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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

o         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 001-7120

HARTE-HANKS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code — 210-829-9000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

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 o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price ($9.14) as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2012), was approximately $437,258,000.

The number of shares outstanding of each of the registrant’s classes of common stock as of January 31, 2013 was 62,395,489 shares of common stock, all of one class.

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Documents incorporated by reference:

Portions of the Proxy Statement to be filed for the Company’s 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

THIS ANNUAL REPORT ON FORM 10-K IS BEING DISTRIBUTED TO STOCKHOLDERS IN LIEU OF A SEPARATE ANNUAL REPORT PURSUANT TO RULE 14a-3(b) OF THE ACT AND SECTION 203.01 OF THE NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL.

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Harte-Hanks, Inc. and Subsidiaries

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Form 10-K Report

December 31, 2012

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PART I

ITEM 1.     BUSINESS

INTRODUCTION

Harte-Hanks, Inc. (Harte-Hanks) is a worldwide direct and targeted marketing company that provides multichannel direct and digital marketing services and shopper advertising opportunities to a wide range of local, regional, national and international consumer and business-to-business marketers.  We manage our operations through two operating segments:  Direct Marketing, which operates both nationally and internationally, and Shoppers, which operates in certain California markets.

Virtually all for-profit organizations, as well as many non-profit organizations, rely on marketing to generate revenues and publicity.  Many businesses have a chief-level executive responsible for marketing who is charged with combining data, technology, channels and resources to demonstrate a return on marketing investment.  This has led many businesses to use direct and targeted marketing, which offer accountability and measurability of marketing programs, allowing customer insight to be leveraged to create and accelerate value.  Direct Marketing, which represented 76% of our total revenues in 2012, is a leader in the movement toward highly targeted, multichannel marketing.  Our Shoppers business applies geographic targeting principles, providing approximately 780 zones for local marketing.

Harte-Hanks® is the successor to a newspaper business started by Houston Harte and Bernard Hanks in Texas in the early 1920s.  In 1972, Harte-Hanks went public and was listed on the New York Stock Exchange (NYSE).  We became private in a leveraged buyout initiated by management in 1984.  In 1993, we again went public and listed our common stock on the NYSE.

Harte-Hanks provides public access to all reports filed with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (the 1934 Act).  These documents may be accessed free of charge on our website at http://www.harte-hanks.com.  These documents are provided as soon as practical after they are filed with the SEC and may also be found at the SEC’s website at http://www.sec.gov.  Additionally, we have adopted and posted on our website a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer.  Our website also includes our corporate governance guidelines and the charters for each of our audit, compensation, and nominating and corporate governance committees.  We will provide a printed copy of any of the aforementioned documents to any requesting stockholder.

DIRECT MARKETING

General

Our Direct Marketing services offer a wide variety of integrated, multichannel, data-driven solutions for top brands around the globe.  We help our clients gain insight into their customers’ behaviors from their data and use that insight to create innovative multichannel marketing programs to deliver a return on marketing investment.  We believe our clients’ success is determined not only by how good their tools are, but how well we help them use the tools to gain insight and analyze their consumers.  This results in a strong and enduring relationship between our clients and their customers.

We offer a full complement of capabilities and resources to provide a broad range of marketing services and data management software, in media from direct mail to email.

·                  Agency & Digital Services.  The Agency Inside Harte-Hanks® and Mason Zimbler® are full-service, customer engagement agencies specializing in direct and digital communications for both consumer and business-to-business markets. With strategy, creative and implementation services, we help marketers within targeted industries understand, identify, and engage prospects and customers in their channel of choice.  Our digital solutions integrate online services within the marketing mix and include:  website development and design, digital strategy, social media marketing and monitoring, email marketing, ecommerce and interactive relationship management and a host of other services that support our core businesses.

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·                  Database Marketing Solutions.  We have successfully delivered marketing database solutions for over 35 years across various industries.  Our solutions are built around centralized marketing databases with three core offerings: insight and analytics; customer data integration; and marketing communications tools. Our solutions enable organizations to build and manage customer communication strategies that drive new customer acquisition and retention and maximize the value of existing customer relationships. Through insight, we help clients identify models of their most profitable customer relationships and then apply these models to increase the value of existing customers while also winning profitable new customers. Through customer data integration, data from multiple sources comes together to provide a single customer view of client prospects and customers. Then, utilizing our Allink® suite of customer communication and sales optimization tools, we help clients apply their data and insights to the entire customer lifecycle, to help clients sustain and grow their business, gain deeper customer insights, and continuously refine their customer resource management strategies and tactics.

·                  Trillium Software® Data Quality and Service Solutions.  Our proprietary software has helped global customers more effectively analyze, enrich, cleanse and report on their product, financial and customer data as part of master data management, data governance, CRM, data warehousing and integration initiatives.  With industry-leading Trillium Software System®, Global Locator geocoding product, and associated data governance services, business users can optimize data-based business processes and transactions, realize efficiencies, and enhance the accuracy of their master set of data-improving program results.

·                  Business-to-Business Lead Generation.  Our technology marketing solutions provide business-to-business lead generations through our CI Technology Database® and Aberdeen Group®. Our CI Technology Database tracks technology installations, business demographics and over 5 million key decision makers at more than 4.5 million business locations in 25 countries in North America, Latin America, Europe and China.  Our clients use the data to gain insight into their prospect’s and client’s technology buying cycles. Our Aberdeen Group is a provider of fact-based research to identify and educate technology buyers across numerous industries and product categories.  Leading technology providers use Aberdeen’s proprietary research content for use in their demand creation programs, online marketing campaigns and Web-based sales and marketing tools.

·                  Direct Mail and Fulfillment.  As a full-service direct marketing provider and one of the largest mailing partners of the United States Postal Service (USPS®), our operational mandate is to ensure creativity and quality, provide an understanding of the options available in technologies and segmentation strategies and capitalize on economies of scale with our variety of execution options.  Our services include digital printing, print on demand, advanced mail optimization, logistics and transportation optimization, tracking (including our proprietary prEtrak® solution), commingling, shrink wrapping and specialized mailings.  We also maintain fulfillment centers throughout the United States where we provide custom kitting services, print on demand, product recalls and freight optimization allowing our customers to distribute literature and other marketing materials.  With facilities strategically placed nationwide, we are among the largest solo mailers in the country other than the U.S. government.

·                  Contact Centers.  We operate teleservice workstations around the globe providing advanced contact center solutions such as: speech, chat, integrated voice response, email, social cloud monitoring and web self-service.  We provide both inbound and outbound contact center services and support many languages with our strategically placed global locations for both consumer and business-to-business markets.

Many of our client relationships start with an offering from the list above on an individual solution basis to the client or a combination of our offerings from across our portfolio of businesses.  Multichannel marketing is communicating through different marketing solutions or channels, such as email, mobile devices, mail, radio, television, computer, and newspaper, in an integrated form to reach a consumer so it is easy for a consumer to buy in whatever manner the consumer chooses.

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In 2012, 2011 and 2010, Harte-Hanks Direct Marketing had revenues of $581.1 million, $614.3 million, and $601.3 million, respectively, which accounted for approximately 76%, 76%, and 73% of our total revenues, respectively.

Customers

Direct marketing services are marketed to specific industries or markets with services and software products tailored to each industry or market.  We believe that we are generally able to provide services to new industries and markets by modifying our existing services and applications.  We currently provide direct marketing services primarily to the retail, high-tech/telecom, financial services and pharmaceutical/healthcare vertical markets, in addition to a range of selected markets.  The largest Direct Marketing client (measured in revenue) comprised 6% of total Direct Marketing revenues in 2012 and 5% of our total revenues in 2012.  The largest 25 clients in terms of revenue comprised 42% of total Direct Marketing revenues in 2012 and 32% of our total revenues in 2012.

Sales and Marketing

Our enterprise sales force is organized around the five verticals we service: retail, high-tech/telecom, financial services, pharmaceutical/healthcare, and a wide range of selected markets.  The enterprise sales force sells a variety of solutions and services to address client’s targeted marketing needs.  We also maintain solution-specific sales forces and sales groups to sell our individual products and solutions.  Our sales forces, with industry-specific knowledge and experience, emphasize the cross-selling of a full range of direct marketing services and are supported by employees in each sector assigned to specific clients.  We rely on our enterprise and solution sellers to primarily sell our products and services to new clients and task our employees supporting existing clients to expand our client relationship through additional solutions and products.

Direct Marketing Facilities

Direct marketing services are provided at the following facilities, all of which are leased except as otherwise noted:

National Offices

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Competition

Our Direct Marketing business faces competition in all of its offerings and within each of its vertical markets.  Direct marketing is a dynamic business, subject to rapid technological change, high turnover of client personnel who make buying decisions, client consolidations, changing client needs and preferences, continual development of competing products and services and an evolving competitive landscape.  Our competition comes from numerous local, national and international direct marketing and advertising companies, and client internal resources, against whom we compete for individual projects, entire client relationships and marketing expenditures.  Competitive factors in our industry include the quality and scope of services, technical and strategic expertise, the perceived value of the services provided, reputation and brand recognition.  We also compete against print and electronic media and other forms of advertising for marketing and advertising dollars in general.  Failure to continually improve our current processes, advance and upgrade our technology applications, and to develop new products and services in a timely and cost-effective manner, could result in the loss of our clients or prospective clients to current or future competitors.  In addition, failure to gain market acceptance of new products and services could adversely affect our growth.  Although we believe that our capabilities and breadth of services, combined with our national and worldwide production capability, industry focus and ability to offer a broad range of integrated services, enable us to compete effectively, our business results may be adversely impacted by competition.  Please refer to Item 1A, “Risk Factors”, for additional information regarding risks related to competition.

Seasonality

Our Direct Marketing revenues tend to be higher in the fourth quarter than in other quarters during a given year.  This increased revenue is a result of overall increased marketing activity prior to and during the holiday season, primarily related to our retail vertical.

SHOPPERS

General

Harte-Hanks Shoppers is North America’s largest owner, operator and distributor of shopper publications, based on weekly circulation and revenues.  Shoppers are weekly advertising publications, 7 by 10 inches in size, distributed free by USPS saturation mail to households and businesses in a particular geographic area.  Shoppers offer advertisers a targeted, cost-effective local advertising system, with virtually 100% penetration in its areas of distribution.  Shoppers are particularly effective in large markets with high media fragmentation in which major metropolitan newspapers generally have low penetration.  Our Shoppers segment also provides online advertising and other services through our website, PennySaverUSA.com®, as well as business websites and search—engine marketing.  Our websites serve as advertising portals, bringing buyers and sellers together through our online offerings, including local classifieds, business listings, coupons, special offers and PowerSites®.  PowerSites are templated web sites for our customers, optimized to help small and medium-sized business owners establish a web presence and improve their lead generation through call tracking.  At December 31, 2012, we were publishing approximately 5,600 PowerSites weekly.

On December 31, 2012, we sold the assets of our Florida Shoppers operations, The Flyer®, for gross proceeds of $2.0 million, subject to working capital adjustments.  This transaction resulted in an after-tax loss of $2.7 million.  After this sale, Harte-Hanks Shoppers no longer has any operations or circulation in Florida.

Now all of our Shopper operations are located in California, and our California publications account for all Shoppers circulation.  As of December 31, 2012, Shoppers delivered approximately 9.1 million shopper packages in six major markets each week, covering Southern, Central and Northern California.

As of December 31, 2012, Harte-Hanks Shoppers published approximately 780 individual shopper editions each week, distributed to zones with circulation of approximately 11,600 in each zone.  This allows single-location, local advertisers to saturate a single relevant geographic zone, while enabling multiple-location advertisers to saturate multiple zones.  This unique distribution system gives large and small advertisers alike a

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cost-effective way to reach their target markets.  Our zoning capabilities and production technologies have enabled us to saturate and target areas in a number of ways, including geographic, demographic, lifestyle, behavioral and language, which we believe allows our advertisers to effectively target their customers.  Distribution products are zoned into smaller segments called sub-zones to allow further targeting, primarily for larger accounts targeting specific demographics or store locations; at December 31, 2012 Harte-Hanks offered 2,025 subzones.

In 2012, 2011, and 2010, excluding the Florida Shoppers operations, Harte-Hanks Shoppers had revenues of $186.6 million, $197.4 million, and $219.4 million, respectively, accounting for approximately 24%, 24%, and 27% of our total revenues, respectively.

Publications

The following table sets forth certain publication information with respect to Shoppers:

Our shopper publications contain classified and display advertising and are delivered by saturation mail.  The typical shopper publication contains approximately 32 pages and is 7 by 10 inches in size.  Each edition, or zone, is targeted around a natural neighborhood marketing pattern.  Shoppers also serve as a distribution vehicle for national, regional and local advertisers, utilizing “print and deliver” single-sheet inserts designed and printed by us, four-color glossy flyers designed by us or our customers and printed by third party printers or preprinted customer supplied inserts.  During 2012, we distributed approximately 3.9 billion inserted distribution pieces.  In addition, our shoppers also provide advertising and other services online through our website, PennySaverUSA.com, and our PowerSite product.

We have acquired, developed and applied innovative technology and customized equipment in the publication of our shoppers, contributing to our efficiency.  A proprietary pagination system has made it possible for over two thousand zoned editions to be designed, built and output direct-to-plate in a fully digital environment.  Automating the production process saves on labor, newsprint and overweight postage.  This software also allows for better ad tracking, immediate checks on individual zone and ad status, and more on-time press starts with less manpower.

