SECURITIES AND EXCHANGE COMMISSION
FORM
10-K/A(Amendment No. 1)
10-K
xý ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172018
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto .
Commission File Number: 001-07120
(Exact name of registrant as specified in its charter)
Delaware
| | 74-1677284
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| Delaware | | 74-1677284 |
(State or other jurisdiction of incorporation or
organization) | | (I.R.S. Employer Identification No.) |
9601 McAllister Freeway, Suite 610, San Antonio, Texas 78216
(Address of principal executive offices, including zipcode)
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| | | | |
| Title of each class |
| Name of each exchange on which
registered | |
| Common Stock | | New York Stock Exchange | |
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 xý 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 xý
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 xý No o
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 (§ (§ 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 xý 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. xý Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting
company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging"emerging growth
company”company" in Rule 12b-2 of the Exchange Act.
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| | | |
| Large accelerated filer | o | | Accelerated filer | x
ý |
Non-accelerated filer | o | (Do not check if a smaller reporting company)
| Smaller reporting company | o
ý |
| | | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No xý
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price ($
10.30)11.10) as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30,
2017)2018), was approximately
$50,200,128.$54,415,142.
The number of shares outstanding of each of the registrant’s classes of common stock as of January 31,
20182019 was
6,217,5866,266,130 shares of common stock, all of one class.
Documents incorporated by reference:
None.
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.
Harte Hanks, Inc. and Subsidiaries
PART I
ITEM 1. BUSINESS
INTRODUCTION
Harte Hanks, Inc. ("Harte Hanks," "we," "our," or "us") is a purveyor of data-driven, omni-channel marketing and customer relationship solutions and logistics. The Company has robust capabilities that offer clients the strategic guidance they need across the customer data landscape as well as the executional know-how in database build and management, data analytics, digital media, direct mail, customer contact, client fulfillment and marketing and product logistics. Harte Hanks solves marketing, commerce and logistical challenges for some of the world's leading brands in North America, Asia-Pacific and Europe.
We are the successor to a newspaper business started by Houston Harte and Bernard Hanks in Texas in the early 1920s. We were incorporated in Delaware on October 1, 1970. In 1972, Harte Hanks went public and was listed on the New York Stock Exchange ("NYSE"). We became a private company in a leveraged buyout in 1984, and in 1993 we again went public and listed our common stock equity, share,on the NYSE.
We provide 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 www.hartehanks.com. There is not any information from this website incorporated by reference herein. 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 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, and we will provide a printed copy of any of these documents to any requesting stockholder.
OUR BUSINESS
We offer a wide variety of integrated, omni-channel, 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 multi-channel marketing programs that deliver greater 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 these tools to gain insight and analyze their consumers. This results in a strong and enduring relationship between our clients and their customers which is key to being leaders in customer interaction. We offer a full complement of capabilities and resources to provide a broad range of marketing services, in media from direct mail to email, including:
Agency: We offer full-service, customer engagement solutions 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.
Digital Solutions: Our digital solutions integrate online services within the marketing mix and include: search engine management, display, digital analytics, website development and design, digital strategy, social media, email, e-commerce, and interactive relationship management and a host of other services that support our core businesses.
Database Marketing Solutions: We have successfully delivered marketing database solutions 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 customer acquisition and retention and maximize the value of existing customer relationships. Through insight and analytics, 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 is brought together to provide a single customer view of client prospects and customers. We then help clients apply their data and insights to the entire customer life cycle, which helps clients sustain and grow their business, gain deeper customer insights, and continuously refine their customer resource management strategies and tactics.
Direct Mail: As a full-service direct marketing provider and a substantial mailing partner of the U.S. 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.
Mail and Product Fulfillment: We offer mail and product fulfillment solutions where we provide print on demand, manage product recalls, and distribute literature and other products. Harte Hanks has temperature-controlled, FDA-approved and geographically convenient warehouses to support print and product, all controlled by our proprietary nexTOUCH platform.
Logistics: Harte Hanks is one of the leading providers of third-party logistics and freight optimization in the United States. We complete millions of shipments of time-sensitive materials annually and have access to a certified fleet of over 15,000 trucks and a proprietary logistical system called Allink®360 that is designed to get customers’ products delivered on-time and on-budget.
Contact Centers: We offer an intelligently responsive contact center approach, which uses real-time data and predictive insights to interact with each customer in the most effective way. Our on-shore and off-shore customer support representatives deftly handle incoming calls in multiple languages, email, chat, video and social media requests 24/7 to improve customer experiences. At the same time, our advanced analytics can alert customers to trending product or service issues. Our team skillfully configures Oracle CRM or Salesforce to create great customer interactions by seamlessly linking continually-improving content between agent or AI-driven interfaces and web-based self-help tools or community forums. Our lead specialists engage qualified buyers and influencers with just the right message at just the right moment. Additionally, when combined with our Fulfillment and Logistics offerings, we provide a full suite of services for customers’ warranty, returns and recall issues.
Many of our client relationships start with an offering from the list above on an individual solution basis or a combination of our offerings from across our service offerings.
In 2018 and 2017, Harte Hanks had revenues of $284.6 million and $383.9 million, respectively.
Management Changes
Effective January 4, 2019, Bant Breen was appointed as our Chief Executive Officer. He joined Harte Hanks' Board in June 2018. Before joining Harte Hanks, Bant led numerous award-winning agencies within the WPP, IPG and Publicis groups and was inducted into the American Advertising Federation's Hall of Achievement in 2010. Most recently, Bant founded Qnary, the leading technology platform for executive reputation management. Qnary was recognized in 2018 by both Inc. and Entrepreneur magazines as one of the most innovative and fastest growing companies in America. In connection with Bant’s appointment, the Office of the CEO that was formed upon the resignation of Karen A. Puckett was dissolved.
Effective January 4, 2019, Andrew Harrison was promoted to President and Chief Operating Officer. Andrew has been with Harte Hanks for more than 20 years and brings a wealth of company and industry knowledge to the leadership team.
On January 16, 2019, Mark Del Priore was appointed as Chief Financial Officer to succeed Jon Biro who chose to leave the Company. Mark has more than 15 years of media experience, most recently as CFO for the publicly traded advertising company, SITO Mobile. Mark began working with Harte Hanks as an advisor in October 2018.
On Feb 1, 2019, Martin Reidy took the helm of our marketing services division which covers our agency, digital solutions and database marketing solutions. Martin was a Harte Hanks board member and has significant experience in direct marketing, digital advertising, predictive marketing and data-driven results marketing. Most recently, Martin served as the President and CEO of Ansira Partners, a data and digital marketing agency. Prior to that he was CEO and President of Meredith Xcelerated Marketing (a marketing services division within Meredith Publishing Inc.), Publicis Modem and R/GA (leading digital advertising and relationship marketing services firms).
Restructuring Activities
On September 21, 2018, our Board of Directors approved a reduction in our workforce for certain employees performing sales and corporate marketing functions. in Q4 2018, we identified additional reduction opportunities which resulted in an additional reduction of our workforce in other functions. The workforce reductions resulted in a restructuring charge of approximately $0.9 million for employee severance and related costs and we anticipate that this action will result in annualized cost savings of approximately $7.5 million. In addition, beginning in 2019 we expect to reduce certain non-labor discretionary expenses, with the aim of reducing expenses by an additional approximately $2.0 million per share amountsyear.
Customers
Our services are marketed to specific industries or markets with services and software products tailored to each industry or market. We tailor our services and software products depending on the industry or market we are targeting. 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 services primarily to the retail, B2B, financial services, consumer, and healthcare vertical markets, in addition to a range of other select markets. Our largest client (measured in revenue) comprised 8% of total revenues in 2018. Our largest 25 clients in terms of revenue comprised 64% of total revenues in 2018.
Sales and Marketing
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. Our marketing services sales force sells a variety of solutions and services to address client’s targeted marketing needs. We maintain solution-specific sales forces and sales groups to sell our individual products and solutions.
Facilities
Our services are provided at the following facilities, all of which are leased:
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| Domestic Offices | |
| Austin, Texas | Lenexa, Kansas |
| Chelmsford, Massachusetts | Maitland, Florida |
| Deerfield Beach, Florida | New York, New York |
| Denver, Colorado | Raleigh, North Carolina |
| East Bridgewater, Massachusetts | San Antonio, Texas |
| Fullerton, California | Shawnee, Kansas |
| Grand Prairie, Texas | Trevose, Pennsylvania |
| Jacksonville, Florida | Texarkana, Texas |
| Langhorne, Pennsylvania | Wilkes-Barre, Pennsylvania |
| |
| International Offices | |
| Hasselt, Belgium | Manila, Philippines |
| Iasi, Romania | Uxbridge, United Kingdom |
Competition
Our competition comes from local, national, and international marketing and advertising companies, and internal client 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 social, mobile, web-based, email, print, broadcast, and other forms of advertising for marketing and advertising dollars in general.
