suppliers and other entities to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 Issues. While the Company has not been informed of
any material risks associated with these entities, there is no guarantee that
the systems of these critical suppliers or other entities on which the Company
relies, will be timely converted and will not have an adverse effect on the
Company's systems or operations. In addition to the above, the Company formed a
Year 2000 Compliance Council in June 1998 to monitor the status of compliance
efforts and to ensure that all compliance issues are consistently addressed.
The Company's Year 2000 remediation plan consists of four key phases:
Inventory/Assessment, Repair/Replacement, Testing and Compliance/Internal
Certification. As related to the Company's products and services, the Company is
100%, 80%, 60% and 60% completed, respectively. With regards to business
operation support systems, the Company is 100%, 60%, 40%, and 40% completed,
respectively. Finally, suppliers, facilities and equipment are 70%, 40%, 20% and
20% completed, respectively. It is anticipated that all reprogramming and
testing efforts will be completed by March 31, 1999; however, the Company can
provide no assurance in this regard.
The Company has expensed $1.5 million of cost incurred to date related to the
Year 2000 Issue. The total remaining cost of the Year 2000 project is presently
estimated at $2.5 million, which will be expensed as incurred. The costs of the
project and the date on which the Company believes it will complete the Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this areas and the ability to locate and correct all relevant computer codes.
The Company presently believes that with modifications to existing software and,
in certain instances, conversions to new software, the Year 2000 Issue can be
mitigated. As noted above, the Company has not yet completed all necessary
phases of the Year 2000 remediation program. In the event that the Company does
not complete any additional phases, it could experience disruptions in its
operations, including among other things, a temporary inability to fulfill
<PAGE> 17
17
customer direct marketing requests (such as sales leads and personalized
mailings), process financial transactions, or engage in similar normal business
activities. In addition, disruptions in the economy generally resulting from the
Year 2000 Issues could also materially adversely affect the Company. The Company
could be subject to litigation for computer systems failures, equipment
shutdowns or failure to properly date business records. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
Contingency plans are currently being developed and are anticipated to be
completed by March 31, 1999. This includes developing contingency plans for
products and services, as well as business operation support systems.
Contingency plans already in the development process include identifying
alternate providers in case the primary providers cannot meet delivery
requirements, and providing specific 100-year interval windowing techniques to
customers in the event their applications could not be made Year 2000 compliant.
<PAGE> 18
18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See index to Exhibits on Page 20.
(b) No Form 8-K has been filed during the three months ended
September 30, 1998.
<PAGE> 19
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
HARTE-HANKS, INC.
November 13, 1998 /s/ Jacques D. Kerrest
----------------- ----------------------------------
Date Jacques D. Kerrest
Senior Vice President, Finance and
Chief Financial and Accounting Officer
<PAGE> 20
20
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- - ------- ------------------------------------------------------------------- -------------
<S> <C> <C>
2(a) Certificate of Ownership and Merger (filed as Exhibit 2(a) to
the Company's Registration Statement No. 33-69202 and
incorporated by reference herein).
2(b) Agreement and Plan of Merger dated as of February 4, 1996 among
Harte-Hanks Communications, Inc., HHD Acquisition Corp. and
DiMark, Inc. (filed as Appendix A to the Company's Registration
Statement No. 333-02047 and incorporated by reference herein).
2(c) Agreement and Plan of Merger and Reorganization, dated as of May
16, 1997, by and between The E.W. Scripps Company and
Harte-Hanks Communications, Inc. (filed as Exhibit 2.1 to the
Company's Form 8-K dated May 22, 1997 and incorporated by
reference herein).
2(d) Acquisition Agreement, dated as of May 16, 1997, by and between
The E.W. Scripps Company and Harte-Hanks Communications, Inc.
(filed as Exhibit 2.2 to the Company's Form 8-K dated May 22,
1997 and incorporated by reference herein).
2(e) Stock Purchase Agreement dated as of July 26, 1997 between ABC,
Inc. and Harte-Hanks Communications, Inc. (filed as Exhibit 2(e)
to the Company's Form 10-Q for the nine months ended September
30, 1997 and incorporated by reference herein).
3(a) Amended and Restated Certificate of Incorporation (filed as
Exhibit 3(a) to the Company's Form 10-K for the year ended
December 31, 1993 and incorporated by reference herein).
3(b) Amended and Restated Bylaws (filed as Exhibit 3(b) to the
Company's Registration Statement No. 33-69202 and incorporated
by reference herein).