Customers

Shoppers serves both business and individual advertisers in a wide range of industries, including real estate, employment, automotive, retail, grocery, education, telecommunications, financial services, and a number of other industries.  The largest client (measured in revenue) comprised 2% of Shoppers revenues in 2012 and less than 1% of our total revenues in 2012.  The top 25 clients in terms of revenue comprised 22% of Shoppers revenues in 2012 and 5% of our total revenues in 2012.

Sales and Marketing

We employ more than 270 commissioned sales representatives who develop both targeted and saturation advertising programs, both in print and online, for clients.  The sales organization provides service to national, regional and local advertisers through its telemarketing departments and field sales representatives.  Shoppers

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clients vary from individuals with a single item for sale to local neighborhood advertisers to large multi-location advertisers.  The weekly number of ads is primarily driven by residential customers, whereas revenues are primarily driven by small and midsize businesses.  We also focus our marketing efforts on larger national accounts by emphasizing our ability to deliver saturation advertising in defined zones, or even partial zones for inserts, in combination with advertising in the shopper publication.

Additional focus is placed on particular industries/categories through the use of sales specialists.  These sales specialists are primarily used to target automotive, real estate and employment advertisers.

We utilize proprietary sales and marketing systems to enter client orders directly from the field, instantly checking space availability, ad costs and other pertinent information.  These systems efficiently facilitate the placement of advertising into multiple-zoned editions and include built-in error-reducing safeguards that aid in minimizing costly sales adjustments.  In addition to allowing advertising information to be entered for immediate publication, these systems feed a relational client database, enabling sales personnel to access client history by designated variables to facilitate the identification of similar potential clients and to assist with timely follow-up on existing clients.

Shoppers Facilities

Our shoppers are produced at owned or leased facilities in the markets they serve.  At December 31, 2012, we had four production facilities — three in Southern California (Brea, Mira Loma and Vista) and one in Northern California (Rancho Cordova).  In the third quarter of 2013 the Northern California production facility will be closed, and production of the Northern California publication will be shared among the three Southern California production facilities.

The Southern California production facilities also house our telemarketing sales groups and administrative functions.  We also operate several executive suite type offices in areas we serve.

For more information please refer to Item 2, “Properties.”

Competition

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, satellite and cable television, other shoppers, the websites, social media, other communications media and other printed advertising media 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.  Failure to continually improve our current processes, advance and upgrade our technology applications, and develop new products and services in a timely and cost-effective manner, 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, and in geographic areas, could adversely affect our growth.  We believe that our production systems and technology, which enable us to publish separate editions in narrowly targeted zones, our local ad content, and our integrated online offering allow us to compete effectively, particularly in large markets with high media fragmentation.  However, our business results may be adversely impacted by competition.  Please refer to Item 1A, “Risk Factors”, for additional information regarding risks related to competition.

Seasonality

Historically, the second and third quarters have been the highest revenue quarters for our Shoppers business.  Revenues from the last two publication dates in December and the first two to three publication dates in January each year have been affected by a slowdown in advertising by businesses and individuals after the holidays.

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U.S. AND FOREIGN GOVERNMENT REGULATIONS

As a company with business activities around the world, we are subject to a variety of domestic and international legal and regulatory requirements that impact our business, including, for example, regulations governing consumer protection and unfair business practices, contracts, ecommerce, intellectual property, labor and employment, securities, tax, and other laws that are generally applicable to commercial activities.

We are also subject to, or affected by, numerous domestic and foreign laws, regulations and industry standards that regulate direct marketing activities, including those that address privacy, data security and unsolicited marketing communications.  Examples of some of these laws and regulations that may be applied to, or affect, our business or the businesses of our clients include the following:

·                  Federal and state laws governing the use of the internet and regulating telemarketing, including the U.S. Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM), which regulates commercial email and requires that commercial emails give recipients an opt-out method.  The Canadian Fighting Internet and Wireless Spam Act apply in a comparable manner for our activities in Canada.  Telemarketing activities are regulated by, among other requirements, the Federal Trade Commission’s Telemarketing Sales Rule (TSR), the Federal Communications Commission’s Telephone Consumer Protection Act (TCPA) and various state do-not-call laws.

·                  The U.S. Department of Commerce’s proposed Dynamic Privacy Framework, the Federal Trade Commission’s Protecting Consumer Privacy in an Era of Rapid Change policy and the European Commission’s proposed changes to the European Union’s Data Protection framework, each of which seeks to address consumer privacy, data protection and technological advancements in relation to the collection or use of personal information.

·                  A significant number of states in the U.S. have passed versions of security breach notification laws, which generally require timely notifications to affected persons in the event of data security breaches or other unauthorized access to certain types of protected personal data.

·                  The Fair Credit Reporting Act (FCRA), which governs, among other things, the sharing of consumer report information, access to credit scores, and requirements for users of consumer report information.

·                  The Financial Services Modernization Act of 1999, or Gramm-Leach-Bliley Act (GLB), which, among other things, regulates the use for marketing purposes of non-public personal financial information of consumers that is held by financial institutions. Although Harte-Hanks is not considered a financial institution, many of our clients are subject to the GLB.  The GLB also includes rules relating to the physical, administrative and technological protection of non-public personal financial information.

·                  The Health Insurance Portability and Accountability Act of 1996 (HIPAA), which regulates the use of personal health information for marketing purposes and requires reasonable safeguards designed to prevent intentional or unintentional use or disclosure of protected health information.

·                  The Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amended the FCRA and requires, among other things, consumer credit report notice requirements for creditors that use consumer credit report information in connection with risk-based credit pricing actions and also prohibits a business that receives consumer information from an affiliate from using that information for marketing purposes unless the consumer is first provided a notice and an opportunity to direct the business not to use the information for such marketing purposes, subject to certain exceptions.

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·                  The European Union (EU) data protection laws, including the comprehensive EU Directive on Data Protection (1995), which imposes a number of obligations with respect to use of personal data, and includes a prohibition on the transfer of personal information from the EU to other countries that do not provide consumers with an “adequate” level of privacy or security. The EU standard for adequacy is generally stricter and more comprehensive than that of the U.S. and most other countries.

There are additional consumer protection, privacy and data security regulations in the U.S. and in other countries in which we or our clients do business.  These laws regulate the collection, use, disclosure and retention of personal data and may require consent from consumers and grant consumers other rights, such as the ability to access their personal data and to correct information in the possession of data controllers.  We and many of our clients also belong to trade associations that impose guidelines that regulate direct marketing activities, such as the Direct Marketing Association’s Commitment to Consumer Choice.

As a result of increasing public awareness and interest in individual privacy rights, data protection, information security and environmental and other concerns regarding marketing communications, federal, state and foreign governmental and industry organizations continue to consider new legislative and regulatory proposals that would impose additional restrictions on direct marketing services and products.  Examples include data encryption standards, data breach notification requirements, consumer choice and consent restrictions and increased penalties against offending parties, among others.  In 2012, several members of the U.S. Congress (in coordination with the Federal Trade Commission and consumer advocacy groups) initiated several inquiries regarding data brokerage, one of which was directed to us (among others).  We anticipate that additional inquiries will be made, and that proposals will continue to be introduced in the future, some of which may be adopted.

In addition, our business may be affected by the impact of these restrictions on our clients and their marketing activities.  These additional regulations could increase compliance requirements and restrict or prevent the collection, management, aggregation, transfer, use or dissemination of information or data that is currently legally available. Additional regulations may also restrict or prevent current practices regarding unsolicited marketing communications.  For example, many states have considered implementing do-not-mail legislation that could impact our Direct Marketing and Shoppers businesses and the businesses of our clients and customers.  In addition, continued public interest in individual privacy rights and data security may result in the adoption of further voluntary industry guidelines that could impact our direct marketing activities and business practices.

We cannot predict the scope of any new legislation, regulations or industry guidelines or how courts may interpret existing and new laws. Additionally, enforcement priorities by governmental authorities may change and also impact our business either directly or through requiring our customers to alter their practices.  Compliance with regulations is costly and time-consuming for us and our clients, and we may encounter difficulties, delays or significant expenses in connection with our compliance.  We may also be exposed to significant penalties, liabilities, reputational harm and loss of business in the event that we fail to comply with applicable regulations.  There could be a material adverse impact on our business due to the enactment or enforcement of legislation or industry regulations, the issuance of judicial or governmental interpretations, enforcement priorities of governmental agencies or a change in customs arising from public concern over consumer privacy and data security issues.

INTELLECTUAL PROPERTY RIGHTS

Our intellectual property assets include trademarks and service marks that identify our company and our products and services, software and other technology that we develop, our proprietary collections of data and intellectual property licensed from third parties, such as prospect list providers.  We generally seek to protect our intellectual property through a combination of license agreements and trademark, service mark, copyright,

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patent and trade secret laws, and domain name registrations and enforcement procedures.  We also enter into confidentiality agreements with many of our employees, vendors and clients and seek to limit access to and distribution of intellectual property and other proprietary information. We pursue the protection of our trademarks and other intellectual property in the United States and internationally.

Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary information and technology. Monitoring unauthorized use of our intellectual property is difficult, and unauthorized use of our intellectual property may occur. We cannot be certain that patents or trademark registrations will be issued, nor can we be certain that any issued patents or trademark registrations will give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable. In addition, others may develop competing technologies or databases on their own. Moreover, there is no assurance that our confidentiality agreements with our employees or third parties will be sufficient to protect our intellectual property and proprietary information.

We may also be subject to infringement claims against us by third parties and may incur substantial costs and devote significant management resources in responding to such claims.  We are obligated under some agreements to indemnify our clients as a result of claims that we infringe on the proprietary rights of third parties. These costs and diversions could cause our business to suffer. If any party asserts an infringement claim, we may need to obtain licenses to the disputed intellectual property.  We cannot assure you, however, that we will be able to obtain these licenses on commercially reasonable terms or that we will be able to obtain any licenses at all. The failure to obtain necessary licenses or other rights may have an adverse affect on our ability to provide our products and services.

EMPLOYEES

As of December 31, 2012, Harte-Hanks employed approximately 6,140 full-time employees and 270 part-time employees, of which approximately 2,040 are based outside of the U.S.  Approximately 5,210 full-time and 70 part-time employees were in the Direct Marketing segment and 910 full-time and 200 part-time employees were in the Shoppers segment.  A portion of our workforce is provided to us through staffing companies.  None of the workforce is represented by labor unions.  We consider our relations with our employees to be good.

ITEM 1A.             RISK FACTORS

Cautionary Note Regarding Forward-Looking Statements

This report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), contains “forward-looking statements” within the meaning of the federal securities laws. All such statements are qualified by this cautionary note, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 (1933 Act) and Section 21E of the Securities Exchange Act of 1934 (1934 Act).  Forward-looking statements may also be included in our other public filings, press releases, our website and oral and written presentations by management.  Statements other than historical facts are forward-looking and may be identified by words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “seeks,” “could,” “intends,” or words of similar meaning.  Examples include statements regarding (1) our strategies and initiatives, (2) adjustments to our cost structure and other actions designed to respond to market conditions and improve our performance, and the anticipated effectiveness and expenses associated with these actions, (3) our financial outlook for revenues, earnings per share, operating income, expense related to equity-based compensation, capital resources and other financial items, (4) expectations for our businesses and for the industries in which we operate, including with regard to the performance trends in our Shoppers business and the impact of economic conditions in the United States and other markets we serve on the marketing expenditures and activities of our Direct Marketing clients and prospects, (5) competitive factors, (6) acquisition and development plans, (7) our stock repurchase program, (8) expectations regarding legal proceedings and other contingent liabilities, and (9) other statements regarding future events, conditions or outcomes.

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These forward-looking statements are based on current information, expectations and estimates and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to vary materially from what is expressed in or indicated by the forward-looking statements.  In that event, our business, financial condition, results of operations or liquidity could be materially adversely affected, and investors in our securities could lose part or all of their investments.  Some of these risks, uncertainties, assumptions and other factors can be found in our filings with the SEC, including the factors discussed below in this Item 1A, “Risk Factors”, and any updates thereto in our Forms 10-Q.  The forward-looking statements included in this report and those included in our other public filings, press releases, our website and oral and written presentations by management are made only as of the respective dates thereof, and we undertake no obligation to update publicly any forward-looking statement in this report or in other documents, our website or oral statements for any reason, even if new information becomes available or other events occur in the future.

In addition to the information set forth elsewhere in this report, including in the MD&A section, the factors described below should be considered carefully in making any investment decisions with respect to our securities. The risks described below are not the only ones we face or may face in the future. Additional risks and uncertainties that are not presently anticipated or that we may currently believe are immaterial could also impair our business operations and financial performance.

We face significant competition for individual projects, entire client relationships and advertising dollars in general.

Our Direct Marketing business faces significant competition in all of its offerings and within each of its vertical markets.  Direct marketing is a dynamic business, subject to rapid technological change, high turnover of client personnel who make buying decisions, client consolidations, changing client needs and preferences, continual development of competing products and services and an evolving competitive landscape.  This competition comes from numerous local, national and international direct marketing and advertising companies, and client internal resources, against whom we compete for individual projects, entire client relationships and marketing expenditures by clients and prospective clients.  We also compete against print and electronic media and other forms of advertising for marketing and 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, satellite and cable television, other 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.

Current and future competitors may have significantly greater financial and other resources than we do, and they may sell competing products and services at lower prices or at lower profit margins, resulting in pressures on our prices and margins.