Seasonality
Our 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.
GOVERNMENT REGULATION
As a company conducting varied business activities for clients across diverse industries 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, e-commerce, intellectual property, labor, and employment (especially wage and hour laws), securities, tax, and other laws that are generally applicable to commercial activities.
We are also subject to, or affected by, numerous local, national, and international 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:
The Federal Trade Commission’s positions regarding the processing of personal information and protecting consumers as expressed through its Protecting Consumer Privacy in an Era of Rapid Change, Data Brokers, Big Data and Cross-Device Tracking reports (each of which seek to address consumer privacy, data protection, and technological advancements related to the collection or use of personal information for marketing purposes).
Data protection laws in the European Union ("EU"), including the General Data Protection Regulation (EU Regulation 679/2016) which imposes a number of obligations with respect to the processing of personal data and prohibitions related to the transfer of personal information from the EU to other countries, including the U.S., that do not provide data subjects with an “adequate” level of privacy or security.
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 protected 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.
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.
Federal and state laws governing the use of email for marketing purposes, including the U.S. Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 ("CAN-SPAM"), Canada’s Anti-Spam Legislation ("CASL") and similar e-Privacy laws in Europe (in support of Directive 2002/58/EC).
Federal and state laws governing the use of telephones for unsolicited marketing purposes, including the Federal Trade Commission’s Telemarketing Sales Rule ("TSR"), the Federal Communications Commission’s Telephone Consumer Protection Act ("TCPA"), various U.S. state do-not-call laws, Canada’s National Do Not Call laws and rules (“Telecommunications Act”) and similar e-Privacy laws in Europe (in support of Directive 2002/58/EC).
Federal and state laws governing the collection and use of personal data online and via mobile devices, including but not limited to the Federal Trade Commission Act and the Children's Online Privacy Protection Act, which seek to address consumer privacy and protection.
Federal and state laws in the U.S., Canada, and Europe specific to data security and breach notification, which include required standards for data security and 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.
There are additional consumer protection, privacy, and data security regulations in locations where 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. For example, as discussed in the Company’s Risk Factors in Item 1A, the new European General Data Protection Regulation (GDPR) that took effect in May 2018 applies to all of our products and services in Europe. The GDPR includes operational requirements for companies that receive or process personal data of residents of the EU that are different than those currently in place in the EU. 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 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 been retroactively adjustedconsidered implementing "do-not-mail" legislation that could impact our business 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 reflectalter 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 one-for-ten reverse stock splitmaterial 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 services, know-how, software, and other technology that we develop for our internal use and for license to clients and data and intellectual property licensed from third parties, such as commercial software and data providers. We generally seek to protect our intellectual property through a combination of license agreements and trademark, service mark, copyright, patent and trade secret laws as well as through 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 U.S. and internationally. Although we from time to time evaluate inventions for patentability, we do not own any patents, and patents are not core to our intellectual property strategy (other than as may be incidental to commercially available technology or software we license).
EMPLOYEES
As of December 31, 2018, Harte Hanks employed 2,816 full-time employees and 167 part-time employees, of which
was effective January 31, 2018.approximately 1,308 are based outside of the U.S., primarily in the Philippines. A portion of our workforce is provided to us through staffing companies. None of our workforce is represented by labor unions. We consider our relations with our employees to be good.
AVAILABLE INFORMATION
Our website is http://www.hartehanks.com. We make available free of charge, on or through our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing them to, the SEC. The SEC's website, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. These website addresses are intended to be for inactive textual references only. None of the information on, or accessible through, these websites are part of this Form 10-K or is incorporated by reference herein.
ITEM 1A. RISK FACTORS
Cautionary Note Regarding Forward-Looking Statements
This Amendment No. 1 on Form 10-K/Areport, 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 as amended,(the "1933 Act") and Section 21E of the Securities Exchange Act1934 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 1934, as amended. The words “may,” “anticipate,” “believe,” “expect,” “estimate,” “project,” “suggest,” “intend”similar meaning. Examples include statements regarding (1) our strategies and similar expressionsinitiatives, (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 the impact of economic conditions of the markets we serve on the marketing expenditures and activities of our 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.
These forward-looking statements are intendedbased on current information, expectations, and estimates and involve risks, uncertainties, assumptions, and other factors that are difficult to identifypredict and that could cause actual results to vary materially from what is expressed in or indicated by the forward-looking statements. SuchIn 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 and 8-K. The forward-looking statements reflectincluded in this report and those included in our current viewsother 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, except as required by law.
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 future eventsour securities.
Most of our client engagements are cancelable on short notice.
The marketing services we offer, and in particular for direct mail and contact center services, are generally terminable upon short notice by our clients, even if the term of the agreement (and the expected duration of services) is several or many years. Many of our customer agreements do not have minimum volume or revenue requirements, so clients may (and do) vary their actual orders from us over time based on their own business needs, their satisfaction with the quality and pricing of our services, and a variety of other competitive factors. In addition, the timing of particular jobs or types of jobs at particular times of year (such as mail programs supporting the holiday shopping season or contact center programs supporting a specific event) may cause significant fluctuations in the operating results of our operations in any given quarter. We depend to some extent on sales to certain industries, such as the consumer retail industries, technology, and financial performance and are subject to certain risks, uncertainties and assumptions, including those discussed in “Item 1A. Risk Factors.”services. To the extent these industries experience downturns, our clients may re-evalute their marketing spend, which could adversely affect the results of our operations.
A large portion of our revenue is generated from a limited number of clients, with concentration in the Original Filing (as defined below). Shouldconsumer retail industry. The loss of a client or significant work from one or more of our clients could adversely affect our business.
Our ten largest clients collectively represented 44% of our revenues for 2018. Furthermore, traditional consumer retail (which is an industry experiencing significant business model and financial challenges) represented 23% of our 2018 revenues. While we typically have multiple projects with our largest customers which would not all terminate at the same time, the loss of one or more of our larger clients or the projects or contracts with one of our largest clients could adversely affect our business, results of operations, and financial condition if the lost revenues were not replaced with profitable revenues from that client or other clients.
We rely on business partners for some services and technology, and we depend on one business partner in particular, which is also a significant equity holder, for a large number of critical services.
We have determined that for some services, and most technology, we are best served by partnering with other companies, engaging them as vendors either on a standing or as-needed basis. We believe this approach reduces the investment needed to access these services and technologies for our clients and provides greater flexibility in how we structure solutions for clients and adapt to market changes. However, because we do not own or control the service or technology partners, we are subject to the potential failure of those partners financially or commercially and must maintain good relations with them to ensure continued service. We may not be able to anticipate any such problems, and failure or weakness of one or more of our key business partners or our relationships with any such provider, could have a material effect on our ability to deliver services to our clients, and in turn harm our financial performance. Furthermore, our business partners may have different or conflicting interests, and although we seek to negotiate appropriate commercial terms, we may be unable to secure or enforce those terms in order to protect our client and employee relationships. Should our partners undermine our client or employee relations, our financial performance will be harmed.
Further, once we engage with a partner it may be difficult to switch to a different vendor even if we are not happy with their performance.
In particular, Wipro, LLC (“Wipro”) and its subsidiaries provide a wide array of services for us and for our clients, including database and software development, database support and analytics, IT infrastructure support and digital campaign management. Because of the nature of these services, it would be difficult and disruptive to our business to replace Wipro on short notice if doing so was necessary or desirable. Wipro also is our largest equity holder, having invested $9.9 million in us in 2018 through the purchase of our Series A Convertible Preferred Stock, which is convertible into 16.0% of our common stock. Subject to certain conditions, Wipro is entitled to appoint a non-voting board observer or a board member to our board of directors. As of December 31, 2018, Wipro has designated an observer to the Board of Directors.
Our indebtedness may adversely impact our ability to react to changes in our business or changes in general economic conditions.
On April 17, 2017, we entered into a credit agreement with Texas Capital Bank, N.A. The agreement consists of a two-year $20.0 million revolving credit facility, which we amended on January 9, 2018 to increase the availability under the revolving credit facility to $22.0 million and extended the term of the credit facility by one year to April 17, 2020. The agreement limits our ability to incur funded debt while any obligation or letter of credit issued thereunder is outstanding, subject to customary exceptions. See Note C, Long-Term Debt, in the Notes to Consolidated Financial Statements for further discussion.
We may incur additional indebtedness in the future and the terms of future arrangements may be less favorable to the company than our previous or current facilities. Our ability to incur indebtedness is also impacted by the terms of our Series A Convertible Preferred Stock, which limits our ability to incur indebtedness without the holders' consent to the greater of $40.0 million or four times our trailing 12-month EBITDA (measured at the time such indebtedness is incurred). Any failure or inability to obtain new financing arrangements when needed on favorable terms could have a material adverse impact on our liquidity position.