3(c) Amendment dated April 30, 1996 to Amended and Restated
Certificate of Incorporation (filed as Exhibit 3(c) to the
Company's Form 10-Q for the nine months ended September 30, 1996
and incorporated by reference herein).
3(d) Amendment dated May 5, 1998 to Amended and Restated Certificate
of Incorporation (filed as Exhibit 3(d) to the Company's Form
10-Q for the six months ended June 30, 1998 and incorporated by
reference herein).
3(e) Amended and Restated Certificate of Incorporation as amended
through May 5, 1998 (filed as Exhibit 3(e) to the Company's Form
10-Q for the six months ended June 30, 1998 and incorporated by
reference herein).
4(a) Long term debt instruments are not being filed pursuant to
Section (b)(4)(iii) of Item 601 of Regulation S-K. Copies of
such instruments will be furnished to the Commission upon
request.
</TABLE>
<PAGE> 21
21
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Page No.
- - ------- ------------------------------------------------------------------- -------------
<S> <C> <C>
10(a) 1984 Stock Option Plan (filed as Exhibit 10(d) to the Company's
Form 10-K for the year ended December 31, 1984 and
incorporated herein by reference).
10(b) Registration Rights Agreement dated as of September 11, 1984
among HHC Holding Inc. and its stockholders (filed as Exhibit
10(b) to the Company's Form 10-K for the year ended December
31, 1993 and incorporated by reference herein).
10(c) Severance Agreement between Harte-Hanks Communications, Inc.
and Larry Franklin, dated as of July 23, 1993 (filed as Exhibit
10(f) to the Company's Registration Statement No. 33-69202
and incorporated by reference herein).
10(d) Form of Severance Agreement between Harte-Hanks
Communications, Inc. and certain Executive Officers of the
Company, dated as of July 7 or December 28,1997 (filed as
Exhibit 10(f) to the Company's Form 10-K for the year ended
December 31, 1997 and incorporated by reference herein).
10(e) Harte-Hanks, Inc. Pension Restoration Plan
(filed as Exhibit 10(j) to the Company's Registration Statement
No. 33-69202 and incorporated by reference herein).
10(f) Harte-Hanks Communications, Inc. 1996 Incentive Compensation
Plan (filed as Exhibit 10(p) to the Company's Form 10-Q for the
nine months ended September 30, 1996 and incorporated by reference
herein).
10(g) Harte-Hanks, Inc. Amended and Restated 1991 Stock Option Plan
(filed as Exhibit 10(g) to the Company's Form 10-Q for the six
months ended June 30, 1998 and incorporated by reference herein).
10(h) Harte-Hanks, Inc. 1998 Director Stock Plan (filed as Exhibit 10(h)
to the Company's Form 10-Q for the six months ended June 30, 1998
and incorporated by reference herein).