The sizes of our competitors vary widely across market and service segments.  Therefore, some of our competitors may have significantly greater financial, technical, marketing or other resources than we do in one or more of our market segments, or overall.  As a result, our competitors may be in a position to respond more quickly than we can to new or emerging technologies and changes in customer requirements, or may devote greater resources than we can to the development, promotion, sale and support of products and services.  Moreover, new competitors or alliances among our competitors may emerge and potentially reduce our market share, revenue or margins.  Some of our competitors also may choose to sell products or services competitive to ours at lower prices by accepting lower margins and profitability, or may be able to sell products or services competitive to ours at lower prices given proprietary ownership of data, technical superiority or economies of scale.  Price reductions or pricing pressure by our competitors could negatively impact our margins and results

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of operations, and could also harm our ability to obtain new customers on favorable terms.  Competitive pricing pressures tend to increase in difficult economic environments, such as the current environments in the United States and other economies, due to reduced marketing expenditures of many of our clients and prospects and the resulting impact on the competitive business environment for marketing service providers such as our company.

We must maintain technological competitiveness, continually improve our processes and develop and introduce new products and services in a timely and cost-effective manner.

We believe that our success depends on, among other things, maintaining technological competitiveness in our Direct Marketing and Shoppers products, processing functionality and software systems and services.  Technology changes rapidly and there are continuous improvements in computer hardware, network operating systems, programming tools, programming languages, operating systems, database technology and the use of the internet.  Advances in information technology may result in changing client preferences for products and product delivery formats in our industry.  We must continually improve our processes and provide new products and services in a timely and cost-effective manner though development, license or acquisition to match our competitors’ technological developments and competing product/service offerings, and to satisfy the increasingly sophisticated requirements of our clients.  We may be unable to successfully identify, develop and bring new and enhanced services and products to market in a timely and cost-effective manner, such services and products may not be commercially successful, and services, products and technologies developed by others may render our services and products noncompetitive or obsolete.

Our success depends on our ability to consistently and effectively deliver our products and services to our clients.

Our success depends on our ability to effectively and consistently staff and execute client engagements within the agreed upon timeframe and budget.  Depending on the needs of our clients, our Direct Marketing engagements may require customization, integration and coordination of a number of complex product and service offerings and execution across many of our facilities worldwide.  Moreover, in some of our engagements, we rely on subcontractors and other third parties to provide a portion of our overall services, and we cannot guarantee that these third parties will effectively deliver their services or that we will have adequate recourse against these third parties in the event they fail to effectively deliver their services.  Other contingencies and events outside of our control may also impact our ability to provide our products and services.  Our failure to effectively and timely staff, coordinate and execute our client engagements may adversely impact existing client relationships, the amount or timing of payments from our clients, our reputation in the marketplace and ability to secure additional business and our resulting financial performance.  In addition, our contractual arrangements with our Direct Marketing clients and other customers may not provide us with sufficient protections against claims for lost profits or other claims for damages.

If our new leaders are unsuccessful, or if we lose key management and are unable to attract and retain the talent required for our business, our operating results could suffer.

Our prospects depend in large part upon our ability to attract, train and retain experienced technical, client services, sales, consulting, research and development, marketing, administrative and management personnel. While the demand for personnel is dependent on employment levels, competitive factors and general economic conditions, qualified personnel historically have been in great demand.  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.  In addition, we have recently replaced the leaders of our Direct Marketing and Shoppers divisions, and reorganized our operational structures.  If our new leaders fail to successfully adapt to their new roles and responsibilities in our reorganized business — and more generally if we are unable to attract new leaders with the necessary skills to manage our business — our business and its operating results may suffer.

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We have recently experienced, and may experience in the future, reduced demand for our products and services and increased bad debt expense because of general economic conditions, the financial conditions and marketing budgets of our clients and other factors that may impact the industry verticals that we serve.

Economic downturns and turmoil severely affect the marketing services industry.  Throughout the most recent recession, as in prior economic downturns, our customers responded 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.  Our customers may be slow to restore their marketing budgets to prior levels during a recovery, and may respond similarly to adverse economic conditions in the future.  In addition, revenues from our Shoppers business are largely dependent 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, regional and international economies and business conditions.  A lasting economic recession or anemic recovery in the U.S. or other markets in which we operate (such as the recent recession and recovery) could have material adverse effects on our business, financial position or operating results.  Similarly, industry or company-specific factors may negatively impact our clients and prospective clients or their industries, and in turn result in reduced demand for our products and services, client insolvencies, collection difficulties or bankruptcy preference actions related to payments received from our clients.  We may also experience reduced demand as a result of consolidation of clients and prospective clients in the industry verticals that we serve.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K for additional information about the adverse impact on our financial performance of the ongoing difficult economic environment in the United States and other economies.

Our Shoppers business is geographically concentrated and is greatly affected by the California economy.

Our Shoppers business is concentrated exclusively in California.  An economic downturn in California (such as the recent downturn), an anemic recovery (such as the present recovery), or a large disaster (such as a flood, hurricane, earthquake or other disaster or condition that disables our facilities, immobilizes the USPS or causes a significant negative change in the economy of California or the individual markets we serve) could have a material adverse effect on our business, financial position or operating results.

Our business plan requires us to effectively manage our costs. If we do not achieve our cost management objectives, our financial results could be adversely affected.

Our business plan and expectations for the future require that we effectively manage our cost structure, including our operating expenses and capital expenditures across our operations. To the extent that we do not effectively manage our costs, our financial results may be adversely affected in any economic climate and even more so during a prolonged recession, such as the recent economic downturn in the United States and elsewhere.

Privacy, information security and other direct marketing regulatory requirements may prevent or impair our ability to offer our products and services.

We are subject to and affected by numerous laws, regulations and industry standards that regulate direct marketing activities, including those that address privacy, data protection, information security and marketing communications.  Please refer to the section above entitled “U.S. and Foreign Government Regulations” for additional information regarding some of these regulations.

As a result of increasing public awareness and interest in privacy rights, data protection and access, information security, environmental protection and other concerns, national and local governments and industry organizations regularly consider and adopt new laws, rules, regulations and guidelines that restrict or regulate marketing communications, services and products.  Examples include data encryption standards, data breach notification requirements, registration/licensing requirements (often with fees), consumer choice, notice and consent restrictions and penalties for infractions, among others.  We anticipate that additional restrictions and regulations will continue to be proposed and adopted in the future.

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In addition, our business may be affected by the impact of these restrictions and regulations on our clients and their marketing activities.  Current and future restrictions and regulations could increase compliance requirements and costs, and restrict or prevent the collection, management, aggregation, transfer, use or dissemination of information, or change the requirements therefore so as to require other changes to our business or that of our clients.  Additional restrictions and regulations may limit or prohibit current practices regarding marketing communications.  For example, many states and countries have considered implementing do not contact legislation that could impact our Direct Marketing and Shoppers businesses and the businesses of our clients and customers.  In addition, continued public interest in privacy rights, data protection and access, and information security may result in the adoption of further industry guidelines that could impact our direct marketing activities and business practices.

We cannot predict the scope of any new laws, rules, regulation or industry guidelines or how courts or agencies may interpret current ones.  Additionally, enforcement priorities by governmental authorities will change over time, which may impact our business.  Understanding the laws, rules, regulations and guidelines applicable to specific client multichannel engagements and across many jurisdictions poses a significant challenge, as such laws, rules, regulations and guidelines are often inconsistent or conflicting, and are sometimes at odds with client objectives.  Our failure to properly comply with these regulatory requirements and client needs may materially and adversely affect our business.  General compliance with privacy, data protection and information security obligations is costly and time-consuming, and we may encounter difficulties, delays or significant expenses in connection with our compliance.   We may be exposed to significant penalties, liabilities, reputational harm and loss of business in the event that we fail to comply.  We could suffer a material adverse impact on our business due to the enactment or enforcement of legislation or industry regulations, the issuance of judicial or governmental interpretations, changed enforcement priorities of governmental agencies or a change in behavior arising from public concern over privacy, data protection and information security issues.

We could fail to adequately protect our intellectual property rights and may face claims for intellectual property infringement.

Our ability to compete effectively depends in part on the protection of our technology, products, services and brands through intellectual property right protections, including patents, copyrights, database rights, trade secrets, trademarks and domain name registrations and enforcement procedures.  The extent to which such rights can be protected and enforced varies in different jurisdictions.  Litigation involving patents and other intellectual property rights has become far more common and expensive in recent years, and we face the risk of additional litigation relating to our use or future use of intellectual property rights of third parties. Third-party infringement claims and any related litigation against us could subject us to liability for damages, significantly increase our costs, restrict us from using and providing our technologies, products or services or operating our business generally, or require changes to be made to our technologies, products and services.  Please refer to the section above entitled “Intellectual Property Rights” for additional information regarding our intellectual property and associated risks.

Consumer perceptions regarding the privacy and security of their data may prevent or impair our ability to offer our products and services.

Various federal, state, foreign and industry regulations give consumers varying degrees of control as to how certain data regarding them is collected, used and shared for marketing purposes.  If, due to privacy, security or other concerns, consumers exercise their ability to prevent or limit such data collection, use or sharing, it may impair our ability to provide direct marketing to those consumers and limit our clients’ requirements for our services.  Additionally, privacy and security concerns may limit consumers’ willingness to voluntarily provide data to our customers or marketing companies.  Some of our services depend on voluntarily provided data and may be impaired without such data.

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Our reputation and business results may be adversely impacted if we, or subcontractors upon whom we rely, do not effectively protect sensitive personal information of our clients and our clients’ customers.

Current privacy and data security laws and industry standards impact the manner in which we capture, handle, analyze and disseminate customer and prospect data as part of our client engagements.  In many instances, client contracts also mandate privacy and security practices. If we fail to effectively protect and control sensitive personal information (such as personal health information, social security numbers or credit card numbers) of our clients and their customers or prospects in accordance with these requirements, we may incur significant expense, suffer reputational harm and loss of business, and, in certain cases, be subjected to regulatory or governmental sanctions or litigation.  These risks may be increased due to our reliance on subcontractors and other third parties in providing a portion of our overall services in certain engagements.  We cannot guarantee that these third parties will effectively protect and handle sensitive personal information or other confidential information, or that we will have adequate recourse against these third parties in that event.

We may not be able to adequately protect our information systems.

Our ability to protect our information systems against damage from a data loss, security breach, human error, malfeasance, computer virus, fire, power loss, telecommunications failure or other disaster is critical to our future success. Some of these systems may be outsourced to third-party providers from time to time. Any damage to our information systems that causes interruptions in our operations or a loss of data could affect our ability to meet our clients’ requirements, which could have a material adverse effect on our business, financial position or operating results.  While we take precautions to protect our information systems, such measures may not be effective, and existing measures may become inadequate because of changes in future conditions.  Although we maintain insurance which may respond to cover some types of damages incurred by breaches of (or problems with) our information systems, such insurance is limited and expensive, and may not respond or be sufficient to prevent such damage from materially harming our business.

Breaches of security, or the perception that ecommerce is not secure, could severely harm our business and reputation.

Business-to-business and business-to-consumer electronic commerce requires the secure transmission of confidential information over public networks. Some of our products and services are accessed through the internet.  Security breaches in connection with the delivery of our products and services, or well-publicized security breaches that may affect us or our industry, such as database intrusion, could be severely detrimental to our business, operating results and financial condition.  We cannot be certain that advances in criminal capabilities, new discoveries in the field of cryptography or other developments will not compromise or breach the technology protecting the information systems that access our products, services and proprietary database information.

Data suppliers could withdraw data that we rely on for our products and services.

We purchase or license much of the data we use.  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 or materially restrict the authorized uses of their data. Data providers could withdraw their data if there is a competitive reason to do so, if there is pressure from the consumer community or if additional legislation is passed restricting the use of the data.  We also rely upon data from other external sources to maintain our proprietary and non-proprietary databases, including data received from customers and various government and public record sources. If a substantial number of data providers or other key data sources were to withdraw or restrict their data, if we were to lose access to data due to government regulation, or if the collection of data becomes uneconomical, our ability to provide products and services to our clients could be materially adversely affected, which could result in decreased revenues, net income and earnings per share.

We must successfully evaluate acquisition targets and integrate acquisitions.

We frequently evaluate acquisition opportunities to expand our product and service offerings and geographic locations, including potential international acquisitions.  Acquisition activities, even if not consummated, require substantial amounts of management time and can distract from normal operations. In addition, we may

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be unable to achieve the profitability goals, synergies and other objectives initially sought in acquisitions, and any acquired assets, data or businesses may not be successfully integrated into our operations.  Acquisitions may result in the impairment of relationships with employees and customers.  Moreover, although we review and analyze assets or companies we acquire, such reviews are subject to uncertainties and may not reveal all potential risks, and we may incur unanticipated liabilities and expenses as a result of our acquisition activities.  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 and could negatively impact our net income and earnings per share.

We are vulnerable to increases in paper prices.

Newsprint prices are subject to fluctuations.  We maintain, on average, less than 75 days of paper inventory for our Shoppers business and do not purchase our paper pursuant to long-term paper contracts.  Because we have a limited ability to protect ourselves from increases in the price of paper or to pass increased costs along to our clients, these increases could materially affect the results of our operations.  Likewise, increased paper costs could also cause our Direct Marketing customers to reduce spending on other marketing programs, or to shift to media which are less profitable for us, in each case potentially materially affecting our revenues and profits.

We are vulnerable to increases in postal rates and disruptions in postal services.