The amount of our indebtedness and the terms under which we borrow money under any future credit facilities or other agreements could have significant consequences for our business. Borrowings may include covenants requiring that we maintain certain financial measures and ratios. Covenant and ratio requirements may limit the manner in which we can conduct our business, and we may be unable to engage in favorable business activities or finance future operations and 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 indebtedness. In addition, the amount and terms of any future 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 the Risk Factor “Interest rate increases could affect our results of operations, cash flows, and financial position.”
Risks related to our pension benefit plans may adversely impact our results of operations and cash flows.
Pension benefits represent significant financial obligations. Because of the uncertainties involved in estimating the timing and amount of future payments and asset returns, significant estimates are required to calculate pension expense and liabilities related to our plans. We utilize the services of independent actuaries, whose models are used to facilitate these calculations. Several key assumptions are used in the actuarial models to calculate pension expense and liability amounts recorded in the
consolidated financial statements. In particular, significant changes in actual investment returns on pension assets, discount rates, or legislative or regulatory changes could impact future results of operations and required pension contributions. Differences between actual pension expenses and liability amounts from these estimated expense and liabilities may adversely impact our results of operations and cash flows.
We may need to obtain additional funding to continue as a going concern; if we are unable to meet our needs for additional funding in the future, we will be required to limit, scale back, or cease operations.
Our consolidated financial statements for the year ended December 31, 2018 have been prepared assuming we will continue to operate as a going concern. Because we continue to experience net operating losses, our ability to continue as a going concern is subject to our ability to obtain profitability or successfully raise sufficient additional capital as needed, through future financings or other strategic arrangements. Additional funds may not be available when needed, or if available, we may not be able to obtain such funds on terms acceptable to us. If adequate funds are unavailable when needed, we may not be able to continue as a going concern. We may be required to scale down or sell certain businesses or cease operations.
We face significant competition for individual projects, entire client relationships and advertising dollars in general.
Our business faces significant competition within each of our vertical markets and for all of our offerings. We offer our marketing services within a dynamic business environment characterized by 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 internet (social, mobile, web-based, and email), print, broadcast, 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 which may prevent us from performing similar services for competitors. Some of our clients have also sought to reduce the number of marketing vendors or use third-party procurement organizations, all of which increases pricing pressure, and may disadvantage us relative to our competitors. 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 and financial condition.
Current and future competitors may have significantly greater financial and other resources than we do, and they may sell competing 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 vertical markets and service lines. Therefore, some of our competitors may have significantly greater financial, technical, marketing, or other resources than we do in any 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, methodologies, 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 that competes with ours at lower prices by accepting lower margins and profitability or may be able to sell products or services that competes with ours at lower prices given proprietary ownership of data, technical superiority, a broader or deeper product or experience set, or economies of scale. Price reductions or pricing pressure by our competitors could negatively impact our margins and results of operations and could also harm our ability to obtain new customers on favorable terms. Competitive pricing pressures tend to increase in difficult or uncertain economic environments, 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 services in a timely and cost-effective manner.
We believe that our success depends on, among other things, maintaining technological competitiveness in our products, processing functionality, and software systems and services. Technology changes rapidly as makers of computer hardware, network systems, programming tools, computer and data architectures, operating systems, database technology, and mobile devices continually improve their offerings. Advances in information technology may result in changing client preferences for products and product delivery channels in our industry. The increasingly sophisticated requirements of our clients require us to continually improve our processes and provide new products and services in a timely and cost-effective manner (whether through development, license, or acquisition). Our direct mail operations are increasingly pressured by larger-scale competitors who have adopted technologies allowing them to more effectively and efficiently customize mailed marketing materials. 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 services to our clients.
Our success depends on our ability to effectively and consistently staff and execute client engagements within the agreed upon time frame and budget. Depending on the needs of our clients, our engagements may require customization, integration, and coordination of a number of complex product and service offerings and execution across many facilities. Moreover, in some of our engagements, we rely on subcontractors and other third parties to provide some of the services to our clients, and we cannot guarantee that these third parties will effectively deliver their services, that we will be able to easily suspend work with contractors that are not performing adequately, 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 clients and other customers may not provide us with sufficient protections against claims for lost profits or other claims for damages.
We have recently experienced, and may experience in the future, reduced demand for our products and services due to the financial condition and marketing budgets of our clients and other factors that may impact the industry verticals that we serve.
Marketing budgets are largely discretionary in nature, and as a consequence are easier to reduce in the short-term than other expenses. Our customers have in the past, and may in the future, responded to their own financial constraints (whether caused by weak economic conditions, weak industry performance or client-specific issues) by reducing their marketing spending. Customers may also be slow to restore their marketing budgets to prior levels during a recovery and may respond similarly to adverse economic conditions in the future. Our revenues are dependent on national, regional, and international economies and business conditions. A lasting economic recession or anemic recovery in the markets in which we operate 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, 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.
We must effectively manage our costs to be successful. 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 accurately anticipate and effectively manage our costs as our business evolves, our financial results may be adversely affected.
Our financial performance has harmed our commercial reputation and relationship with customers, vendors, and other commercial parties, and may impair our ability to attract, retain and motivate employees.
Our declining financial performance has caused customers and vendors to increase scrutiny on payment and performance terms in our agreements, which may impose additional costs (or result in reduced profitability) in our operations. Clients, vendors, and partners and recent performance, as well as prospective clients, vendors, and partners) may also decline to do business with us due to their concerns regarding our financial condition. Additionally, due to our liquidity constraints, we may be unable to aggressively price our services to win work in competitive bid situations. These impediments to working with clients, vendors and partners may reduce both our overall revenues and profitability, and consequently the value of our common stock.
Likewise, our declining financial performance has negatively affected employee morale and compensation. Due to financial constraints, we may have difficulty providing compensation that is sufficient to attract, retain and motivate employees, especially skilled professionals for whom sizable bonus payouts are a key element of market-driven cash compensation. Furthermore, the decline in the price of our common stock has eroded the value of our equity-based incentive programs. If we are unable to attract, retain and motivate employees despite our financial performance and within the resource constraints, it will impair our ability to effectively serve our clients, which in turn is likely to reduce both our overall revenues and profitability, and consequently the value of our common stock.
Our inability to comply with the listing requirements of the New York Stock Exchange could result in our common stock being delisted, which could affect our common stock’s market price and liquidity and reduce our ability to raise capital.
During 2017, we received several notices from the NYSE indicating that the average closing price of our common stock had fallen below $1.00 per share over a period of 30 consecutive trading days, which is the minimum average share price for continued listing on the NYSE under Rule 802.01C of the NYSE Listed Company Manual. This compelled us to effect a 1-for-10 reverse stock split on January 31, 2018.
Although the NYSE has notified us that we have cured the average closing price requirement, additional NYSE continued listing requirements include that we maintain an average market capitalization of over $50 million (measured over a consecutive 30 trading-day periods) when our stockholders' equity is less than $50 million, as it recently has been (the “Market Capitalization Listing Requirement”).
On October 31, 2018, we disclosed that we received a notice from the NYSE that we were not in compliance with the “Market Capitalization Listing Requirement”.
The NYSE accepted our plan of definitive action to bring us into compliance with the Market Capitalization Listing Requirement in January 2019, thereby delaying any decision to delist us for up to 18 months. The NYSE will closely monitor our attempt to implement our plan over the next 18 months and our failure to achieve the initiatives and goals included in the plan will result in our being subject to a NYSE trading suspension at the time any initiative or goal is not met. In order to regain compliance with the Market Capitalization Listing Requirement, we will have to maintain the required $50 million global market capitalization. Our failure to do so will result in a suspension by the NYSE of trading in our common stock and the initiation of procedures to delist our common stock.
In addition, if our average global market capitalization over a consecutive 30 trading-day period is less than $15 million, the NYSE will promptly initiate suspension and delisting procedures and, under the NYSE’s continued listing standards, we will not have any opportunity to regain compliance and our common stock will be delisted.
Our common stock could be delisted if we are not in compliance with this (or any other such) requirement and are unable to regain compliance during any applicable cure or grace period. A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock and reducing the number of investors willing to hold or acquire our common stock. A suspension or delisting could also adversely affect our relationships with our business partners and suppliers and customers’ and potential customers’ decisions to purchase our products and services, and would have a material, adverse impact on our business, operating results and financial condition. In addition, a suspension or delisting would impair our ability to raise additional capital through equity or debt financing and our ability to attract and retain employees by means of equity compensation.
In the event of a delisting, our common stock could be traded on the over-the-counter bulletin board, or in the so-called “pink sheets.” In the event of such trading, it is highly likely that there would be: significantly less liquidity in the trading of our common stock; decreases in institutional and other investor demand for our common stock, coverage by securities analysts, market making activity and information available concerning trading prices and volume; and fewer broker-dealers willing to execute trades in our common stock. The occurrence of any of these events could result in a further decline in the market price of our common stock. The occurrence of any of these events could impair our ability to retain and attract employees and members of management.
