| HARTE HANKS INC ITEM 1A RISK FACTORS From time to time, in written reports, filings and oral statements by senior management, we may express our expectations regarding future performance |
| These “forward-looking statements” are inherently uncertain, and events could turn out to be other than what we expected |
| Statements containing the words “believes,” “anticipates,” “estimates,” “expects,” “intends,” “plans,” “seeks,” “will,” “may,” “should,” “would,” “projects,” “predicts,” “continues” and similar expressions or the negative of these terms constitute forward-looking statements that involve risks and uncertainties |
| Those statements are based on current expectations and are subject to risks, uncertainties and changes in condition, significance, value and effect, including those discussed in this section entitled “Risk Factors” |
| Those risks, uncertainties and changes in condition, significance, value and effect could cause actual results to differ materially from those anticipated |
| Set forth below are some key factors and important risks, uncertainties and contingencies that could cause our actual results, performances or achievements, to be materially different from our forward-looking statements, including our revenues, net income and earnings per share; however, the risks described below are not the only ones we face |
| Additional risks and uncertainties that are not presently known, or that we currently consider immaterial, could also impair our business operations |
| Risks Related to our Business We face intense competition |
| Direct marketing is a rapidly evolving business, subject to periodic technological advancements, high turnover of client personnel who make buying decisions, and changing client needs and preferences |
| Consequently, our Direct Marketing business faces competition in all of its offerings and within each of its vertical markets |
| This competition comes from numerous local, national and international direct marketing companies which we compete against for individual projects and entire client relationships |
| We also compete against print and electronic media and other forms of advertising for advertising dollars in general |
| In addition, our ability to attract new clients and to retain existing clients may, in some cases, be limited by clients’ policies on or perceptions of conflicts of interest |
| These policies can prevent us from performing similar services for competing products or companies |
| Our Shoppers 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, the internet, other communications media and other advertising printers that operate in our 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 |
| Our failure to improve our current processes or to develop new products and services could result in the loss of our clients to current or future competitors |
| In addition, failure to gain market acceptance of new products and services could adversely affect our growth |
| We must be able to attract, maintain and retain qualified personnel |
| We believe that our future prospects will depend in large part upon our ability to attract, train and retain highly skilled technical, client services and administrative personnel |
| While the demand for personnel is dependent on employment levels and general economic conditions, qualified personnel historically have been in great demand and from time to time and in the foreseeable future will likely remain a limited resource |
| There can be no assurance that we will be able to retain our existing personnel or attract and retain qualified employees |
| We are dependent on the efforts, abilities, experience and expertise of our current officers, particularly our Chief Executive Officer and Chief Financial Officer, and the Chairman of our Board of Directors |
| The loss or prolonged absence of the services of these individuals could have a material adverse effect on our business, financial position or operating results |
| 11 ______________________________________________________________________ [33]Table of Contents We must maintain technological competitiveness |
| We believe that our future success will be dependent on, among other things, maintaining technological competitiveness in our direct marketing and shopper products, processing functionality, and software systems and services |
| Advances in information technology may result in changing client preferences for products and product delivery formats in our industry |
| We must continually improve our current processes and develop and introduce new products and services in order to match our competitors’ technological developments and the increasingly sophisticated requirements of our clients |
| We might not be able to successfully identify, develop and bring new and enhanced services and products to market in a timely manner, that such services or products will be commercially successful or that services, products or technologies developed by others will not render our services and products noncompetitive or obsolete |
| We may not be able to protect our computer systems and databases |
| Our ability to protect our data centers against damage from a security breach, fire, power loss, telecommunications failure or other disasters is critical to our future |
| We believe we have taken reasonable precautions to protect our data centers from events that could interrupt our operations |
| Any damage to our data centers that causes interruptions in our operations could affect our ability to meet our clients’ requirements, which could have a material adverse effect on our business, financial position or operating results |
| Data suppliers could withdraw data |
| There could be a material adverse impact on our Direct Marketing business if owners of the data we use were to withdraw or cease to allow access to the data |