Our Shoppers and Direct Marketing services depend on the USPS and other commercial delivery services to deliver products. Our Shoppers are delivered by saturation mail, and postage is the largest expense in our Shoppers business.  Standard postage rates have increased in recent years (most recently in April 2011, January 2012 and January 2013) and may continue to do so at frequent and unpredictable intervals.  Shoppers’ postage rates increased by less than 1.0% as a result of the April 2011 rate increase, increased by approximately 2.1% as a result of the January 2012 rate increase, and will increase by approximately 2.8% as a result of the January 2013 rate increase.  The January 2013 postage rate increase, and any additional future changes in postage rates will affect Shoppers’ distribution costs.  Postage rates also influence the demand for our Direct Marketing services even though the cost of mailings is typically borne by our clients and is not directly reflected in our revenues or expenses.  Accordingly, future postal increases or disruptions in the operations of the USPS may have an adverse impact on us.

The USPS has had significant financial and operational challenges recently.  In reaction, the USPS has proposed many changes in its services, such as delivery frequency and facility access.  Recently, the USPS announced it would end household delivery on Saturdays starting in August 2013.  At this point we do not believe the announced or proposed changes will have a material impact on our business.  Additional changes, individually or in combination with other market factors, could materially and negatively affect our costs and ability to meet our clients expectations.

Our financial results could be negatively impacted by impairments of goodwill or other intangible assets with indefinite useful lives.

In the second quarter of 2012 we recorded an impairment charge of $165.3 million related to goodwill and other intangible assets in our Shoppers business as a result of continuing revenue declines, the poor economic conditions in the geographies in which we operated, and management’s evaluation of the business.  Excluding the Florida Shoppers operations (which were sold at the end of 2012 and are included in discontinued operations), the total impairment charge related to our Shoppers business was $156.9 million.  As of December 31, 2012, the net book value of our goodwill and other intangibles represented approximately $414.0 million out of our total assets of $706.2 million.  We continue to test goodwill and other intangible assets with indefinite useful lives for impairment as of November 30 of each year and on an interim date should factors or indicators become apparent that would require an interim test.  A downward revision in the fair value of either of our reporting units or any of the other intangible assets could result in additional impairments and non-cash charges. Any such impairment charges could have a significant negative effect on our reported net income.

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Our indebtedness may adversely impact our ability to react to changes in our business or changes in general economic conditions.

The amount of our indebtedness and the terms under which we have borrowed money under our credit facilities or other agreements could have important consequences for our business.  Our debt covenants require that we maintain certain financial measures and ratios.  As a result of these covenants and ratios, we may be limited in the manner in which we can conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.  A failure to comply with these restrictions or to maintain the financial measures and ratios contained in the debt agreements could lead to an event of default that could result in an acceleration of outstanding indebtedness. In addition, the amount and terms of our indebtedness could:

·                  limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate, including limiting our ability to invest in our strategic initiatives, and, consequently, place us at a competitive disadvantage;

·                  reduce the availability of our cash flows that would otherwise be available to fund working capital, capital expenditures, acquisitions and other general corporate purposes; and

·                  result in higher interest expense in the event of increases in interest rates, as discussed below under “Interest rate increases could affect our results of operations, cash flows and financial position.”

We may incur additional indebtedness in the future and, if new debt is added to our current debt levels, the above risks could be increased.

Interest rate increases could affect our results of operations, cash flows and 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 credit facilities.  As of December 31, 2012, we had $110.3 million of debt outstanding, all of which bore variable interest rates.  Our results of operations, cash flows and financial position could be materially adversely affected by significant increases in interest rates.  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.

Our international operations subject us to risks associated with operations outside the U.S.

Harte-Hanks Direct Marketing conducts business outside of the United States.  During 2012, approximately 15.3% of Harte-Hanks Direct Marketing’s revenues and 11.6% of Harte-Hanks total revenues were derived from operations outside the United States, primarily Europe, Asia and South America.  We may expand our international operations in the future as part of our growth strategy.  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 U.S. and foreign governmental legal requirements or policies resulting in burdensome government controls, tariffs, restrictions, embargoes or export license requirements;

·                  inflation;

·                  the potential for nationalization of enterprises;

·                  less favorable labor laws that may increase employment costs and decrease workforce flexibility;

·      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;

·                  more onerous or differing data privacy and security requirements or other marketing regulations;

·                  longer payment cycles for sales in foreign countries; and

·                  the costs and difficulties of managing international operations.

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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 and that 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 and other factors may impact the volatility of our stock price.

The price at which our common stock has traded in recent years has fluctuated greatly and has declined significantly. Our common stock price may continue to be volatile due to a number of factors including the following (some of which are beyond our control):

·                  the impact and duration of the ongoing economic downturn, overall strength of the United States and other economies and general market volatility;

·                  variations in our operating results from period to period and variations between our actual operating results and the expectations of securities analysts, investors and the financial community;

·                  unanticipated developments with client engagements or client demand, such as variations in the size, budget, or progress toward the completion of engagements, variability in the market demand for our services, client consolidations and the unanticipated termination of several major client engagements;

·                  announcements of developments affecting our businesses;

·                  competition and the operating results of our competitors; and

·                  other factors discussed elsewhere in this Item 1A, “Risk Factors”.

As a result of these and other factors, investors in our common stock may not be able to resell their shares at or above their original purchase price.

War or terrorism could affect our business.

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, whether due to economic declines, reactions to security risks or other factors.  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.

ITEM 1B.             UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.                                              PROPERTIES

Our headquarters are located in San Antonio, Texas, and we occupy approximately 8,000 square feet of leased office space at that location.  Our business is conducted in facilities worldwide containing aggregate space of approximately 2.8 million square feet.  Approximately 2.6 million square feet are held under leases, which expire at dates through 2020.  The balance of our properties, used in our Brea, California Shoppers operations and Hasselt, Belgium Direct Marketing operations, are owned.

ITEM 3.                                              LEGAL PROCEEDINGS

Information regarding legal proceedings is set forth in Note J, Commitments and Contingencies, of the “Notes to Consolidated Financial Statements” and is incorporated herein by reference.

ITEM 4.                                                MINE SAFETY DISCLOSURES

Not applicable

PART II

ITEM 5.                                                MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock

Our common stock is listed on the NYSE (symbol: HHS). The reported high and low quarterly sales price ranges for 2012 and 2011 were as follows:

We paid a quarterly dividend of 8.5 cents per share in each of the first three quarters of 2012 and two dividends of 8.5 cents per share in the fourth quarter of 2012.  The second dividend paid in the fourth quarter of 2012 was a one-time acceleration of the regular quarterly dividend we would have ordinarily paid in the first quarter of 2013.  As a result, we do not anticipate paying a dividend in the first quarter of 2013.  We currently plan to pay a quarterly dividend of 8.5 cents per share in each of the second, third and fourth quarters of 2013, although any actual dividend declaration can be made only upon approval of our Board of Directors, based on its business judgment.

In 2011, quarterly dividends were paid at the rate of 8.0 cents per share.

As of January 31, 2013, there are approximately 2,130 holders of record.

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Issuer Purchases of Equity Securities

The following table contains information about our purchases of equity securities during the fourth quarter of 2012:

(1)  During the fourth quarter of 2012, we purchased 387,378 shares of our common stock through our stock repurchase program that was publicly announced in August 2012.  Under this program, from which shares can be purchased in the open market, our Board of Directors has authorized us to spend up to $10.0 million to repurchase shares of our outstanding common stock.  As of December 31, 2012, we have repurchased 700,284 shares and spent $4.6 million under this authorization.  Through December 31, 2012, we had repurchased a total of 65,602,625 shares at an average price of $18.55 per share under this program and previously announced programs.

(2)  Total number of shares purchased includes shares, if any, purchased as part of our publicly announced stock repurchase program, plus shares withheld to pay applicable withholding taxes and the exercise price related to stock options, and shares withheld to pay applicable withholding taxes related to the vesting of nonvested shares, pursuant to the Harte-Hanks, Inc. 2005 Omnibus Incentive Plan.

Comparison of Stockholder Returns

The material under this heading is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any filing under the 1933 Act or the 1934 Act, whether made before or after the date hereof and irrespective of any general incorporation language in such filing.

The following graph compares the cumulative total return of our common stock during the period December 31, 2007 to December 31, 2012 with the Standard & Poor’s 500 Stock Index (S&P 500 Index) and with our peer group.

Our peer group includes Acxiom Corporation, Alliance Data Systems Corporation, Cenveo, Inc., Consolidated Graphics, Inc., Convergys Corp., Dun & Bradstreet Corporation, Equifax, Inc., Gartner, Inc., Informatica Corp., Interpublic Group of Companies, Inc., Meredith Corp., Sapient Corp., Sykes Enterprises, Inc., Techtarget, Inc., Valassis Communications, Inc., and ValueClick, Inc.

The S&P Index includes 500 United States companies in the industrial, transportation, utilities and financial sectors and is weighted by market capitalization.  The peer groups are also weighted by market capitalization.

The graph depicts the results of investing $100 in our common stock, the S&P 500 Index and the peer groups at closing prices on December 31, 2007 and assumes the reinvestment of dividends.

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ITEM 6.                                                SELECTED FINANCIAL DATA

The following table sets forth our summary historical financial information for the periods ended and as of the dates indicated.  You should read the following historical financial information along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Form 10-K.  The fiscal year financial information included in the table below for the years ended December 31, 2012, 2011, and 2010 is derived from audited financial statements contained in this Form 10-K.  Information for the years ended December 31, 2009 and 2008 was derived from previously filed Annual Reports on Form 10-K.  All financial information presented below excludes amounts related to our Florida Shoppers operations, which were sold on December 31, 2012.

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ITEM 7.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note About Forward-Looking Statements

This report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), contains “forward-looking statements” within the meaning of the federal securities laws. All such statements are qualified by the cautionary note included under Item 1A above, which is provided pursuant to the safe harbor provisions of Section 27A of the 1933 Act and Section 21E of the 1934 Act.  Actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

Overview

The following MD&A section is intended to help the reader understand the results of operations and financial condition of Harte-Hanks, Inc. (Harte-Hanks).  This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements.

Harte-Hanks is a worldwide direct and targeted marketing company that provides multichannel direct and digital marketing services and shopper advertising opportunities to a wide range of local, regional, national and international consumer and business-to-business marketers.  We manage our operations through two operating segments:  Direct Marketing and Shoppers.

Our Direct Marketing services offer a wide variety of integrated, multichannel, data-driven solutions for top brands around the globe.  We help our clients gain insight into their customers’ behaviors from their data and use that insight to create innovative multichannel marketing programs to deliver a return on marketing investment.  We believe our clients’ success is determined not only by how good their tools are, but how well we help them use the tools to gain insight and analyze their consumers.  This results in a strong and enduring relationship between our clients and their customers.

We offer a full complement of capabilities and resources to provide a broad range of marketing services and data management software, in media from direct mail to email, including:

·                  agency and digital services;

·                  database marketing solutions;

·                  data quality software and services with Trillium Software;

·                  business-to-business lead generation;

·                  direct mail and fulfillment; and

·                  contact centers.

In 2012, our Direct Marketing segment had revenues of $581.1 million, which represented 76% of our total revenues.

Harte-Hanks Shoppers is North America’s largest owner, operator and distributor of shopper publications, based on weekly circulation and revenues.  Shoppers are weekly advertising publications, 7 by 10 inches in size, distributed free by Standard Mail to households and businesses in a particular geographic area.  Through print and digital offerings, Shoppers is a trusted local source for saving customers money and helping businesses grow.  Shoppers offer advertisers a geographically 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.  Our Shoppers segment also provides online advertising and other services through our website, PennySaverUSA.com®, as well as business websites and search—engine marketing.  Our websites are online advertising portals, bringing buyers and sellers together through our online offerings, such as local classifieds, business listings, coupons, special offers and PowerSites.  PowerSites are templated websites for our customers, optimized to help small and medium-sized business owners establish a web presence and improve their lead generation.  At December 31, 2011, we were publishing approximately 5,600 PowerSites weekly.

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On December 31, 2012 we sold the assets of our Florida Shoppers operations, The Flyer®, for gross proceeds of $2.0 million, subject to working capital adjustments.  This transaction resulted in an after-tax loss of $2.7 million.  Because the Florida Shoppers represent a distinct business unit with operations and cash flows that can clearly be distinguished, both operationally and for financial purposes, from the rest of Harte-Hanks, Inc., the results of the Florida Shoppers operations are reported as discontinued operations for all periods presented.  Results of the remaining Harte-Hanks, Inc. business segments are reported as continuing operations.

After this sale, Harte-Hanks Shoppers no longer has any operations or circulation in the state of Florida. All of our Shopper operations are now located in California, and our California publications now account for all of Shoppers weekly circulation.  As of December 31, 2012, Shoppers delivered approximately 9.1 million shopper packages in six major markets each week, covering Southern, Central and Northern California.

In 2012, our Shoppers segment, excluding the Florida Shoppers, had revenues of $186.6 million, which represented 24% of our total revenues.

We derive revenues from the sale of direct marketing services and shopper advertising services.

As a worldwide business, Direct Marketing is affected by general national and international economic and business conditions.  Marketing budgets are often more discretionary in nature, and are easier to reduce in the short-term than other expenses in response to weak economic conditions.  Direct Marketing revenues are also affected by the economic fundamentals of each industry that we serve, various market factors, including the demand for services by our clients, and the financial condition of and budgets available to specific clients, among other factors.  We remain committed to making the investments necessary to execute our multichannel strategy while also continuing to adjust our cost structure to reduce costs in the parts of the business that are not growing as fast. We believe these actions will improve our profitability in future periods.