*11 Statement Regarding Computation of Net Income (Loss) Per Common
Share 22
*21 Subsidiaries of the Company. 23
*27 Financial Data Schedule. 24
</TABLE>
- - ---------------------
*Filed herewith
<PAGE> 22
EXHIBIT INDEX
Exhibit No. Description
- - ----------- ----------------
11 Statement Regarding Computation of Net Income (Loss) Per
Common Share
21 Subsidiaries of the Company.
27 Financial Data Schedule.
<PAGE> 1
Exhibit 11
HARTE-HANKS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
In thousands, except per share amount 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EPS
Income from continuing operations......................... $ 16,920 $ 10,470
Income from discontinued operations....................... -- 5,079
-------------- -------------
Net Income................................................ $ 16,920 $ 15,549
============== =============
Weighted-average common shares outstanding
used in net earnings per share computations............ 72,667 74,058
============== =============
Basic earnings per common share:
Continuing operations.................................. $ 0.23 $ 0.14
Discontinued operations................................ -- 0.07
-------------- -------------
Net income............................................. $ 0.23 $ 0.21
============== =============
DILUTED EPS
Income from continuing operations......................... $ 16,920 $ 10,470
Income from discontinued operations....................... -- 5,079
-------------- -------------
Net Income................................................ $ 16,920 $ 15,549
============== =============
Shares used in net earnings per share computations....... 76,192 77,184
============== =============
Diluted earnings per common share:
Continuing operations.................................. $ 0.22 $ 0.13
Discontinued operations................................ -- 0.07
-------------- -------------
Net income............................................. $ 0.22 $ 0.20
============== =============
Computation of shares used in net earnings per share computations:
Average outstanding common shares......................... 72,667 74,058
Average common equivalent shares -
dilutive effect of option shares....................... 3,525 3,126
-------------- -------------
Shares used in net earnings per share computations........ 76,192 77,184
============== =============
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
In thousands, except per share amount 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EPS
Income from continuing operations......................... $ 48,035 $ 27,078
Income from discontinued operations....................... -- 14,833
-------------- -------------
Net Income................................................ $ 48,035 $ 41,911
============== =============
Weighted-average common shares outstanding
used in net earnings per share computations............ 73,230 74,293
============== =============
Basic earnings per common share:
Continuing operations.................................. $ 0.66 $ 0.36
Discontinued operations................................ -- 0.20
-------------- -------------
Net income............................................. $ 0.66 $ 0.56
============== =============
DILUTED EPS
Income from continuing operations......................... $ 48,035 $ 27,078
Income from discontinued operations....................... -- 14,833
-------------- -------------
Net Income................................................ $ 48,035 $ 41,911
============== =============
Shares used in net earnings per share computations....... 76,844 77,438
============== =============
Diluted earnings per common share:
Continuing operations.................................. $ 0.63 $ 0.35
Discontinued operations................................ -- 0.19
-------------- -------------
Net income............................................. $ 0.63 $ 0.54
============== =============
Computation of shares used in net earnings per share computations:
Average outstanding common shares......................... 73,230 74,293
Average common equivalent shares -
dilutive effect of option shares....................... 3,614 3,145
-------------- -------------
Shares used in net earnings per share computations........ 76,844 77,438
============== =============
</TABLE>
<PAGE> 1
Exhibit 21
RESTRICTED SUBSIDIARIES OF
HARTE-HANKS , INC.
As of September 30, 1998
<TABLE>
<CAPTION>
State of % of Stock
Name of Corporation Incorporation Owned
- - ------------------- -------------- ----------
<S> <C> <C>
DiMark, Inc. New Jersey 100%
DiMark Marketing, Inc. Pennsylvania 100%(1)
Direct Market Concepts, Inc. Florida 100%
DMK, Inc. Delaware 100%(2)
The Flyer Publishing Corporation Florida 100%
Harte-Hanks Data Technologies, Inc. Massachusetts 100%
Harte-Hanks Delaware, Inc. Delaware 100%
Harte-Hanks Direct, Inc. Delaware 100%
Harte-Hanks Direct Marketing/Baltimore, Inc. Maryland 100%
Harte-Hanks Direct Marketing/Cincinnati, Inc. Ohio 100%
Harte-Hanks Direct Marketing/Dallas, Inc. Delaware 100%
Harte-Hanks Direct Marketing/Fullerton, Inc. California 100%
Harte-Hanks do Brazil Consultoria e Servicos Ltda. Brazil 100%(3)
Harte-Hanks Limited England 100%(3)
Harte-Hanks Market Research, Inc. New Jersey 100%
Harte-Hanks Partnership, Ltd. Texas 100%(7)
Harte-Hanks Pty. Limited Australia 100%(3)
Harte-Hanks Response Management/Boston, Inc. Massachusetts 100%
Harte-Hanks Response Management Call Centers, Inc. Delaware 100%
Harte-Hanks Response Management Europe Belgium 100%
Harte-Hanks Shoppers, Inc. California 100%
Harte-Hanks Stock Plan, Inc. Delaware 100%
H&R Communications, Inc. New Jersey 100%(2)
HTS, Inc. Connecticut 100%
Information for Marketing Limited (shell corporation) England 100%(5)
Marketing Communications, Inc. Missouri 100%
Mars Graphic Services, Inc. New Jersey 100%(4)
Mercantile Software Systems, Inc. New Jersey 100%
Northern Comprint Co. California 100%
NSO, Inc. Ohio 100%
1-800 Service Partners, Inc. Texas 100%
Potpourri Shopper, Inc. California 100%
PRO Direct Response Corp. New Jersey 100%(2)
PSP&D, Inc. Delaware 100%(6)
Select Marketing, Inc. Texas 100%
Southern Comprint Co. California 100%
Sutton Industries, Inc. Delaware 100%
</TABLE>
(1) Owned by Mars Graphic Services, Inc.
(2) Owned by DiMark Marketing, Inc.
(3) Owned by Harte-Hanks Data Technologies, Inc.
(4) Owned by DiMark, Inc.