Privacy, information security and other 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 “Item 1. Business - Government Regulation” 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. In addition, the new European General Data Protection Regulation (GDPR) took effect in May 2018 and applied to all of our products and services that provide service in Europe. The GDPR includes operational requirements for companies that receive or process personal data of residents of the EU that are different than those currently in place in the EU. For example, we may be required to implement measures to change or limit (by age, use or geography) our service offerings. We may also be required to obtain consent and/or offer new controls to existing and new users in Europe before processing data for certain aspects of our services. In addition, the GDPR will include significant penalties for non-compliance. We anticipate that additional restrictions and regulations will continue to be proposed and adopted in the future. The Philippines has also adopted the Data Privacy Act of 2012 (Republic Act 10173)
which mirrors most important aspects of the GDPR and is likely to have a similar effect on our operations in and involving the Philippines.
Our business may also be affected by the impact of these restrictions and regulations on our clients and their marketing activities. In addition, as we acquire new capabilities and deploy new technologies to execute our strategy, we may be exposed to additional types or layers of regulation. 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 (especially with respect to personal 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 and information quality solutions. For example, many states and countries have considered implementing "do not contact" legislation that could impact our business 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, regulations, 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, or because of our clients’ need to comply. 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 affecting us and/or our clients, 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.
Consumer perceptions regarding the privacy and security of their data may prevent or impair our ability to offer our products and services.
Various local, national, and international regulations, as well as industry standards, 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 marketing to those consumers and limit our clients’ demand 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 therefore may be impaired without such data.
If we do not prevent security breaches and other interruptions to our infrastructure, we may be exposed to lawsuits, lose customers, suffer harm to our reputation, and incur additional costs.
The services we offer involve the transmission of large amounts of sensitive and proprietary information over public communications networks, as well as the processing and storage of confidential customer information. Unauthorized access, remnant data exposure, computer viruses, denial of service attacks, accidents, employee error or malfeasance, “social engineering” and “phishing” attacks, intentional misconduct by computer “hackers” and other disruptions can occur, and infrastructure gaps, hardware and software vulnerabilities, inadequate or missing security controls, and exposed or unprotected customer data can exist that (i) interfere with the delivery of services to our customers, (ii) impede our customers' ability to do business, or (iii) compromise the security of systems and data, which exposes information to unauthorized third parties. We are a target of cyber-attacks of varying degrees on a regular basis. Although we maintain insurance which may respond to cover some types of damages incurred by damage to, breaches of, or problems with, our information and telecommunications systems, such insurance is limited and expensive, and may not respond or be sufficient to offset the costs of such damages, and therefore such damages may materially harm our business.
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, our client contracts also mandate privacy and security practices. If we fail to effectively protect and control information, especially 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 uncertainties materialize,other confidential information, or that we will have adequate recourse against these third parties in that event.
If our facilities are damaged, or if we are unable to access and use our facilities, our business and results of operations will be adversely affected.
Our operations rely on the ability of our employees to work at specially-equipped facilities to perform services for our clients. Although we have some excess capacity and redundancy, we do not have sufficient excess capacity or redundancy (in equipment, facilities, or personnel) to maintain service and operational levels for extended periods if we are unable to use one of our major facilities. Should we lose access to a facility for any reason, our service levels are likely to decline or be suspended, clients would go without service or secure replacement services from a competitor. As consequence of such an event, we would suffer a reduction in revenues and harm to (and loss of) client relationships.
Significant system disruptions, loss of data center capacity or interruption of telecommunication links could adversely affect our business and results of operations.
Our business is heavily dependent upon data centers and telecommunications infrastructures, which are essential to both our call center services and our database services (which require that we efficiently and effectively create, access, manipulate, and maintain large and complex databases). In addition to the third-party data centers we use, we also operate several data centers to support both our own and our clients' needs in this regard, as well as those of some of our clients. Our ability to protect our operations against damage or interruption from fire, flood, tornadoes, power loss, telecommunications or equipment failure, or other disasters and events beyond our control is critical to our continued success. Likewise, as we increase our use of third-party data centers, it is critical that the vendors providing that service adequately protect their data centers from the same risks. Our services are very dependent on links to telecommunication providers. We believe we have taken reasonable precautions to protect our data centers and telecommunication links from events that could interrupt our operations. Any damage to the data centers we use or any failure of our telecommunications links could materially adversely affect our ability to continue services to our clients, which could result in loss of revenues, profitability and client confidence, and may adversely impact our ability to attract new clients and force us to expend significant company resources to repair the damage.
If our new leaders are unsuccessful, or if we continue to lose key management and are unable to attract and retain the talent required for our business, our operating results could suffer.
Over the past three years we have replaced many of our leaders (including our Chief Executive Officer, Chief Marketing Officer, and Chief Financial Officer) and we have eliminated or consolidated several leadership positions (including Chief Technology Officer, and Executive Vice President of Sales), resulting in a much smaller leadership team. If our new leaders fail in their new and additional roles and responsibilities (and more generally if we are unable to attract additional leaders with the necessary skills to manage our business) our business and its operating results may suffer. Further, our prospects depend in large part upon our ability to attract, train, and retain experienced technical, client services, sales, consulting, marketing, and management personnel. While the demand for personnel is dependent on employment levels, competitive factors, and general economic conditions, our recent business performance may diminish our attractiveness as an employer. 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.
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 copyrights, database rights, trade secrets, trademarks, as well as through domain name registrations, and enforcement procedures. The extent to which such rights can be protected and enforced varies by jurisdiction, and capabilities we procure through acquisitions may have less protection than would be desirable for the use or scale we intend or need. 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.
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 trademark registrations will be issued, nor can we be certain that any issued trademark registrations will give us adequate protection from competing products. For example, 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.
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. We may also be subject to such infringement claims against us by third parties and may incur substantial costs and devote significant management resources in responding to such claims, as we have in the recent past. We have been, and continue to be, 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 distractions could cause our business to suffer. In addition, 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 effect on our ability to provide our products and services.
Breaches of security, or the perception that e-commerce 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 or are otherwise dependent on 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, cryptography, or other fields will not compromise or breach the technology protecting the information systems that deliver our products, services, and proprietary database information.
Datasuppliers could withdraw data that we rely on for our products and services.
We purchase or license much of the data we use for ourselves and for our clients. There could be a material adverse impact on our business if owners of the data we use were to curtail 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 regulations are adopted 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 and adversely affected, which could result in decreased revenues, net income, and earnings per share.
We may be unable to make dispositions of assets on favorable terms, or at all.
In 2018, we sold our 3Q Digital business (which we purchased in 2015 for $30 million in cash plus an earn-out of up to $35 million) for $5 million in cash and assignment of the earn-out obligation. In the future, we may determine to divest certain assets or businesses consistent with our corporate strategy. The price we obtain for such assets or businesses will be driven by performance of those businesses and the current market demand for such assets, and we may not be able to realize a profit upon sale. If we are unable to make dispositions in a timely manner or at profitable price, our business, net income, and earnings per share could be materially and adversely affected.
We are vulnerable to increases in postal rates and disruptions in postal services.
Our services depend on the USPS and other commercial delivery services to deliver products. Standard postage rates have increased in recent years (most recently in January 2019) and may continue to do so at frequent and unpredictable intervals. Postage rates influence the demand for our services even though the cost of mailings is typically borne by our clients (and is not directly reflected in our revenues or expenses) because clients tend to reduce other elements of marketing spending to offset increased postage costs. Accordingly, future postal increases or disruptions in the operations of the USPS may have an adverse impact on us.
In addition, 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. These changes, together with others that may be adopted, individually or in combination with other market factors, could materially and negatively affect our costs and ability to meet our clients’ expectations.
We are vulnerable to increases in paper prices.
Price of print materials are subject to fluctuations. Increased paper costs could cause our customers to reduce spending on other marketing programs, or to shift to formats, sizes, or media which may be less profitable for us, in each case potentially materially affecting our revenues and profits.
We are unlikely to declare cash dividends or repurchase our shares.
Although our board of directors has in the past authorized the payment of quarterly cash dividends on our common stock, we announced in 2016 that we did not plan to declare any further dividends. In addition, although our board has authorized stock purchase programs (and we repurchased shares as recently as 2015), we are unlikely to make any repurchases in the near term. Decisions to pay dividends on our common stock or to repurchase our common stock will be based upon periodic determinations by our board that such dividends or repurchases are both in compliance with all applicable laws and agreements and in the best interest of our stockholders after considering our financial condition and results of operations, the price of our common stock, credit conditions, and such other factors as are deemed relevant by our board. The failure to pay a cash dividend or repurchase stock could adversely affect the market price of our common stock.
Interestrate increases could affect our results of operations, cash flows and financial position.