Prior to the sale of our Florida Shoppers in 2012, our Shoppers business operated in regional markets in both California and Florida and was greatly affected by the strength of the state and local economies.  Revenues from our Shoppers business were largely dependent on local advertising expenditures in the areas of California and Florida in which we operated.  During 2012, the poor economic conditions that we have experienced since the second half of 2007 in California and Florida continued.  These conditions were initially created by weakness in the real estate and associated financing markets and have spread and persist across virtually all categories.  As a result of management’s evaluation of the Shoppers business, we recorded a $165.3 million impairment loss in the second quarter of 2012 related to Shoppers’ goodwill and other intangible assets.  Excluding the Florida Shoppers operations, the total impairment charge related to our Shoppers business was $156.9 million.  We see some improvement in the California economy, but we expect to have further challenges before our performance improves.  In response, during 2012, we continued our efforts to reduce expenses in the Shoppers business, primarily through organizational restructuring, and the discontinuance of a number of unprofitable digital initiatives, including SaverTime and mobile apps.  We also made plans to close our production facility in Northern California in 2013.  We continue to invest in online offerings, particularly our PowerSites, where we are seeing good revenue growth and are adding capabilities that provide value for our readers and advertisers, and in other profitable digital initiatives.  We believe the steps we are taking to improve overall efficiency, combined with our continued investments in digital initiatives, will improve our Shoppers performance in the long term.

Our principal operating expense items are labor, postage and transportation.

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Results of Continuing Operations

As discussed in Note P, Discontinued Operations, we sold the assets of our Florida Shoppers operations on December 31, 2012.  Therefore, the operating results of our Florida Shoppers, including the loss on the sale, are being reported as discontinued operations in the Consolidated Financial Statements, and are excluded from management’s discussion and analysis of financial condition and results of operations below.

Operating results from continuing operations, direct marketing and California shoppers, were as follows:

Year ended December 31, 2012 vs. Year ended December 31, 2011

Revenues

Consolidated revenues decreased $43.9 million, to $767.7 million, in 2012 compared to 2011.  Our overall results reflect decreased revenues of $33.2 million, or 5.4%, from our Direct Marketing segment and decreased revenues of $10.7 million, or 5.4%, from our Shoppers segment.  Direct Marketing results reflect the impact of a large, long standing retail customer which changed its marketing strategy to emphasize broadcast at the expense of direct mail.  Direct Marketing experienced decreased revenues from all of our verticals, with the high-tech vertical representing the largest dollar decrease.  Shoppers’ revenue performance reflects the continued impact that the difficult economic environment in California is having on our Shoppers business.  The decrease in revenues was the result of decreased sales in established markets, including declines from most revenue categories.  Revenues from in-book advertising decreased at a higher rate than revenues from distribution products.  Shoppers revenues increased from the automotive, consumer spending and communications sectors, and decreased from the services and real estate sectors.

Operating Expenses

Overall operating expenses were $857.6 million in 2012, compared to $733.5 million in 2011.  This $124.1 million increase was a result of the impairment charge of $156.9 million discussed above.  Excluding this impairment charge, operating expenses decreased $32.8 million, or 4.5%, compared to 2011.  This $32.8 million decrease in operating expenses was driven by decreased operating expenses in Direct Marketing of $25.1 million, or 4.7%, and decreased operating expenses of $9.2 million, or 4.8%, in Shoppers , partially offset by an increase in general corporate expense of $1.5 million, or 13.3%.  The decrease at Direct Marketing was primarily due to decreased outsourced costs resulting from decreased outsourced volumes, decreased mail supply chain costs resulting from decreased volumes, and reductions in headcount, temporary labor, incentive compensation and commissions, all as a result of revenue performance.  The decrease at Shoppers was due to decreased severance costs, decreased stock-based compensation, lower payroll costs due to lower ad sales and headcount reductions, decreases in newsprint and job paper expenses due to declines in volumes, decreased bad debt expense and decreased facility lease expense.  The overall decrease at Shoppers was partially offset by costs accrued for the closure of the Northern California production facility, legal accrual reductions in 2011, an increase in offload printing costs due to an increase in heatset volumes, an increase in postage costs due to the January 2012 postage rate increase, an increase in outsourced costs due to increased outsourced volumes, and the write-off of software related to various digital initiatives.  The increase in general corporate expense was attributable to increased pension expense resulting from using a lower discount rate to calculate the projected pension benefit obligation.

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Income/Earnings Per Share from Continuing Operations

We recorded a loss from continuing operations of $73.1 million, and diluted loss per share from continuing operations of $1.16, in 2012.  Excluding the impairment loss, income from continuing operations and diluted earnings per share from continuing operations for 2012 would have been $39.0 million and $0.62, respectively.  These results, excluding the impairment loss, compare to income from continuing operations of $45.9 million, and diluted earnings per share from continuing operations of $0.72 in 2011.  The decrease in income from continuing operations, excluding the impairment loss, is primarily a result of decreased operating income from both Direct Marketing and Shoppers, a gain on the sale of land in 2011, changes in net foreign currency transaction gains and losses, and an increase in general corporate expense.

Year ended December 31, 2011 vs. Year ended December 31, 2010

Revenues

Consolidated revenues decreased $9.1 million, to $811.6 million, in 2011 compared to 2010.  Our overall results reflect increased revenues of $13.0 million, or 2.2%, from our Direct Marketing segment and decreased revenues of $22.1 million, or 10.1%, from our Shoppers segment.  The Direct Marketing results were affected by a large, one-time, voluntary recall project performed for a long-time pharmaceutical customer during the second half of 2010.  Excluding the results from this project, total Direct Marketing revenues increased $29.1 million, or 5.0% in 2011 compared to 2010.  Direct Marketing experienced increased revenues from our select, retail and financial verticals, which were partially offset by decreased revenues from our healthcare and high-tech vertical.  The August 2010 acquisition of Information Arts also contributed to the 2011 revenue growth.  Shoppers revenue performance reflects the continued impact that the difficult economic environment in California is having on our Shoppers business.  The decrease in revenues was the result of decreased sales in established markets, including declines in most revenue categories.

Operating Expenses

Overall operating expenses increased 0.8%, to $733.5 million, in 2011 compared to 2010.  The overall increase in operating expenses was driven by increased operating expenses in Direct Marketing of $16.2 million, or 3.2%.  The Direct Marketing increase was primarily due to increased headcount to support revenues and improve our database service capabilities, higher mail supply chain costs on higher transportation volumes, increased travel and increased employee recruiting.  The acquisition of Information Arts also contributed to the increase in Direct Marketing operating expenses.  Shoppers operating expenses decreased $10.1 million, or 5.0%, due to lower variable payroll costs, decreased postage due to lower distribution volumes and the elimination of the second day edition, decreased outsourced costs on lower volumes, decreased lease expense due to facility consolidations, and a $1.3 million reduction of a legal accrual.  The overall decrease at Shoppers was partially offset by $4.1 million of charges recognized in the first half of 2011 related to our efforts to reduce expenses in the Shoppers business.  Of these charges, $3.9 million related to the retirement of the President of our Shoppers business and severance due to headcount reductions.  The remaining charges related to facilities and other miscellaneous items.  The decrease at Shoppers was also partially offset by an increase in newsprint expense due to higher paper rates.  Excluding the retirement, severance and other charges, and the legal accrual reduction, Shoppers operating expenses decreased $12.9 million, or 6.4%.

Income/Earnings Per Share from Continuing Operations

Income from continuing operations decreased 16.9%, to $45.9 million, and diluted earnings per share from continuing operations decreased 16.3%, to $0.72 per share, in 2011 compared to 2010.  These decreases were the result of decreased operating income from both Shoppers and Direct Marketing, higher interest expense, and a higher effective tax rate in 2011 compared to 2010.  These decreases were partially offset by a $2.3 million gain on the sale of land adjacent to our Shopper’s Brea facility, and a $1.3 million change in net foreign currency transaction gains and losses.

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Direct Marketing

Direct Marketing operating results were as follows:

Year ended December 31, 2012 vs. Year ended December 31, 2011

Revenues

Direct Marketing revenues decreased $33.2 million, or 5.4%, in 2012 compared to 2011.  These results reflect the impact of a large, long standing retail customer which changed its marketing strategy to emphasize broadcast at the expense of direct mail.  Despite the shift in strategy and reduced direct mail volumes, this company remains one of our largest customers.  Reduced revenues from this customer represented a little less than half of the overall decline in Direct Marketing revenues.  Revenues from our retail vertical declined 1% compared to the prior year as increased spending by other existing retail customers somewhat offset the reduced spending by this customer.  Revenues from our pharmaceutical vertical decreased 16% compared to 2012, reflecting the effect of volume reductions from one long standing customer beginning in the second quarter of 2012, and the loss of another long standing customer in the third quarter of 2012.  Our high-tech vertical declined 9%, representing the largest dollar decrease from the prior year.  Our select vertical declined 4% and our financial vertical declined 3%.

Future revenue performance will depend on, among other factors, the overall strength of the national and international economies and how successful we are at maintaining and growing business with existing clients, acquiring new clients and meeting client demands.  We believe that, in the long-term, an increasing portion of overall marketing and advertising expenditures will be moved from other advertising media to the targeted media space, and that our business will benefit as a result.  Targeted media advertising results can be more effectively tracked, enabling measurement of the return on marketing investment.

Postage costs of mailings in our Direct Marketing business are borne by our clients and are not directly reflected in our revenues or expenses.

Operating Expenses

Operating expenses decreased $25.1 million, or 4.7%, in 2012 compared to 2011.  Labor costs decreased $7.0 million, or 2.5%, primarily due to reductions in headcount and temporary labor, decreased incentive compensation and decreased commissions, all as a result of revenue performance.  Production and distribution costs decreased $19.5 million, or 10.2%, due to decreased outsourced costs resulting from decreased outsourced volumes, decreased mail supply chain costs resulting from decreased volumes, and decreased lease costs due to costs recognized in 2011 to terminate a lease.  General and administrative expense increased $0.9 million, or 2.0%, due primarily to an increase in legal fees, increased royalties and increased employee travel and training, partially offset by decreased promotion expense and facilities costs.  Depreciation and software amortization expense increased $0.5 million, or 3.1%, due to increased capital expenditures in 2011.  Intangible asset amortization was up slightly.

Direct Marketing’s largest cost components are labor, outsourced costs and mail supply chain costs.  Each of these costs is somewhat variable and tends to fluctuate with revenues and the demand for our direct marketing services.  Mail supply chain rates have increased over the last few years due to demand and supply issues within the transportation industry.  Future changes in mail supply chain rates will continue to impact Direct Marketing’s total production costs and total operating expenses, and may have an impact on future demand for our supply chain management.

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Year ended December 31, 2011 vs. Year ended December 31, 2010

Revenues

Direct Marketing revenues increased $13.0 million, or 2.2%, in 2011 compared to 2010.  These results were affected by a large, one-time, voluntary recall project performed for a long-time pharmaceutical customer during the second half of 2010.  Excluding the results from this project, total Direct Marketing revenues increased $29.1 million, or 5.0%, in 2011 compared to 2010.  Revenues from our select vertical increased 17%, representing the largest dollar increase from the prior year.  Our retail vertical increased 9% and our financial vertical increased 4%.  Revenues from our pharmaceutical vertical declined 18% due to the recall project discussed above, and our high-tech vertical declined 7%.  Revenues from our vertical markets are impacted by, among other things, the economic fundamentals of each industry, various market factors, including the demand for services by our clients, and the financial condition of and budgets available to specific clients.  The August 2010 acquisition of Information Arts also contributed to the 2010 revenue growth.

Operating Expenses

Operating expenses increased $16.2 million, or 3.2%, in 2011 compared to 2010.  Labor costs increased $9.3 million, or 3.5%, due to increased headcounts to support revenues and improve our database service capabilities.  Production and distribution costs increased $6.4 million, or 3.4%, due to higher mail supply chain costs on higher transportation volumes.  General and administrative expense increased $2.2 million, or 4.8%, due primarily to an increase in travel and employee recruiting.  Depreciation and software amortization expense decreased $1.6 million, or 9.5%, due to decreased capital expenditures over the last few years.  Intangible asset amortization was down $0.1 million, or 20.9%, due to certain intangible assets becoming fully amortized.

Shoppers

Shoppers operating results were as follows:

Year ended December 31, 2012 vs. Year ended December 31, 2011

Revenues

Shoppers revenues decreased $10.7 million, or 5.4%, in 2012 compared to 2011.  These results reflect the continued impact that the difficult economic environment in California is having on our Shoppers business.  The decrease in revenues was the result of decreased sales in established markets, including declines from most revenue categories.  Revenues from in-book advertising decreased at a higher rate than revenues from distribution products.  Shoppers revenues increased from the automotive, consumer spending and communications sectors.  Revenues from the services and real estate sectors decreased.

At December 31, 2012, our Shoppers circulation reached approximately 9.1 million addresses in California each week.  While we have not made any significant changes to our circulation in the last several years, we continue to evaluate all of our circulation performance and may make circulation reductions in the future as part of our efforts to address the difficult economic conditions in California.

Future revenue performance will depend on, among other factors, the overall strength of the California economy, as well as how successful we are at maintaining and growing business with existing clients, and acquiring new clients.