| Data providers could withdraw their data if there is a competitive reason to do so or if additional legislation is passed restricting the use of the data |
| If a substantial number of data providers were to withdraw their data, our ability to provide products and services to our clients would be materially adversely affected |
| We must successfully integrate acquisitions |
| We continue to pursue acquisition opportunities |
| Acquisition activities, even if not consummated, require substantial amounts of management time and can distract from normal operations |
| In addition, there can be no assurance that the synergies and other objectives sought in acquisitions would be achieved |
| We believe that we will be able to successfully integrate recently acquired businesses into existing operations but there is no certainty that future acquisitions will be consummated on acceptable terms or that any acquired assets, data or businesses will be successfully integrated into our operations |
| The failure to identify appropriate candidates, to negotiate favorable terms, or to successfully integrate future acquisitions into existing operations could result in not achieving planned revenue growth or negatively impact our net income and earnings per share |
| We are vulnerable to increases in paper prices |
| In recent years, newsprint prices have fluctuated widely |
| We maintain, on average, less than 30 days of paper inventory and do not purchase our paper pursuant to long-term paper contracts |
| Because we have a limited ability to protect ourselves from fluctuations in the price of paper or to pass increases costs along to our clients, these fluctuations could materially affect the results of our operations |
| We are vulnerable to increases in postal rates and disruptions in postal services |
| Our Shoppers and Direct Marketing services depend on the United States Postal Service to deliver products |
| Our shoppers are delivered by Standard Mail, and postage is the second largest expense, behind payroll, in our Shopper business |
| Standard postage rates had been unchanged since the beginning of the third quarter of 2002, but did increase in the first quarter of 2006, and likely will increase again in the future |
| Overall Shoppers 12 ______________________________________________________________________ [34]Table of Contents postage costs are expected to grow as a result of anticipated increases in circulation and insert volumes |
| Postal rates also influence the demand for our Direct Marketing services even though the cost of mailings is borne by our clients and is not directly reflected in our revenues or expenses |
| Thus far, we have not experienced a significant negative financial impact as a result of the most recent postal rate increase, but there is no assurance that this and future postal increases will not have an adverse impact on us |
| Our international operations subject us to risks associated with operations outside the US Harte Hanks Direct Marketing conducts business outside of the United States |
| During 2005, approximately 9dtta5prca of Harte Hanks Direct Marketing’s revenues were derived from businesses outside the United States |
| Accordingly, our future operating results could be negatively affected by a variety of factors, some of which are beyond our control, including: • social, economic and political instability; • changes in US and foreign governmental legal and requirements or policies resulting in burdensome government controls, tariffs, restrictions, embargoes or export license requirements; • inflation; • the potential for nationalization of enterprises; • potentially adverse tax treatment; • less favorable foreign intellectual property laws that would make it more difficult to protect our intellectual properties from appropriation by competitors; • longer payment cycles for sales in foreign countries; and • the costs and difficulties of managing international operations |
| In addition, exchange rate movements may have an impact on our future costs or on future cash flows from foreign investments |
| We have not entered into any foreign currency forward exchange contracts or other derivative instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates |
| The various risks that are inherent in doing business in the United States are also generally applicable to doing business outside of the United States, and may be exaggerated by the difficulty of doing business in numerous sovereign jurisdictions due to differences in culture, laws and regulations |
| We must maintain effective internal controls |
| In designing and evaluating our internal controls over financial reporting, we recognize that any internal control or procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives |
| We believe that our internal controls over financial reporting currently provide reasonable assurance of achieving their control objectives, however no system of internal controls can be designed to provide absolute assurance of effectiveness |
| If we fail to maintain a system of effective internal controls, it could have a material adverse effect on our business, financial position or operating results |
| Additionally, adverse publicity related to a failure in our internal controls over financial reporting could have a negative impact on our reputation and business |
| Fluctuation in our Revenue and Operating results may impact our stock price |
| Fluctuations in our quarterly revenues and operating results in any future period that fall below the expectations of securities analysts and investors could cause a decline in our stock price |