Interest rate fluctuations in Europe and the U.S. can affect the amount of interest we pay related to our debt and the amount we earn on cash equivalents. Borrowings under our Texas Capital Bank credit facility bear interest at variable rates based upon the prime rate or LIBOR. Our results of operations, cash flows, and financial position could be materially or adversely affected by significant increases in interest rates. We also have exposure to interest rate fluctuations in the U.S., 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.
We are subject to risks associated with operations outside the U.S.
Harte Hanks conducts business outside of the U.S. During 2018, approximately 14.5% of our revenues were derived from operations outside the U.S., primarily Europe and Asia. 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:
changes in local, national, and international legal requirements or policies resulting in burdensome government controls, tariffs, restrictions, embargoes, or export license requirements;
higher rates of 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 property from misappropriation;
more onerous or differing data privacy and security requirements or other marketing regulations;
longer payment cycles;
social, economic, and political instability;
the differing costs and difficulties of managing international operations;
modifications to international trade policy, including changes to or repeal of the North American Free Trade Agreement or the imposition of increased or new tariffs, quotas or trade barriers on key commodities; and
geopolitical risk and adverse market conditions caused by changes in national or regional economic or political conditions (which may impact relative interest rates and the availability, cost, and terms of mortgage funds), including with regard to Brexit.
In addition, exchange rate fluctuations 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 U.S. are also generally applicable to doing business anywhere else and may be exacerbated by the difficulty of doing business in numerous sovereign jurisdictions due to differences in culture, laws, and regulations.
We have identified material weaknesses in our internal control over financial reporting that could, if not remediated, result in material misstatements in our financial statements. In addition, current and potential stockholders could lose confidence in our financial reporting, which could cause our stock price to decline.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. We identified control deficiencies in our financial reporting process that constitute material weaknesses; as of December 31, 2018, two of those material weaknesses were not yet remediated.
As discussed in Part II, Item 9A, material weaknesses in the following areas existed as of December 31, 2018; (i) two of five components of internal control as defined by COSO (control activities and information and communication), and (ii) the effectiveness of internal controls over the completeness and accuracy of data used to recognize and record revenue and related accounts such as accounts receivable, accrued revenue and deferred revenue, and the precision of management’s review of controls over revenue. As a result of these material weaknesses management has determined that both our disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2018.
In light of the material weaknesses identified, we performed additional analysis and procedures to ensure that our consolidated financial statements were prepared in accordance with GAAP and fairly reflected our financial position and results of operations as of and for the year ended December 31, 2018. Prior to our December 31, 2016 fiscal year end, we began taking a number of actions in order to remediate the material weaknesses described above, including developing a plan to redesign processes and controls, and in 2017 we engaged specialists to assist in the comprehensive review, design, and implementation of new internal controls. Improvements in the design and operating effectiveness of internal controls over financial reporting that we have affected to date have led to the successful remediation of several previously disclosed material weaknesses including contingent consideration, recoverability of deferred tax assets, financial close and reporting, and three of the five components of internal control as defined by COSO (control environment, risk assessment and monitoring). Our remediation efforts will continue into the fiscal year ending December 31, 2019. We expect to incur additional costs remediating these material weaknesses.
Although we believe we are taking appropriate actions to remediate the control deficiencies identified and to strengthen our internal control over financial reporting, we may need to take additional measures to fully mitigate the material weaknesses discussed above. Measures to improve our internal controls may not be sufficient to ensure that our internal controls are effective or that the identified material weaknesses will not result in a material misstatement of our annual or interim consolidated financial statements. In addition, other material weaknesses or deficiencies may be identified in the future. If we are unable to correct material weaknesses in internal controls in a timely manner, our ability to record, process, summarize, and report financial information accurately and within the time periods specified in the rules and forms of the SEC will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and adversely impact our business and financial condition.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Implementation of new technology related to the control system may result
in misstatements due to errors that are not detected and corrected during testing. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Fluctuation in ourrevenueand 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):
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;
the overall strength of the economies of the markets we serve and general market volatility; and
other factors discussed elsewhere in this Item 1A, “Risk Factors.”
Because 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.
Our certificate of incorporation and bylaws contain anti-takeover protections that may discourage or prevent strategic transactions, including a takeover of our company, even if such a transaction would be beneficial to our stockholders
Provisions contained in our certificate of incorporation and bylaws, in conjunction with provisions of the Delaware General Corporation Law, could delay or prevent a third party from entering into a strategic transaction with us, even if such a transaction would benefit our stockholders. For example, our certificate of incorporation and bylaws provide for a staggered board of directors, do not allow written consents by stockholders, and have strict advance notice and disclosure requirements for nominees and stockholder proposals.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our business is conducted in facilities worldwide containing aggregate space of approximately 1.3 million square feet. All facilities are held under leases, which expire at dates through 2025. See “Item 1 - Business - Facilities”.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is set forth in Note I, 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 under the symbol HHS. As of January 31, 2019, there are approximately 1617 common stockholders of record. The last reported share price of our common stock on March 15, 2019 was $3.95.
Issuer Purchases of Equity Securities
The following table contains information about our purchases of equity securities during the fourth quarter of 2018:
|
| | | | | | | | | | | | | | |
| Period | | Total Number of
Shares
Purchased (1) | | Average
Price Paid
per Share | | Total Number of
Shares Purchased
as Part of a Publicly
Announced Plan (2) | | Maximum Dollar
Amount that May
Yet Be Spent
Under the Plan |
| October 1 - 31, 2018 | | — |
| | $ | — |
| | — |
| | $ | 11,437,544 |
|
| November 1 - 30, 2018 | | — |
| | $ | — |
| | — |
| | $ | 11,437,544 |
|
| December 1 - 31, 2018 | | — |
| | $ | — |
| | — |
| | $ | 11,437,544 |
|
| Total | | — |
| | $ | — |
| | — |
| | |
|
(1) Total number of shares purchased includes shares, if any, (i) purchased as part of our publicly announced stock repurchase program, and (ii) pursuant to our 2013 Omnibus Incentive Plan and applicable inducement award agreements with certain executives, withheld to pay withholding taxes upon the vesting of shares.
(2) During the fourth quarter of 2018, we did not purchase any shares of our common stock through our stock repurchase program that was publicly announced in August 2014. Under this program, from which shares can be purchased in the open market, our Board has authorized us to spend up to $20.0 million to repurchase shares of our outstanding common stock. As of December 31, 2018, we have repurchased 150,667 shares and spent $8.6 million under this authorization. Through December 31, 2018, we had repurchased a total of 6,788,798 shares at an average price of $181.02 per share under this program and previously announced programs.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical financial information for the periods ended and as of the dates indicated. You should underlying assumptions prove incorrect, actualread 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.
|
| | | | | | | | |
| In thousands, except per share amounts | | 2018 | | 2017 |
| Statement of Comprehensive Income (loss) data | | |
| | |
|
| Revenues | | $ | 284,628 |
| | $ | 383,906 |
|
| Operating income (loss) from continuing operations | | (26,034 | ) | | (40,865 | ) |
| Income (loss) from continuing operations | | $ | 17,550 |
| | $ | (41,860 | ) |
| | | | | |
| Earnings (loss) from continuing operations per common share—diluted | | $ | 2.38 |
| | $ | (6.76 | ) |
| Weighted-average common and common equivalent shares outstanding—diluted | | 6,270 |
| | 6,192 |
|
| | | | | |
| Cash dividends per share | | $ | — |
| | $ | — |
|
| | | | | |
| Balance sheet data (at end of period) | | |
| | |
|
| Cash and cash equivalents | | $ | 20,882 |
|
| $ | 8,397 |
|
| Total assets | | 125,175 |
| | 130,812 |
|
| Total debt | | 14,200 |
| | — |
|
| Total stockholders’ equity (deficit) | | (19,184 | ) | | (34,635 | ) |
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
those anticipated, believed, expected, estimated, projected, suggestedwhat is expressed in or
intended.EXPLANATORY NOTEindicated 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. This Amendment No. 1section is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements.
Harte Hanks partners with clients to deliver relevant, connected, and quality customer interactions. Our approach starts with discovery and learning, which leads to customer journey mapping, creative and content development, analytics, and data management, and ends with execution and support in a variety of digital and traditional channels. We do something powerful: we produce engaging and memorable customer interactions to drive business results for our clients, which is why Harte Hanks is known for developing better customer relationships and experiences and defining interaction-led marketing.
Our services offer a wide variety of integrated, multi-channel, 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 multi-channel marketing programs to deliver a return on Form 10-K/A (“Amendment No. 1”) amendsmarketing investment. We believe our Annual Reportclients’ 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, in media from direct mail to social media, including:
agency and digital services;
database marketing solutions and business-to-business lead generation;
direct mail, logistics, and fulfillment; and
contact centers.