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Operating Expenses

Shoppers operating expenses were $339.2 million in 2012, compared to $191.5 million in 2011.  This $147.7 million year over year increase was primarily a result of the $156.9 million impairment loss recorded in the second quarter of 2012, as discussed above.  This increase was also impacted by $1.3 million of costs recognized in the fourth quarter of 2012 relating to the closure of our production facility in Northern California.   Excluding the impairment loss and facility closure costs, operating expenses decreased $10.5 million, or 5.5%, compared to 2011.  Total labor costs decreased $10.1 million, or 15.7%, due to decreased severance costs (partially offset by severance costs related to the facility closure), decreased stock-based compensation, and lower payroll costs from lower ad sales, headcount reductions and pay rate reductions.  Total production costs were up $1.6 million, or 1.4%, due to an increase in offload printing costs due to an increase in heatset volumes, an increase in postage costs resulting from the January 2012 postage rate increase, and an increase in outsourced costs due to increased outsourced volumes, partially offset by decreases in newsprint and job paper expenses due to declines in volumes, and a decrease in facility lease expense.  Total general and administrative costs decreased $0.8 million, or 6.0%, due to a decrease in bad debt expense, lower credit card processing fees and lower costs associated with digital products, partially offset by a portion of the closing costs discussed above and legal accrual reductions in 2011.  Depreciation and software amortization expense increased $0.1 million, or 2.0%, due to writing off software related to various digital initiatives in the second quarter of 2012.

Shoppers’ largest cost components are postage, labor, and paper.  Shoppers’ labor costs are partially variable and tend to fluctuate with the number of zones, circulation, volumes and revenues.  Standard postage rates have increased in recent years, most recently in April 2011, January 2012 and January 2013.  Shoppers’ postage rates increased by less than 1.0% as a result of the April 2011 rate increase, increased by approximately 2.1% as a result of the January 2012 rate increase, and will increase by approximately 2.8% as a result of the January 2013 rate increase.  The January 2013 postage rate increase, and any additional future changes in postage rates will affect Shoppers’ distribution costs.  The U. S. Postal Service has also proposed various changes in its services to address its financial performance, such as delivery frequency and facility access.  Recently, the USPS announced it would end household delivery on Saturdays starting in August 2013.  At this point we do not believe the announced and proposed changes will have a material impact on our Shoppers business.  Newsprint prices increased steadily over the last two years before leveling off in the second half of 2012.  Newsprint prices are expected to continue to remain at the current rates throughout 2013.  Any future changes in newsprint prices will affect Shoppers’ production costs.   Shoppers Northern California production facility will be closed in the third quarter of 2013.  This facility closure will reduce Shoppers overall operating costs in 2013, including reductions in most significant expense lines.

Year ended December 31, 2011 vs. Year ended December 31, 2010

Revenues

Shoppers revenues decreased $22.1 million, or 10.1%, in 2011 compared to 2010.  These results reflect the continued impact that the difficult economic environment in California is having on our Shoppers business.  The decrease in revenues was the result of decreased sales in established markets, including declines in most revenue categories.  At December 31, 2011, our Shoppers circulation reached approximately 9.1 million addresses in California each week.

Operating Expenses

Operating expenses decreased $10.1 million, or 5.0%, in 2011 compared to 2010.  During the first half of 2011, we incurred $4.1 million of charges through our efforts to reduce expenses in the Shoppers business, primarily through organizational restructuring and headcount reductions.  Of these charges, $3.9 million related to the retirement of the President of our Shoppers business and severance due to headcount reductions.  The remaining charges related to facilities and other miscellaneous items.  Total labor costs decreased $3.0 million, or 4.5%, due to lower variable payroll costs from lower ad sales, headcount reductions and lower incentive compensation.  Excluding the severance and retirement charges described above, total labor costs decreased $6.9 million, or 10.3%.  Total production costs decreased $4.9 million, or 4.3%, due primarily to decreased postage costs as a result of a decline in distribution volumes and the elimination of the second day edition in Southern California, decreased outsourced costs resulting from decreased outsourced volumes, and decreased lease expense due to facility consolidations and eliminations.  These decreases were partially offset by an increase in newsprint expense due to higher paper rates.  Total general and administrative costs decreased $2.0

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million, or 12.6%, due primarily to a $1.3 million reduction of a legal accrual.  Depreciation and software amortization expense decreased $0.2 million, or 4.9%, due to decreased capital expenditures in the last few years.  Excluding the retirement, severance and other charges, and the legal accrual reduction, Shoppers operating expenses decreased $12.9 million, or 6.4%.

General Corporate Expense

Year ended December 31, 2012 vs. Year ended December 31, 2011

General corporate expense increased $1.5 million, or 13.3%, in 2012 compared to 2011.  This increase was attributable to increased pension expense resulting from an increase in the projected pension benefit obligation due to a lower discount rate.

Year ended December 31, 2011 vs. Year ended December 31, 2010

General corporate expense decreased $0.1 million, or 0.6%, in 2011 compared to 2010.  This decrease was the result of lower incentive compensation due to overall financial results.

Interest Expense

Year ended December 31, 2012 vs. Year ended December 31, 2011

Interest expense increased $0.4 million, or 12.2%, in 2012 compared to 2011, due to a higher interest rate spread as a result of the 2011 Term Loan Facility, which replaced the 2006 Term Loan Facility in August 2011.  This increase was partially offset by lower average debt balances in 2012 due to the maturity and $60.0 million payoff of the 2008 Term Loan in March of 2012.

Year ended December 31, 2011 vs. Year ended December 31, 2010

Interest expense increased $0.4 million, or 12.8%, in 2011 compared to 2010, due to a higher interest rate spread and an increased debt balance as a result of the 2011 Term Loan Facility, which replaced the 2006 Term Loan Facility in August 2011.

Our debt at December 31, 2012 and 2011 is described in Note D Long-Term Debt in the Notes to Consolidated Financial Statements.

Interest Income

Year ended December 31, 2012 vs. Year ended December 31, 2011

Interest income decreased $0.2 million, or 63.5% in 2012 compared to 2011 due to lower average balances and lower returns on invested cash and cash equivalents in 2012.

Year ended December 31, 2011 vs. Year ended December 31, 2010

Interest income increased slightly in 2011 compared to 2010 due to higher returns on invested cash and cash equivalents in 2011.

Other Income and Expense

Year ended December 31, 2012 vs. Year ended December 31, 2011

Other expense, net, was $2.9 million in 2012, a $4.4 million change from other income, net of $1.5 million in 2011.  This change was primarily due to a $2.3 million gain on the sale of land adjacent to our Shopper’s Brea facility, and a $2.2 million change in net foreign currency transaction gains and losses.

Year ended December 31, 2011 vs. Year ended December 31, 2010

Other income, net, was $1.5 million in 2011, a $3.6 million change from other net expense of $2.1 million in 2010.  This change was primarily due to a $2.3 million gain on the sale of land adjacent to our Shopper’s Brea facility, and a $1.3 million change in net foreign currency transaction gains and losses.

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Income Taxes

Year ended December 31, 2012 vs. Year ended December 31, 2011

Our income tax benefit of $23.2 million for 2012 resulted in an effective income tax rate of 24.1%.  The income tax benefit for 2012 reflects the $156.9 million impairment charge that resulted in a $44.8 million tax benefit in the second quarter of 2012.  In addition, the value of the net operating loss related to the Florida Shoppers operations at the beginning of 2012 is now attributed to continuing operations.  Excluding the impairment charges and the deduction related to the Florida net operating loss, 2012 tax expense would have been $23.0 million with an effective tax rate of 37.9%.  This compares to an income tax expense of $30.8 million and an effective tax rate 40.2% for 2011.

Year ended December 31, 2011 vs. Year ended December 31, 2010

Income taxes decreased $2.5 million in 2011 compared to 2010 due to lower pretax income levels, partially offset by a higher effective tax rate.  The effective income tax rate for 2011 was 40.2% compared to 37.6% in 2010.  The increase in the effective tax rate is primarily due to a reduction to our uncertain tax liabilities related to state income taxes in 2010.

Economic Climate and Impact on our Financial Statements

The economic climate in California and Florida had a negative impact on our Shoppers’ operations and cash flows for the year ended December 31, 2012, and our financial position at December 31, 2012.  This impact is reflected in our financial results, including the $165.3 million impairment charge related to goodwill and other intangible assets recorded in the second quarter of 2012.  Excluding the Florida Shoppers operations, which were sold at the end of 2012 and are reported as discontinued operations, the total impairment charge related to our Shoppers business was $156.9 million.  We cannot predict the duration of the current difficult economic environment in California, or the timing or magnitude of any subsequent improvement.  If the economic climate and markets we serve fail to improve (or deteriorate), we may record additional charges, including charges related to restructuring costs and the impairment of goodwill, other intangibles and long-lived assets, and our operations, cash flows and financial position may be materially and adversely affected.

Liquidity and Capital Resources

Sources and Uses of Cash

As of December 31, 2012, cash and cash equivalents were $49.6 million, decreasing $37.1 million from cash and cash equivalents at December 31, 2011.  This net decrease was a result of net cash provided by operating activities of $76.3 million, offset by net cash used in investing activities of $13.8 million and net cash used in financing activities of $99.8 million.

Operating Activities

Net cash provided by operating activities in 2012 was $76.3 million, compared to $60.7 million in 2011.  The $15.6 million year-over-year increase was attributable to the changes within working capital assets and liabilities.

In 2012, our principal working capital changes, which directly affected net cash provided by operating activities, were as follows:

·                  A decrease in accounts receivable attributable to collection of the December 31, 2011 receivables as well as higher revenues in the fourth quarter of 2011 compared to the fourth quarter of 2012.  Days sales outstanding were approximately 64 days at December 31, 2012, which decreased from 66 days at December 31, 2011;

·                  A decrease in inventory due to purchasing and holding higher levels of newsprint inventory in prior periods in advance of increases in newsprint prices;

·                  An increase in prepaid expenses and other current assets due to timing of payments;

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·                  A decrease in accounts payable due to lower overall production and distribution expense in the fourth quarter of 2011 than in the fourth quarter of 2012;

·                  A decrease in accrued payroll and related expenses due to the payment of 2011 incentive compensation and lower accrued incentive compensation at December 31, 2012 than at December 31, 2011;

·                  An increase in deferred revenue and customer advances due to timing of receipts;

·                  An increase in customer postage and program deposits due to the timing of a new customer rebate program; and

·                  A decrease in income taxes payable due to overpayment of estimated taxes payments in 2012.  The overpayment was the result of the loss on the sale of Florida Shoppers operations at the end of 2012.

Investing Activities

Net cash used in investing activities was $13.8 million in 2012, compared to $17.6 million in 2011.  The $3.7 million decrease is primarily the result of a $7.1 million decrease in capital spending in 2012 compared to 2011, partially offset by $3.4 million received in connection with the sale of land in 2011.

Financing Activities

Net cash used in financing activities was $99.8 million in 2012 compared to $42.2 million in 2011.  The $57.7 million increase is attributable to $55.6 million in higher net debt repayments in 2012 than in 2011 due to the five-year $122.5 million term loan facility obtained in August 2011.  The additional dividend in the fourth quarter of 2012 also contributed to this increase.  This increase was partially offset by a $4.0 million decrease in treasury stock purchases in 2012 compared to 2011.

Credit Facilities

On March 7, 2008, we entered into a four-year $100 million term loan facility (2008 Term Loan Facility) with Wells Fargo Bank, N.A., as Administrative Agent.  The 2008 Term Loan Facility matured on March 7, 2012, at which time we paid the remaining outstanding principal of $60.0 million using cash on hand.

On August 12, 2010, we entered into a new three-year $70 million revolving credit facility, which includes a $25 million accordion feature, a $25 million letter of credit sub-facility and a $5 million swing line loan sub-facility (2010 Revolving Credit Facility), with Bank of America, N.A., as Administrative Agent.  The 2010 Revolving Credit Facility permits us to request up to a $25 million increase in the total amount of the facility.  The 2010 Revolving Credit Facility matures on August 12, 2013.  For each borrowing under the 2010 Revolving Credit Facility, we can generally choose to have the interest rate for that borrowing calculated on either (i) the LIBOR rate (as defined in the 2010 Revolving Credit Facility) for the applicable interest period, plus a spread which is determined based on our total net debt-to-EBITDA ratio (as defined in the 2010 Revolving Credit Facility) then in effect, which ranges from 2.25% to 3.00% per annum; or (ii) the highest of (a) the Federal Funds Rate plus 0.50%, (b) the Agent’s prime rate, and (c) the LIBOR rate plus 1.00%, plus a spread which is determined based on our total net debt-to-EBITDA ratio then in effect, which ranges from 1.25% to 2.00% per annum.  There is a facility fee that we are also required to pay under the 2010 Revolving Credit Facility.  The facility fee rate ranges from 0.40% to 0.45% per annum, depending on our total net debt-to-EBITDA ratio then in effect.  In addition, there is a letter of credit fee with respect to outstanding letters of credit.  That fee is calculated by applying a rate equal to the spread applicable to LIBOR based loans plus a fronting fee of 0.125% per annum to the average daily undrawn amount of the outstanding letters of credit.  We may elect to prepay any amounts drawn on the 2010 Revolving Credit Facility at any time.  At December 31, 2012, we did not have any outstanding amounts drawn against our 2010 Revolving Credit Facility.  At December 31, 2012, we had letters of credit totaling $9.5 million issued under the 2010 Revolving Credit Facility, decreasing the amount available for borrowing to $60.5 million.