| These fluctuations could be caused by unanticipated variations in the size, budget, or progress toward the completion of our engagements; variability in the market demand for our services, client consolidations or the unanticipated termination of several major client engagements |
| 13 ______________________________________________________________________ [35]Table of Contents The granting of stock options to our employees could affect our expenses and affect our stock price |
| New stock option accounting rules will increase our reported expenses, which could affect the price of our common shares |
| Effective January 1, 2006, we became subject to new stock option accounting rules that require that compensation costs related to share-based payment transactions, including stock options, restricted stock and performance stock units, be recognized in our financial statements |
| Previously, we accounted for stock-based compensation of employees using the intrinsic value method, which resulted in no compensation expense charged against income for stock options grants to employees where the exercise price was equal to the market price of the underlying stock at the date of grant |
| Future grants of options, stock or other forms of equity, however, will require us to recognize compensation expense in our income statement, increasing our reported expenses for the same activities and negatively impacting our earnings per share |
| General economic conditions could result in reduced demand for our products and services |
| Economic downturns often severely affect the marketing services industry |
| In the past, our customers have responded, and may respond in the future, to weak economic conditions by reducing their marketing budgets, which are generally discretionary in nature and easier to reduce in the short-term than other expenses |
| In addition, revenues from our Shoppers 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 economies |
| A lasting economic recession or downturn in the United States economy and the economies we operate in abroad, could have material adverse effects on our business, financial position or operating results |
| Our Shoppers business is geographically concentrated and is subject to the California and Florida economies |
| Our Shoppers business is concentrated geographically in California and Florida |
| A large disaster, such as a flood, hurricane, earthquake or other disaster or condition that disables our facilities, immobilizes the United States Postal Service or causes a significant negative change in the economies of these regions could have a material adverse effect on our business, financial position or operating results |
| Changes in legislation, judicial interpretations, or the consumer environment could affect us |
| Our business is subject to various laws that regulate various aspects of direct marketing, the internet and emerging technologies, including on-line content, email, intellectual property, privacy, and taxation |
| In addition, federal, state, local and foreign governmental organizations also are considering, and may consider in the future, other legislative and regulatory proposals that would regulate various direct marketing services and products |
| There is privacy legislation is pending in Congress and in most of the 50 states, and we anticipate that additional legislation will continue to be introduced in the future |
| In addition, the European Union and European Commission have adopted directives to address the regulation of various areas related to marketing, including privacy, e-commerce, security, and consumer protection |
| It is not known how courts will interpret both existing and new laws |
| Therefore, we are uncertain as to how new laws or the application of existing laws will affect our business |
| This pending legislation could result in restrictions placed upon the collection, management, aggregation, transfer and use of information that is legally available |
| It is also possible that we could be prohibited from disseminating certain types of data |
| In addition, our business may be indirectly affected by our clients who may be subject to such legislation |
| There could be a material adverse impact on our business due to the enactment of legislation or industry regulations, the issuance of judicial interpretations, or simply a change in customs, arising from public concern over consumer privacy and security issues |
| 14 ______________________________________________________________________ [36]Table of Contents Interest rate increases could affect our financial position |
| Interest rate movements in Europe and the United States can affect the amount of interest we pay related to our debt and the amount we earn on cash equivalents |
| Our primary interest rate exposure is to interest rate fluctuations in Europe, specifically Eurodollar rates due to their impact on interest related to our dlra125 million credit facility |
| We also have exposure to interest rate fluctuations in the United States, specifically money market, commercial paper and overnight time deposit rates, as these affect our earnings on excess cash |
| Even with the offsetting increase in earnings on excess cash in the event of an interest rate increase, we cannot be assured that future interest rate increases will not have a material adverse impact on our business, financial position or operating results |
| War and/or terrorism or the threat of war and/or terrorism involving the United States could have a significant impact on our business, financial position or operating results |
| War or the threat of war could substantially affect the levels of advertising expenditures by clients in each of our businesses |
| In addition, each of our businesses could be affected by operation disruptions and a shortage of supplies and labor related to such a war or threat of war |