We are affected by the general, national, and international economic and business conditions in the markets where we and our customers operate. Marketing budgets are largely discretionary in nature, and as a consequence are easier for our clients to reduce in the short-term than other expenses. Further, our contracts with our clients generally don’t require them to purchase a specified amount of services from us and could be cancelled on Form 10-Krelatively short notice. Our 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 fiscalfinancial 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 continued to face a challenging competitive environment in 2018. The sale of 3Q Digital in 2018, and our recent preferred stock financing from Wipro, together with our restructuring efforts that are meant to decrease recurring expenses, are all parts of our efforts to prioritize our investments and focus on our core business of optimizing our clients' customer journey across an omni-channel delivery platform. We expect these actions will enhance our liquidity and financial flexibility. For additional information see Liquidity and Capital Resources. We have taken actions to return the business to profitability and improve our cash, liquidity, and financial position. This includes workforce restructuring, making investments targeted at improving product offerings, and implementing expense reductions.
Results of Operations
Operating results from operations were as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| In thousands, except per share amounts | | 2018 | | % Change | | 2017 | |
| Revenues | | $ | 284,628 |
| | -25.9 | % | | $ | 383,906 |
| |
| Operating expenses | | 310,662 |
| | -26.9 | % | | 424,771 |
| |
| Operating loss | | $ | (26,034 | ) | | 36.3 | % | | $ | (40,865 | ) | |
| Operating margin | | (9.1 | )% | | -14.2 | % | | (10.6 | )% | |
| Other (income) and expenses | | (25,472 | ) | | -333.9 | % | | 10,889 |
| |
| Income tax benefit | | (18,112 | ) | | 83.1 | % | | (9,894 | ) | |
| Net Income (loss) | | $ | 17,550 |
| | 141.9 | % | | $ | (41,860 | ) | |
| | | | | | | | |
| Diluted EPS from operations | | $ | 2.38 |
| | 135.2 | % | | $ | (6.76 | ) | |
Year ended December 31, 2018 vs. Year ended December 31, 2017
Revenues
Revenues were $284.6 million in the year ended December 31, 2018, compared to $383.9 million in the year ended December 31, 2017. These results reflected the impact of declines in all of our industry verticals. Our consumer brand, retail, B2B, transportation, financial services and healthcare verticals declined by $29.9 million, or 33.8%, $28.9 million, or 30.3%, $19.2 million, or 23.1%,
$11.8 million, or 35.0%, $6.3 million, or 10.4% and $3.2 million, or 13.8%, respectively. These declines were partially due to the sale of 3Q Digital at the end of February 2018, which led to $29.2 million of the revenue reduction from 2017 (the “Original Filing”)to 2018 and primarily impacted our B2B and Consumer verticals. Other causes of the decrease included lost clients and lower volumes from existing clients.
Among other factors, our revenue performance will depend on general economic conditions in the markets we serve and how successful we are at maintaining and growing business with existing clients, acquiring new clients, and meeting our clients' 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 targeted media, 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.
Operating Expenses
Operating expenses were $310.7 million in the year ended December 31, 2018, compared to $424.8 million in 2017. This $114.1 million year-over-year decline was partially caused by the sale of 3Q Digital ($26.8 million of total operating expense reduction). Labor costs decreased by $66.4 million, or 28.8%, filedprimarily due to lower payroll expense as a result of our expense reduction efforts and the sale of 3Q Digital ($21.3 million). Production and distribution expenses declined $8.8 million, or 8.1%, primarily due to the lower transportation expenses and the sale of 3Q Digital ($2.1 million expense reduction compared to 2017). Advertising, Selling and General expenses declined $6.2 million primarily due to a reduction in employee-related expenses and the sale of 3Q Digital ($3.2 million expense reduction compared to 2017). Impairment of assets was $4.9 million in 2018 compared to $34.5 million goodwill impairment recorded in 2017. Depreciation, software and intangible asset amortization expense declined
$3.1 million from 2017 primarily due to lower capital expenditure and the elimination of the intangible assets upon the sale of 3Q Digital.
Our largest cost components are labor, outsourced costs, and mail transportation expenses. Each of these costs is somewhat variable and tends to fluctuate with revenues and the demand for our services. Mail transportation rates have increased over the last few years due to demand and supply fluctuations within the transportation industry. Future changes in mail transportation expenses will continue to impact our total production costs and total operating expenses and may have an impact on future demand for our supply chain management services.
Postage costs of mailings are borne by our clients and are not directly reflected in our revenues or expenses.
Operating Loss
Operating loss from operations was $26.0 million in the year ended December 31, 2018, compared to $40.9 million in the year ended December 31, 2017. The $14.8 million decrease in operating loss reflected the impact of a decrease in revenue of $99.3 million, offset by a larger $114.1 million decrease in operating expenses.
Other (Income) Expense
Year ended December 31, 2018 vs. Year ended December 31, 2017
Total other income was $25.5 million in the year ended December 31, 2018, compared to other expense of $10.9 million in 2017. This $36.4 million increase in other income was primarily attributable to the sale of 3Q Digital resulting in a gain of $31 million.
Income Taxes
Year ended December 31, 2018 vs. Year ended December 31, 2017
Our 2018 income tax benefit is $18.1 million. Favorably impacting our benefit was deductible basis on the sale of 3Q Digital ($11.9 million), loss from deemed liquidation of foreign subsidiary ($4.2 million), rate benefit from carryback of capital loss to 35% tax rate year ($6.5 million) and return to provision differences ($1.8 million). Unfavorably impacting our benefit was change in valuation allowance due to realization of deferred tax assets for current year operations and dividend inclusions from foreign subsidiaries related to current period Global Intangible Low Tax Income (GILTI) expense, the impact of which were $3.4 million and $2.8 million, respectively.
This compares to our 2017 income tax benefit of $9.9 million. Unfavorably impacting our benefit was nondeductible goodwill associated with our impairment loss and the change in valuation allowance due to realization of deferred tax assets for current year operations, the impact of which were $6.0 million and $2.3 million, respectively. Favorably impacting our benefit was the enactment of the U.S. SecuritiesTax Cuts and Exchange Commission (“SEC”Jobs Act (the "Tax Reform Act”), the impact of which was a $3.4 million credit. This was the result of remeasurement of our deferred tax balances for the reduction in the corporate tax rate from 35% to 21%, and remeasurement of the valuation allowance for application of provisions in the Tax Reform Act.
Net Income (loss)
Year ended December 31, 2018 vs. Year ended December 31, 2017
We recorded income of $17.6 million and net loss from operations of $41.9 million in 2018 and 2017, respectively. The increase in income from operations is the result of the $31.0 million pre-tax gain recognized for the sale of 3Q Digital in February 2018, and the income tax benefit related to the items noted above, which was partially offset by the loss from operations.
Liquidity and Capital Resources
Sources and Uses of Cash
Our cash and cash equivalent balances were $20.9 million and $8.4 million as of December 31, 2018 and 2017. Our principal sources of liquidity are cash on March 15,hand, cash provided by operating activities, and borrowings. Our cash is primarily used for general corporate purposes, working capital requirements and capital expenditures.
At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt services, operating leases and unfunded pension plan benefit payments) and other cash needs for our operations for at least the next twelve months through a combination of cash on hand, cash flow from operations, a significant tax refund receivable and borrowings under the Texas Capital Credit Facility. Although the Company believes that it will be able to meet its cash needs for the foreseeable future, if unforeseen circumstances arise the company may need to seek alternative sources of liquidity.
Operating Activities
Net cash used in operating activities was $9.2 million for the year ended December 31, 2018. This compared to cash used in operating activities of $30.8 million for the year ending December 31, 2017. The $21.6 million year-over-year decrease was primarily the result of change from net loss in 2017 to net income in 2018, a change in accrued liabilities, which included the impact of 2017 federal income tax payment due to the sale of our Trillium Software business in 2016, the impact of an increase in accounts payable during 2018, as compared to a decrease in 2017.
Investing Activities
Net cash used in investing activities was $0.1 million for the year ended December 31, 2018. This compared to cash used in investing activities of $5.7 million for the year ending December 31, 2017. The $5.6 million decrease was due to the sale of 3Q Digital in late February 2018 and reduced capital expenditure in 2018.
Financing Activities
Net cash provided by financing activities was $22.7 million for the year ended December 31, 2018 and net cash used in financing activities was $1.5 million for the year ended December 31, 2017. The $24.2 million increase in cash inflows in 2018 compared to 2017 was driven by the $14.2 million borrowing under our revolver line and the issuance of $9.7 million Series A Preferred Stock in 2018.
Foreign Holdings of Cash
Consolidated foreign holdings of cash as of December 31, 2018 and 2017 were $2.6 million and $2.6 million.