On August 16, 2011, we entered into a five-year $122.5 million term loan facility (2011 Term Loan Facility) with Bank of America, N.A., as Administrative Agent.  The 2011 Term Loan Facility matures on August 16, 2016.  For each borrowing under the 2011 Term Loan Facility, we can generally choose to have the interest rate

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for that borrowing calculated based on either (i) the LIBOR rate (as defined in the 2011 Term Loan Facility) for the applicable interest period, plus a spread (ranging from 2.00% to 2.75% per annum) based on our total net funded debt-to-EBITDA ratio (as defined in the 2011 Term Loan Facility) then in effect; or (ii) the highest of (a) the Agent’s prime rate, (b) the BBA daily floating rate LIBOR, as determined by Agent for such date, plus 1.00%, and (c) the Federal Funds Rate plus 0.50%, plus a spread (ranging from 1.00% to 1.75% per annum) based on our total net funded debt-to-EBITDA ratio then in effect.  We may elect to prepay the 2011 Term Loan Facility at any time without incurring any prepayment penalties.  At December 31, 2012, we had $110.3 million outstanding under the 2011 Term Loan Facility.

Under all of our credit facilities we are required to maintain an interest coverage ratio of not less than 2.75 to 1 and a total debt-to-EBITDA ratio of not more than 3.0 to 1.  The credit facilities also contain customary covenants restricting our and our subsidiaries’ ability to:

·                  authorize distributions, dividends, stock redemptions and repurchases if a payment event of default has occurred and is continuing;

·                  enter into certain merger or liquidation transactions;

·                  grant liens;

·                  enter into certain sale and leaseback transactions;

·                  have foreign subsidiaries account for more than 20% of the consolidated revenue, assets or EBITDA of Harte-Hanks and its subsidiaries, in the aggregate;

·                  enter into certain transactions with affiliates; and

·                  allow the total indebtedness of Harte-Hanks’ subsidiaries to exceed $20.0 million.

The credit facilities each also include customary covenants regarding reporting obligations, delivery of notices regarding certain events, maintaining our corporate existence, payment of obligations, maintenance of our properties and insurance thereon at customary levels with financially sound and reputable insurance companies, maintaining books and records and compliance with applicable laws.  The credit facilities each also provide for customary events of default including nonpayment of principal or interest, breach of representations and warranties, violations of covenants, failure to pay certain other indebtedness, bankruptcy and material judgments and liabilities, certain violations of environmental laws or ERISA or the occurrence of a change of control.  Our material domestic subsidiaries have guaranteed the performance of Harte-Hanks under our credit facilities.  As of December 31, 2012, we were in compliance with all of the covenants of our credit facilities.

Contractual Obligations

Contractual obligations at December 31, 2012 are as follows:

(1)  Future interest amounts were estimated using the December 31, 2012 effective rate on our outstanding debt of 2.21%.

At December 31, 2012, we had total letters of credit in the amount of $9.9 million.  No amounts were drawn against these letters of credit at December 31, 2012.  These letters of credit renew annually and exist to support insurance programs relating to workers’ compensation, automobile and general liability.  We had no other off-balance sheet arrangements at December 31, 2012.

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Dividends

We paid a quarterly dividend of 8.5 cents per share in each of the first three quarters of 2012 and two dividends of 8.5 cents per share in the fourth quarter of 2012.  The second dividend paid in the fourth quarter of 2012 was a one-time acceleration of the regular quarterly dividend we would have paid in the first quarter of 2013.  As a result, we do not anticipate paying a dividend in the first quarter of 2013.  We currently plan to pay a quarterly dividend of 8.5 cents per share in each of the second, third and fourth quarters of 2013, although any actual dividend declaration can be made only upon approval of our Board of Directors, based on its business judgment.  We have paid consecutive quarterly dividends since the first quarter of 1995.

Share Repurchase

During 2012, we repurchased 0.7 million shares of our common stock for $4.4 million under our stock repurchase program that was publicly announced in August 2012.  Under this program our Board of Directors has authorized us to spend up to $10.0 million to repurchase shares of our outstanding common stock.  At December 31, 2012, we had authorization to spend $5.6 million to repurchase additional shares under this program.  From 1997 through December 2012, we have supported our stockholders by spending more than $1.2 billion to repurchase 65.6 million shares under this program and previously announced programs.

Outlook

We consider such factors as total cash and cash equivalents, current assets, current liabilities, total debt, revenues, operating income, cash flows from operations, investing activities and financing activities when assessing our liquidity.  Our primary sources of liquidity have been cash and cash equivalents on hand and cash generated from operating activities.  Our management of cash is designed to optimize returns on cash balances and to ensure that it is readily available to meet our operating, investing and financing requirements as they arise.  Capital resources are also available from and provided through our 2010 Revolving Credit Facility, subject to the terms and conditions of that facility.

The amount of cash on hand and borrowings available under our 2010 Revolving Credit Facility are influenced by a number of factors, including fluctuations in our operating results, revenue growth, accounts receivable collections, working capital changes, capital expenditures, tax payments, share repurchases, pension plan contributions, acquisitions and dividends.

As of December 31, 2012, we had $60.5 million of unused borrowing capacity under our 2010 Revolving Credit Facility (which matures on August 12, 2013) and a cash balance of $49.6 million.  Based on our current operational plans, we believe that our cash on hand, cash provided by operating activities, and availability under the 2010 Revolving Credit Facility will be sufficient to fund operations, anticipated capital expenditures, payments of principal and interest on our borrowings, dividends on our common stock and pension contributions for the next 12 months.  Nevertheless, we cannot predict the impact on our business performance of the economic climate in the U.S. and other economies in which we operate.  A lasting economic recession in the United States and other economies could have a material adverse effect on our business, financial position or operating results.

Our 2010 Revolving Credit Facility matures in August 2013.  We believe that we will be able to obtain a replacement revolver facility in a similar amount and with similar terms.  However, if there are disruptions in the credit markets, we may be unable to obtain a replacement facility on acceptable terms or at all.  In that event, depending on our ability to generate sufficient cash flow from operations, our overall liquidity and ability to make payments on our indebtedness under our 2011 Term Loan Facility (which matures in August 2016) may be adversely impacted, and we may be required to seek one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations, or seeking to raise debt or equity capital.  We cannot assure you that any of these actions could be affected on a timely basis or on satisfactory terms, if at all.  In addition, our existing debt agreements contain restrictive covenants that may prohibit us from adopting one or more of these alternatives.

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Critical Accounting Policies

Critical accounting policies are defined as those that, in our judgment, are most important to the portrayal of our company’s financial condition and results of operations and which require complex or subjective judgments or estimates.  The areas that we believe involve the most significant management estimates and assumptions are detailed below. Actual results could differ materially from those estimates under different assumptions and conditions. Historically, actual results have not differed significantly from our estimates.

Revenue Recognition

We recognize revenue when all of the following criteria are satisfied:  (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) the service has been performed or the product has been delivered.

Payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as the services are performed or the product is delivered.

Our accounting policy for revenue recognition has an impact on our reported results and relies on certain estimates that require judgments on the part of management.  The portion of our revenue that is most subject to estimates and judgments is revenue recognized using the proportional performance method, as discussed below.

Direct Marketing revenue is derived from a variety of services and products, and may be billed at hourly rates, monthly rates or a fixed price.  For all sales, we require either a purchase order, a statement of work signed by the client, a written contract, or some other form of written authorization from the client.

Revenue from agency and creative services, analytical services and market research is typically billed based on time and materials or at a fixed price.  If billed at a fixed price, revenue is recognized on a proportional performance basis as the services specified in the arrangement are performed.  In most cases, proportional performance is based on the ratio of direct costs incurred to total estimated costs where the costs incurred, primarily labor hours and outsourced services, represent a reasonable surrogate for output measures or contract performance.  For fixed fee market research revenue streams, revenue is recognized in proportion to the value of service provided based on output criteria.

Revenue from email marketing, social media marketing and other digital solutions is recognized as the work is performed.  Revenue from these services is typically based on a fixed price or rate given to the client.

Revenue associated with new marketing database builds is deferred until complete or until client acceptance.  Upon completion or acceptance, revenue and direct build costs are then recognized over the term of the related arrangement as the services are provided.  Revenue from database and website hosting services is recognized ratably over the contractual hosting period.  Pricing for database builds are typically based on a fixed price and hosting fees are typically based on a fixed price per month or per contract.

Revenue from technology database subscriptions is based on a fixed price and is recognized ratably over the term of the subscription.  Revenue from stand-alone technology data sales is recognized at the time of delivery.

Revenue from services such as data processing, printing, personalization of communication pieces using laser and inkjet printing, targeted mail, and transportation logistics is recognized as the work is performed.  Revenue from these services is typically based on a fixed price or rate given to the client.  Postage costs of mailings in our direct mail business are borne by our clients and are not directly reflected in our revenues or expenses.

Revenue related to fulfillment and contact centers, including inbound and outbound calling and email management, is also typically based on a fixed price per transaction or service provided.  Revenue from these services is recognized as the service or activity is performed.

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Revenue from software arrangements involving multiple elements is allocated to each element based on the vendor-specific objective evidence of fair values of the respective elements.  For software sales with multiple elements (for example, software licenses with undelivered post-contract customer support or “PCS”), we allocate revenue to each component of the arrangement using the residual value method based on the fair value of the undelivered elements.  This means we defer revenue from the software sale equal to the fair value of the undelivered elements.  The fair value of PCS is based upon separate sales of renewals to other clients.  The fair value of services, such as training and consulting, is based upon separate sales of these services to other clients.

The revenue allocated to PCS is recognized ratably over the term of the support period.  Revenue allocated to professional services is recognized as the services are performed.  The revenue allocated to software products, including time-based software licenses, is recognized, if collection is probable, upon execution of a licensing agreement and shipment of the software or ratably over the term of the license, depending on the structure and terms of the arrangement.  If the licensing agreement is for a term of one year or less and includes PCS, we recognize the software and the PCS revenue ratably over the term of the license.

For certain non-software arrangements, we enter into contracts that include delivery of a combination of two or more of our service offerings.  Such arrangements are divided into separate units of accounting, provided that the delivered element(s) has stand-alone value and objective and reliable evidence of the fair value of the undelivered element(s) exist(s).

When we are able to unbundle the arrangement into separate units of accounting, revenue from each service is recognized separately, and in accordance with our revenue recognition policy for each element.  If we are unable to unbundle the arrangement into separate units of accounting, we apply one of the revenue recognition policies to the entire arrangement. This might impact the timing of revenue recognition, but would not change the total revenue recognized from the arrangement.

Shopper services are considered rendered, and the revenue recognized, when all printing, sorting, labeling and ancillary services have been provided and the mailing material has been received by the USPS.

Taxes collected from customers and remitted to governmental authorities are not reflected in our revenues or expenses.

Allowance for Doubtful Accounts

We maintain our allowance for doubtful accounts at a balance adequate to reduce accounts receivable to the amount of cash expected to be realized upon collection.  The methodology used to determine the minimum allowance balance is based on our prior collection experience and is generally related to the accounts receivable balance in various aging categories.  The balance is also influenced by specific clients’ financial strength and circumstance.  Accounts that are determined to be uncollectible are written off in the period in which they are determined to be uncollectible.  Periodic changes to the allowance balance are recorded as increases or decreases to bad debt expense, which is included in the “Advertising, selling, general and administrative” line of our Consolidated Statements of Comprehensive Income (Loss).  We recorded bad debt expense of $1.1 million, $1.4 million and $1.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.  At December 31, 2012 and 2011, our allowance for doubtful accounts was $3.4 million and $3.2 million, respectively.  While we believe our reserve estimate to be appropriate, we may find it necessary to adjust the allowance for doubtful accounts if future bad debt expense exceeds the estimated reserve.  Given the significance of accounts receivable to the consolidated financial statements, the determination of net realizable values is considered to be a critical accounting estimate.

Reserve for Healthcare, Workers’ Compensation, Automobile and General Liability

We are self-insured for our workers’ compensation, automobile, general liability and a portion of our healthcare insurance. We make various subjective judgments about a number of factors in determining our reserve for healthcare, workers’ compensation, automobile and general liability insurance, and the related expense.  Our

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deductible for individual healthcare claims is $0.3 million.  Our deductible for workers’ compensation is $0.5 million.  We have a $0.3 million deductible for automobile and general liability claims.  Our insurance administrator provides us with estimated loss reserves, based upon its experience dealing with similar types of claims, as well as amounts paid to date against these claims.  We apply actuarial factors to both insurance estimated loss reserves and to paid claims and then determine reserve levels, taking into account these calculations.  At December 31, 2012 and 2011, our reserve for healthcare, workers’ compensation, automobile and general liability was $11.4 million and $12.1 million, respectively.  If ultimate losses were 10% higher than our estimate at December 31, 2012, net income would be impacted by approximately $0.7 million, net of taxes.  The amount that earnings would be impacted is dependent on the claim year and our deductible levels for that plan year.  Periodic changes to the reserve for workers’ compensation, automobile and general liability are recorded as increases or decreases to insurance expense, which is included in the “Advertising, selling, general and administrative” line of our Consolidated Statements of Comprehensive Income (Loss).  Periodic changes to the reserve for healthcare are recorded as increases or decreases to employee benefits expense, which is included in the “Labor” line of our Consolidated Statements of Comprehensive Income (Loss).

Goodwill

Goodwill is recorded to the extent that the purchase price of an acquisition exceeds the fair value of the identifiable net assets acquired.  We assess the impairment of our goodwill by determining the fair value of each of our reporting units and comparing the fair value to the carrying value for each reporting unit.  Determining fair value requires the exercise of significant judgments, including judgments about appropriate discount rates, the amount and timing of expected future cash flows, and perpetual growth rates.  We have identified our reporting units as Direct Marketing and Shoppers.  At December 31, 2012 and 2011, the net book value of our goodwill was allocated to our reporting units as follows:

As a result of continuing revenue declines in Shoppers, and in conjunction with management’s evaluation of the business, the Company determined that a triggering event had occurred and that an interim step-one impairment test of Shoppers’ goodwill was warranted in connection with the preparation of its second quarter 2012 financial statements.  The fair value of the Shoppers unit was estimated using a discounted cash flow model and a cash flow multiple model, which were consistent with those used in our most recent annual impairment testing as of November 30, 2011.  The discounted cash flow and cash flow multiple models utilize projected financial results based on historical performance and management’s estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions.  The fair value of our Shoppers unit was estimated to be less than its related carrying value.  Management determined that the goodwill balance with respect to this reporting unit was impaired and step-two testing was deemed necessary.