(5) Owned by Harte-Hanks Limited
(6) Owned by Sutton Industries, Inc.
(7) 99.5% Owned by Harte-Hanks Delaware, Inc.
.5% Owned by Harte-Hanks , Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 59,285
<SECURITIES> 128,865
<RECEIVABLES> 116,307
<ALLOWANCES> 3,354
<INVENTORY> 5,436
<CURRENT-ASSETS> 332,973
<PP&E> 188,965
<DEPRECIATION> 96,275
<TOTAL-ASSETS> 682,780
<CURRENT-LIABILITIES> 108,769
<BONDS> 0
0
0
<COMMON> 75,638
<OTHER-SE> 477,785
<TOTAL-LIABILITY-AND-EQUITY> 682,780
<SALES> 547,888
<TOTAL-REVENUES> 547,888
<CGS> 406,034
<TOTAL-COSTS> 454,125
<OTHER-EXPENSES> 10,153
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151
<INCOME-PRETAX> 82,278
<INCOME-TAX> 32,243
<INCOME-CONTINUING> 48,035
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,035
<EPS-PRIMARY> .66
<EPS-DILUTED> .63
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING IS A RESTATED FINANCIAL DATA SCHEDULE AS A RESULT OF ADOPTION OF
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 AND CERTAIN INCOME STATEMENT
RECLASSIFICATIONS. THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FORM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,074
<SECURITIES> 0
<RECEIVABLES> 116,563
<ALLOWANCES> 3,990
<INVENTORY> 12,710
<CURRENT-ASSETS> 167,031
<PP&E> 171,124
<DEPRECIATION> 86,816
<TOTAL-ASSETS> 705,667
<CURRENT-LIABILITIES> 109,917
<BONDS> 311,400
0
0
<COMMON> 37,947
<OTHER-SE> 230,246
<TOTAL-LIABILITY-AND-EQUITY> 705,667
<SALES> 444,499
<TOTAL-REVENUES> 444,499
<CGS> 334,326
<TOTAL-COSTS> 376,247
<OTHER-EXPENSES> (144)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,619
<INCOME-PRETAX> 47,007
<INCOME-TAX> 19,929
<INCOME-CONTINUING> 27,078
<DISCONTINUED> 14,833
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,911
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.54
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING IS A RESTATED FINANCIAL DATA SCHEDULE AS A RESULT OF ADOPTION
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128. THE SCHEDULE CONTAINS
SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND
CONSOLIDATED STATEMENTS OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,156
<SECURITIES> 0
<RECEIVABLES> 101,731
<ALLOWANCES> 2,337
<INVENTORY> 12,175
<CURRENT-ASSETS> 148,273
<PP&E> 153,786
<DEPRECIATION> 76,328
<TOTAL-ASSETS> 581,220
<CURRENT-LIABILITIES> 92,066
<BONDS> 192,400
0
0
<COMMON> 37,830
<OTHER-SE> 242,516
<TOTAL-LIABILITY-AND-EQUITY> 581,220
<SALES> 289,388
<TOTAL-REVENUES> 289,388
<CGS> 219,231
<TOTAL-COSTS> 246,884
<OTHER-EXPENSES> (371)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,765
<INCOME-PRETAX> 28,864
<INCOME-TAX> 12,256
<INCOME-CONTINUING> 16,608
<DISCONTINUED> 9,754
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,362
<EPS-PRIMARY> .35
<EPS-DILUTED> .34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING IS A RESTATED FINANCIAL DATA SCHEDULE AS A RESULT OF ADOPTION
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 AND CERTAIN INCOME STATEMENT
RECLASSIFICATIONS. THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,088
<SECURITIES> 0
<RECEIVABLES> 97,965
<ALLOWANCES> 2,477
<INVENTORY> 12,455
<CURRENT-ASSETS> 141,385
<PP&E> 241,349
<DEPRECIATION> 126,224
<TOTAL-ASSETS> 583,673
<CURRENT-LIABILITIES> 87,763
<BONDS> 208,440
0
0
<COMMON> 37,724
<OTHER-SE> 224,380
<TOTAL-LIABILITY-AND-EQUITY> 583,673
<SALES> 174,835
<TOTAL-REVENUES> 174,835
<CGS> 127,545
<TOTAL-COSTS> 145,684
<OTHER-EXPENSES> 185
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,293
<INCOME-PRETAX> 17,784
<INCOME-TAX> 7,767
<INCOME-CONTINUING> 10,017
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,017
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