Credit Facilities
On April 17, 2017, we entered into a secured credit facility with Texas Capital Bank, N.A., that provides that we may borrow up to $20 million from time to time (the “Original Filing Date”"Texas Capital Credit Facility"). The sole purposeTexas Capital Credit Facility is being used for general corporate purposes and to provide collateral for up to $5.0 million of letters of credit issued by Texas Capital Bank. The Texas Capital Credit Facility is secured by substantially all of the company's assets and is guaranteed by HHS Guaranty, LLC, an entity formed to provide credit support for Harte Hanks by certain members of the Shelton family (descendants of one of our founders) that is otherwise not related to our company.
On January 9, 2018, we entered an amendment (the "First Amendment") to the Texas Capital Credit Facility. The First Amendment (i) increased the availability under the revolving credit facility from $20 million to $22 million and (ii) extended the term of the Texas
Capital Credit Facility one year to April 17, 2020. The Credit Facility remains secured by substantially all of our assets. At December 31, 2018, we had $14.2 million outstanding borrowing under the Texas Capital facility. As of December 31, 2018, we had the ability to borrow up to an additional $5 million under the facility.
Our fee for the collateral provided by HHS Guaranty, LLC was also changed from an annual fee of $0.5 million to 2.0% of collateral actually pledged. For the year ended December 31, 2018, this fee amounted to $0.5 million. See Note C, Long-Term Debt, in the Notes to Consolidated Financial Statements for further discussion.
At December 31, 2018 and 2017, we had letters of credit in the amount of $2.8 million outstanding. No amounts were drawn against these letters of credit at December 31, 2018 and 2017. These letters of credit exist to support insurance programs relating to workers’ compensation, automobile, and general liability. We had no other off-balance sheet arrangements at December 31, 2018 and 2017.
Contractual Obligations
Contractual obligations at December 31, 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | | Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter |
| Debt | | $ | 14,200 |
| | $ | — |
| | $ | 14,200 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Interest on debt (1) | | 825 |
| | 634 |
| | 191 |
| | — |
| | — |
| | — |
| | — |
|
| Operating lease obligations | | 35,018 |
| | 9,645 |
| | 8,815 |
| | 7,425 |
| | 5,456 |
| | 2,349 |
| | 1,328 |
|
| Capital lease obligations | | 1,423 |
| | 748 |
| | 307 |
| | 131 |
| | 133 |
| | 104 |
| | — |
|
| Purchase obligations and others | | 9,104 |
| | 3,167 |
| | 3,087 |
| | 2,632 |
| | 218 |
| | — |
| | — |
|
| Unfunded pension plan benefit payments | | 17,680 |
| | 1,684 |
| | 1,714 |
| | 1,742 |
| | 1,786 |
| | 1,836 |
| | 8,918 |
|
| Total contractual cash obligations | | $ | 78,250 |
| | $ | 15,878 |
| | $ | 28,314 |
| | $ | 11,930 |
| | $ | 7,593 |
| | $ | 4,289 |
| | $ | 10,246 |
|
|
| |
(1) Assumes $14.2 million and $4.3 million of average debt outstanding for the years ended December 31, 2019 and December 31, 2020. |
Dividends
We did not pay any dividends in 2018 and 2017. We currently intend to retain any future earnings and do not expect to pay dividends on our common stock. Any future dividend declaration can be made only upon, and subject to, approval of our Board, based on its business judgment.
Share Repurchase
During 2018 and 2017, we did not repurchase any shares of our common stock under our current stock repurchase program that was publicly announced in August 2014. Under our current program we are authorized to spend up to $20.0 million to repurchase shares of our outstanding common stock. At December 31, 2018, we had authorization of $11.4 million under this program. From 1997 through December 31, 2018, we repurchased 6.8 million shares for an aggregate of $1.2 billion.
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 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.
We believe that there are not any conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for the 12 months following the issuance of the financial statements.
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.
Our Significant Accounting policies are described in Note A, Significant Accounting Policies, in the Notes to Consolidated Financial Statement.
Revenue Recognition
Application of various accounting principles in U.S. GAAP related to measurement and recognition of revenue requires us to make significant judgments and estimates. Specifically, complex arrangements with non-standard terms and conditions may require significant contract interpretation to determine appropriate accounting.
We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those products or services. We apply the following five-step revenue recognition model:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when (or as) we satisfy the performance obligation
Certain client programs provide for adjustments to billings based upon whether we achieve certain performance criteria. In these circumstances, revenue is recognized when the foregoing conditions are met. We record revenue net of any taxes collected from customers and subsequently remitted to governmental authorities. Any 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. Costs incurred for search engine marketing solutions and postage costs of mailings are billed to our clients and are not directly reflected in our revenue.
Income Taxes
We are subject to income taxes in the United States and numerous other jurisdictions. Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.
We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. For additional information on the valuation allowance see Note D, Income Taxes, in the Notes to Consolidated Financial Statements.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We adjust these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes includes the effects of any reserves that we believe are appropriate, as well as the related net interest and penalties.
Recent Accounting Pronouncements
See Note A, Significant Accounting Policies, in the Notes to Consolidated Financial Statements for a discussion of certain accounting standards that we have recently adopted and certain accounting standards that we have not yet been required to adopt and may be applicable to our future financial condition and results of operations.
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.
The interest rate on the Texas Capital Credit Facility is variable based upon the prime rate or LIBOR and, therefore, is affected by changes in market interest rates. We estimate that a 100-basis point increase in market interest rates on the actual borrowings in 2018 would have an immaterial impact on our interest expense. At December 31, 2018, the company had $14.2M of debt outstanding under the Texas Capital Credit Facility. The nature and amount of our borrowings can be expected to fluctuate as a result of business requirements, market conditions, and other factors. Due to our overall debt level and cash balance at December 31, 2018, anticipated cash flows from operations, and the various financial alternatives available to us, we do not believe that we currently have significant exposure to market risks associated with an adverse change in interest rates. At this time, we have not 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, and Philippine Peso. 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, intercompany transactions that are expected to be settled in the near-term are denominated in 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 $0.5 million pre-tax currency transaction gain in 2018 and $0.4 million in pre-tax currency transaction loss in 2017. At this time, we are not party to 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. 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 page38 of this Amendment No. 1 is to include the information required by Items 10 through 14 of Part III of Form 10-K. This information was previously omitted from the Original Filing in reliance on General Instruction G(3) to Form 10-K which permits the information(Financial Statements).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in
the above referenced items to be incorporated in the Form 10-K by reference from our definitive proxy statement if such proxy statement is filed no later than 120 days after our fiscal year-end. The reference on the cover of the Original Filing to the incorporation by reference to portions of our definitive proxy statement into Part III of the Original Filing is hereby deleted.In accordance with Rule 12b-1513a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange(the "Exchange Act”), Part III, Items 10 through 14 of the Original Filing that are hereby amended and restateddesigned to ensure that information required to be disclosed in their entirety. In addition, new certifications by our principal executive officer and principal financial officer arereports filed as exhibits to this Amendment No. 1, as required by Rule 12b-15or submitted under the Exchange Act. This Amendment No. 1Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our CEO, CFO, and Corporate Controller as appropriate to allow timely decisions regarding required disclosure.
Our management, including our CEO, CFO, and Corporate Controller evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December 31, 2018, the end of the period covered by this Annual Report on form 10-K. Based upon such evaluation, our CEO, CFO, and Corporate Controller concluded that our disclosure controls and procedures were not effective solely due to the material weaknesses in our internal controls over financial reporting that are described below.
Notwithstanding the material weaknesses described below, based on the additional analysis and other post-closing procedures performed, we believe the consolidated financial statements included in this Annual Report on Form 10-K are fairly presented in all material respects, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our internal control over financial reporting is a process designed by, or under the supervision of our CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with U.S. GAAP.
Management evaluated, under the supervision of our CEO, CFO, and Corporate Controller, the design and effectiveness of the Company's internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organization of the Treadway Commission ("COSO"). Based on this assessment, management concluded that internal control over financial reporting was not effective because material weaknesses existed at December 31, 2018 as described below.
A material weakness, as defined in the Exchange Act Rule 12b-2, is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. We identified material weaknesses in each of the following areas.
Control Activities and Information and Communication
We identified deficiencies in aggregate that constitute material weaknesses in two of the five components of internal control as defined by COSO (control environment, risk assessment, control activities, information and communication and monitoring). In particular, controls related to the following were not effectively designed and implemented:
Information and Communication
We did not design and maintain effective controls to obtain, generate and communicate relevant and accurate information to support the function of internal control over financial reporting.
We did not use an adequate level of precision in our review of information used in certain controls.
These deficiencies create a reasonable possibility that a material misstatement of the annual or interim financial statements would not have been prevented or detected on a timely basis. Further, the above material weakness contributed to the following additional material weakness at the control-activity level:
Revenue Recognition
Management did not design and maintain effective controls over the completeness and accuracy of data used to recognize and record revenue and related accounts such as accounts receivable, accrued revenue, contract assets, deferred revenue and related disclosures. We did not use an adequate level of precision in performance of controls over revenue.