Step-two of the goodwill test consists of performing a hypothetical purchase price allocation, under which the estimated fair value of the reporting unit is allocated to its tangible and intangible assets based on their estimated fair values, with any residual amount being assigned to goodwill.  During the step-two analysis, book value was estimated to approximate fair value for all working capital items, as well as a number of insignificant assets and liabilities.  Owned real estate and buildings were valued using the market approach and comparable property values.  Other significant property, plant and equipment items were valued using the cost approach and trending models to estimate the cost of reproduction and then adjusting for the diminution of value from physical deterioration and obsolescence.

The models used to value the total Shoppers unit in step-one relied heavily on management’s assumptions.  These assumptions, which are significant to the calculated fair values, are considered Level 3 inputs under the

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fair value hierarchy established by FASB ASC 820 as they are unobservable.  The assumptions in step-one include discount rate, revenue growth rates, tax rates and operating margins.  The discount rate represents the expected return on capital of the Shoppers unit.  The discount rate was determined using a target structure of 30% debt and 70% equity.  We used the interest rate of a 30-year government security to determine the risk-free rate in our weighted average cost of capital calculation.  Projected growth rates and terminal growth rates are primarily driven by management’s best estimate of future performance, giving consideration to historical performance and existing and anticipated economic and competitive conditions.  Assumed tax rates represent management’s best estimates of blended federal and state income tax rates.  Operating margin assumptions are primarily driven by management’s best estimate of future performance, giving consideration to historical performance and existing and anticipated economic and competitive conditions.

The impairment analysis indicated that $156.9 million of goodwill was impaired and an impairment charge was recorded in the Consolidated Statements of Comprehensive Income (Loss) in the second quarter of 2012.  The Company had not previously recorded any goodwill impairments.  Therefore the amount of impairments recorded in the second quarter of 2012 represented the cumulative amount of goodwill impairment charges through June 30, 2012.

We performed our annual goodwill impairment testing for both the Direct Marketing and Shoppers segments as of November 30, 2012.  Consistent with prior periods, fair value was determined using a discounted cash flow model, a cash flow multiple model, and with consideration of our overall market capitalization.  Based on the results of our November 30, 2012 impairment tests, we did not record any additional impairment losses in 2012 related to goodwill.  We did not record an impairment loss related to goodwill in 2011 or 2010.

The Company continues to monitor potential triggering events, including changes in the business climate in which it operates, attrition of key personnel, the current volatility in the capital markets, the Company’s market capitalization compared to its book value, the Company’s recent operating performance, and the Company’s financial projections.  The occurrence of one or more triggering events could require additional impairment testing, which could result in additional impairment charges.

A summary of the critical assumptions utilized for our impairment testing in 2012 are outlined below. We believe this information, coupled with our sensitivity analysis, provide relevant information to understand our goodwill impairment testing and evaluate our goodwill balances.

For the annual goodwill impairment tests performed in 2012, we did not significantly change the methodology used in 2011 to determine the fair value of our reporting units.  We made changes to certain assumptions utilized in the models for 2011 compared with the prior year due to the U.S. and global economic environments, which affect Direct Marketing, and the economic environments in California and Florida, which affect Shoppers.

Sensitivity Analysis

The following is a sensitivity analysis on the impact of changes in certain assumptions to our overall conclusion concerning impairment of our goodwill balances.

The estimated fair value of our Direct Marketing reporting unit was significantly above its carrying value.

In order to analyze the sensitivity of our assumptions on the results of our Shoppers impairment assessment, we determined the impact that a hypothetical 15% reduction in fair value would have on our conclusions.  In the case of our Shoppers reporting unit, a 15% decline in fair value would not result in the reporting unit’s carrying value to be in excess of its fair value.

The determination of the recoverability of goodwill requires significant judgment and estimates regarding future cash flows and fair values.  These estimates are subject to change and could result in impairment losses being recognized in the future.  If different reporting units or different valuation methodologies had been used, the impairment test results could have differed.

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Stock-based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period.  Determining the fair value of share-based awards requires judgment, including in some cases estimating expected term, volatility and dividend yield.  In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited.  If actual results differ significantly from some of these estimates, stock-based compensation expense and our results of operations could be materially impacted.  For the years ended December 31, 2012, 2011 and 2010, we recorded total stock-based compensation expense of $3.4 million, $5.0 million and $3.9 million, respectively.

Recent Accounting Pronouncements

As discussed in Note A of the Notes to Consolidated Financial Statements, certain new financial accounting pronouncements have been issued which either have already been reflected in the accompanying consolidated financial statements, or will become effective for our financial statements at various dates in the future.  The adoptions of these new accounting pronouncements have not and are not expected to have a material effect on our consolidated financial statements.

ITEM 7A.                                       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk includes the risk of loss arising from adverse changes in market rates and prices.  We face market risks related to interest rate variations and to foreign exchange rate variations.  From time to time, we may utilize derivative financial instruments to manage our exposure to such risks.

We are exposed to market risk for changes in interest rates related to our credit facilities.  Our earnings are affected by changes in short-term interest rates as a result of our credit facilities, which bear interest at variable rates based on LIBOR rates (effective 30 day LIBOR rate of 0.21% at December 31, 2012).  The five-year 2011 Term Loan Facility has a maturity date of August 16, 2016.  At December 31, 2011, our debt balance related to the 2011 Term Loan Facility was $110.3 million.  The three-year $70 million 2010 Revolving Credit Facility has a maturity date of August 12, 2013.  At December 31, 2011, we did not have any debt outstanding under the 2010 Revolving Credit Facility.

Assuming the actual level of borrowings throughout 2012, and assuming a one percentage point change in the average interest rates, we estimate that our net income for 2012 would have changed by approximately $0.8 million.  Due to our overall debt level and cash balance at December 31, 2012, anticipated cash flows from operations, and the various financial alternatives available to us should there be an adverse change in interest rates, we do not believe that we currently have significant exposure to market risks associated with changing interest rates.  At this time we are entered into any interest rate swap or other derivative instruments to hedge the effects of adverse fluctuations in interest rates.

Our earnings are also affected by fluctuations in foreign currency exchange rates as a result of our operations in foreign countries.  Our primary exchange rate exposure is to the Euro, British pound sterling, Australian dollar, Philippine peso and Brazilian real.  We monitor these risks throughout the normal course of business.  The majority of the transactions of our U.S. and foreign operations are denominated in the respective local currencies.  Changes in exchange rates related to these types of transactions are reflected in the applicable line items making up operating income in our Consolidated Statements of Comprehensive Income (Loss).  Due to the current level of operations conducted in foreign currencies, we do not believe that the impact of fluctuations in foreign currency exchange rates on these types of transactions is significant to our overall annual earnings.  A smaller portion of our transactions are denominated in currencies other than the respective local currencies.  For example, inter-company transactions that are expected to be settled in the near-term are denominated in

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U.S. dollars.  Since the accounting records of our foreign operations are kept in the respective local currency, any transactions denominated in other currencies are accounted for in the respective local currency at the time of the transaction.  Any foreign currency gain or loss from these transactions, whether realized or unrealized, results in an adjustment to income, which is recorded in “Other, net” in our Consolidated Statements of Comprehensive Income (Loss).  Transactions such as these amounted to $1.6 million in pre-tax currency transaction losses in 2012.  At this time we are 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.

We do not enter into derivative instruments for any purpose other than cash flow hedging. We do not speculate using derivative instruments.

ITEM 8.                                                FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements required to be presented under Item 8 are presented in the Consolidated Financial Statements and the notes thereto beginning at page F-1 of this Form 10-K (Financial Statements).

ITEM 9.                                                CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.                                       CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the 1934 Act).  It should be noted that, because of inherent limitations, our disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met.  Based upon that evaluation, the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that the design and operation of these disclosure controls and procedures were effective, at the “reasonable assurance” level, to ensure information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of our internal control over financial reporting to determine whether any changes occurred during the fourth quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, there were no changes in our internal control over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. We may make changes in our internal control processes from time to time in the future. It should also be noted that, because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and controls may become inadequate because of changes in conditions or in the degree of compliance with the policies or procedures.

Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements and Internal Control Over Financial Reporting are set forth in the Consolidated Financial Statements beginning on page F-1.

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ITEM 9B.                                       OTHER INFORMATION

None.

PART III

Some of the information required by Items 10 through 14 of this Part III is incorporated by reference from our definitive proxy statement to be filed for our 2013 annual meeting of stockholders (2013 Proxy Statement), as indicated below.  Our 2013 Proxy Statement will be filed with the SEC not later than 120 days after December 31, 2012.  Because the 2013 Proxy Statement has not yet been finalized and filed, there may be certain discrepancies between the currently anticipated section headings specified below and the final section headings contained in the 2013 Proxy Statement.

ITEM 10.                                         DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

The information required by this item regarding our directors and executive officers will be set forth in our 2013 Proxy Statement under the caption “Directors and Executive Officers”, which information is incorporated herein by reference.

Section 16(a) Compliance

The information to appear in our 2013 Proxy Statement under the caption “General Information - Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

Code of Ethics and Other Governance Information

The information required by this item regarding the Supplemental Code of Ethics for our Senior Financial Officers (Code of Ethics), audit committee financial experts, audit committee members and procedures for stockholder recommendations of nominees to our Board of Directors will be set forth in our 2013 Proxy Statement under the caption “Corporate Governance”, which information is incorporated herein by reference.

Our Code of Ethics may be found on our website at www.harte-hanks.com by clicking on the link “About Us” and then the link “Corporate Governance,” and a copy of our Code of Ethics is also available in print, without charge, upon written request to Harte-Hanks, Inc., Attn: Corporate Secretary, 9601 McAllister Freeway, Suite 610, San Antonio, Texas 78216. In accordance with the rules of the NYSE and the SEC, we currently intend to disclose any future amendments to our Code of Ethics, or waivers from our Code of Ethics for our Chief Executive Officer, Chief Financial Officer and Controller, by posting such information on our website (www.harte-hanks.com) within the time period required by applicable SEC and NYSE rules.

Management Certifications

In accordance with the Sarbanes-Oxley Act of 2002 and SEC rules thereunder, our Chief Executive Officer and Chief Financial Officer have signed certifications under Sarbanes-Oxley Section 302, which have been filed as exhibits to this Form 10-K.  In addition, our Chief Executive Officer submitted his most recent annual certification to the NYSE under Section 303A.12(a) of the NYSE listing standards on June 19, 2012.

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ITEM 11.                                         EXECUTIVE COMPENSATION

The information required by this item regarding the compensation of our “named executive officers” and directors and other required information will be set forth in our 2013 Proxy Statement under the captions “Executive Compensation,” and “Director Compensation,” which information is incorporated herein by reference. In accordance with the rules of the SEC, information to be contained in the 2013 Proxy Statement under the caption “Compensation Committee Report” is not deemed to be “filed” with the SEC or subject to the liabilities of the 1934 Act.

ITEM 12.                                         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Beneficial Ownership Tables

The information required by this item regarding security ownership of certain beneficial owners, management and directors will be set forth in our 2013 Proxy Statement under the caption “Security Ownership of Management and Principal Stockholders,” which information is incorporated herein by reference.

Equity Compensation Plan Information

The information required by this item regarding securities authorized for issuance under equity compensation plans will be set forth in our 2013 Proxy Statement under the caption “Executive Compensation - Equity Compensation Plan Information at Year-End 2012,” which information is incorporated herein by reference.

ITEM 13.                                         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

The information required by this item regarding transactions with related persons, including our policies and procedures for the review, approval or ratification of related person transactions that are required to be disclosed under the SEC’s rules and regulations, will be set forth in our 2013 Proxy Statement under the caption “Corporate Governance - Certain Relationships and Related Transactions,” which information is incorporated herein by reference.

Director Independence

The information required by this item regarding director independence will be set forth in our 2013 Proxy Statement under the caption “Corporate Governance—Independence of Directors,” which information is incorporated herein by reference.

ITEM 14.                                         PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item regarding the audit committee’s pre-approval policies and procedures and the disclosures of fees billed by our principal independent auditor will be set forth in our 2013 Proxy Statement under the caption “Audit Committee and Independent Registered Public Accounting Firm,” which information is incorporated herein by reference.

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PART IV

ITEM 15.                                         EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

15(a)(1)                                                    Financial Statements

The financial statements filed as part of this report and referenced in Item 8 are presented in the Consolidated Financial Statements and the notes thereto beginning at page F-1 of this Form 10-K (Financial Statements).

15(a)(2)                                                    Financial Statement Schedules

All schedules for which provision is made in the applicable rules and regulations of the SEC have been omitted as the schedules are not required under the related instructions, are not applicable, or the information required thereby is set forth in the Consolidated Financial Statements or notes thereto.

15(a)(3)                                                    Exhibits

The Exhibit Index following the Notes to Consolidated Financial Statements in this Form 10-K lists the exhibits that are filed or furnished, as applicable, as part of this Form 10-K.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Harte-Hanks, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.