Deloitte & Touche LLP, our independent registered public accounting firm, has issued an audit report on the effectiveness of the company’s internal control over financial reporting as of December 31, 2018.
Changes in Internal Control over Financial Reporting
Improvements in the design and operating effectiveness of internal controls over financial reporting that we have affected to date have led to the successful remediation of several previously disclosed material weaknesses including monitoring, control environment and risk assessment. Other than the material weaknesses discussed above, and the successful remediation of previously disclosed material weaknesses related to monitoring, control environment and risk assessment, there have been no changes in our internal controls over financial reporting during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
Management has been actively engaged in remediation efforts to address the material weaknesses throughout fiscal year 2018 and these efforts will continue into fiscal year 2019. We have made progress towards addressing the weakness in information and communication by preparing a comprehensive listing of applications and assessing each to determine its impact on financial reporting. We have identified and documented all the systems utilized as we redesigned processes and controls. We have documented which reports are used in the execution of controls.
Significant progress has been made towards addressing the weakness in revenue recognition. Walkthroughs have been performed for all significant revenue streams and flow charts have been completed to document these processes. Current key controls have been assessed and mapped to risks within the process. Additional key controls have been identified and designed. We have begun implementing new controls and enhancing the reviews and documentation of currently implemented controls.
We continue to work with the third-party specialists we engaged to review, document, and (as needed) supplement our controls, with the goal of designing and implementing controls that not only better address both the accuracy and precision of management's review, but also enhance our ability to manage our business as it has evolved. In 2018, significant progress was made in relation to the design and implementation of controls, however, there is still additional work to be done to completely remediate the material weakness. While we have made improvements to many of our control activities, management may determine that additional steps may be necessary to remediate the material weaknesses.
While we intend to resolve all the material control deficiencies discussed above, we cannot provide any assurance that these remediation efforts will be successful, will be completed quickly, or that our internal control over financial reporting will be effective as a result of these efforts by any particular date.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and Board of Directors of Harte Hanks, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Harte Hanks, Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated March 18, 2019 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of a new accounting standard.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management identified material weaknesses, which affected the information and communication and control activities components of internal control as defined by COSO. Management also identified material weaknesses over the accounting for revenue as management did not design and maintain effective controls over the completeness and accuracy of data used to recognize and record revenue and related accounts such as accounts receivable, accrued revenue, contract assets, deferred revenue, and controls related to revenue disclosures and the precision of management’s revenue review controls.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2018, of the Company, and this report does not
amend, modify, or otherwise update any other information in the Original Filing. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing. In addition, this Amendment No. 1 does not reflect events that may have occurred subsequent to the Original Filing Date.2affect our report on such financial statements.
/s/ DELOITTE & TOUCHE LLP
San Antonio, TX
March 18, 2019
ITEM 9B. OTHER INFORMATIONNone.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Section 16(a) Beneficial Ownership Reporting Compliance
The information to appear in our 2019 Proxy Statement under the caption "General Information - Section 16(a) of the Exchange ActBeneficial Ownership Reporting Compliance" is incorporate herein by reference.
Directors and related rules of the SEC require our directors and officers, and persons who own more than 10% of a registered class of our equity securities, to file initial reports of ownership and reports of changes in ownership with the SEC. These persons areExecutive Officers
The information required by SEC regulations to furnish us with copies of all Section 16(a) reports that they file. As with many public companies, we provide assistance tothis item regarding our directors and executive officers will be set forth in making their Section 16(a) filings pursuant to powers of attorney granted by our insiders. To our knowledge, based solely on our review of2019 Proxy Statement under the copies of Section 16(a) reports received by us with respect to 2017, including those reports that we have filed on behalf of our directors and executive officers pursuant to powers of attorney, or written representations from certain reporting persons, we believe that all filing requirements applicable to our directors, officers and persons who own more than 10% of a registered class of our equity securities have been satisfied on a timely basis.Directorscaption “Directors and Executive Officers
The following table sets forth certainOfficers” which information about our current directors and executive officers at April 30, 2018:
Name
|
| Age
|
| Position
|
David L. Copeland
| | 62
| | Director (Class I)
|
William F. Farley
| | 74
| | Director (Class II)
|
Christopher M. Harte
| | 70
| | Director (Class I); Chairman of the Board
|
Melvin L. Keating
| | 71
| | Director (Class II)
|
Scott C. Key
| | 59
| | Director (Class I)
|
Judy C. Odom
| | 65
| | Director (Class III)
|
Karen A. Puckett
| | 57
| | Director (Class III); President & CEO
|
Alfred V. Tobia, Jr.
| | 53
| | Director (Class II)
|
Carlos M. Alvarado
| | 44
| | Vice President, Finance & Controller
|
Jon C. Biro
| | 52
| | Executive Vice President & Chief Financial Officer
|
Frank M. Grillo
| | 52
| | Executive Vice President, Sales & Chief Marketing Officer
|
Andrew P. Harrison
| | 48
| | Executive Vice President, Contact Centers & CHRO
|
Robert L. R. Munden
| | 49
| | Executive Vice President, General Counsel & Secretary
|
Class I directors are to be elected at our 2018 annual meeting of stockholders. The term of Class II directors expires at the 2019 annual meeting of stockholders, and the term of Class III directors expires at the 2020 annual meeting of stockholders.
David L. Copeland has served on Harte Hanks’ Board of Directors (the “Board”) since 1996. He has been employedis incorporated herein by SIPCO, Inc., the management and investment company for the Andrew B. Shelton family, since 1980, and currently serves as its President. Since 1998, he has served as a director of First Financial Bankshares, Inc., a financial holding company. Currently, he serves on First Financial Bankshares’ executive and nominating committees and is also the chairman of its audit committee.reference.
We believe that Mr. Copeland’s qualifications for our Board include his experience serving on various committees for a publicly traded financial holding company. We also believe he offers us extensive knowledge of financial instruments, financial and economic trends and accounting expertise from serving as president of SIPCO, Inc. and on the audit committee of First Financial Bankshares. Mr. Copeland, a certified public accountant and a chartered financial analyst, would qualify as a financial expert for our audit committee.
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William F. Farley has served as a director of Harte Hanks since 2003. Currently, he is a Principal with Livingston Capital, a private investment business he started in 2002. From 2005 - 2018 he served on the board of trustees for Blue Cross Blue Shield of Minnesota and was a member of its technology committee and business development committee, and was the chair of its investment committee. He served as Chairman and Chief Executive Officer of Science, Inc., a medical device company, from 2000 to 2002. He also served as Chairman and Chief Executive Officer of Kinnard Investments, a financial services holding company, from 1997 to 2000. From 1990 to 1996, he served as Vice Chairman of U.S. Bancorp, a financial services holding company.
We believe that Mr. Farley’s qualifications for our Board include his extensive leadership experience at various financial institutions serving in roles as chairman and chief executive officer. We believe he provides important perspectives on financial markets, complex securities and financial and economic trends, as well as a broad prospective on corporate governance and risk management issues facing businesses today. Mr. Farley qualifies as a financial expert on our audit committee.
Christopher M. Harte has served as a director of Harte Hanks since 1993. Serving as our Chairman since July 1, 2013, he is also a private investor. He was Chairman and publisher of the Minneapolis Star Tribune from March 2007 through September 2009. The Minneapolis Star Tribune entered bankruptcy in January 2009 and emerged from bankruptcy in September 2009. He had previously been President and publisher of Knight-Ridder newspapers in State College, Pennsylvania and Akron, Ohio, and later President of the newspaper in Portland, Maine. He was a director of Geokinetics, Inc. (from 1997 to 2013) and Crown Resources Corporation (from 2002 until its merger with Kinross Gold Corporation in 2006).
We believe that Mr. Harte’s qualifications for our Board include his extensive experience in managing, investing in and serving on the board of directors of a number of communications and other public and private companies. He offers the perspective of a seasoned board member, having served on our Board through several major transitions, both when the company was private as well as after its most recent public offering.
Melvin L. Keating has served as a director and Audit Committee member of Harte Hanks since July 2017. Mr. Keating is currently a consultant, and as such has provided investment advice and other services to private equity firms since November 2008. Since September 2015, he has been a Director of Agilysys Inc., a leading technology company that provides innovative software for point-of-sale (POS), property management, inventory and procurement, workforce management, analytics, document management and mobile and wireless solutions and services to the hospitality industry. Mr. Keating also currently serves as a Director of MagnaChip Semiconductor Corp., a designer and manufacturer of analog and mixed-signal semiconductor products for consumer, communication, computing, industrial, automotive and IoT applications. From 2005 to October 2008, he served as the President and Chief Executive Officer of Alliance Semiconductor Corp., a manufacturer and seller of semiconductors. During the course of his career, Mr. Keating also served as a director of the following public companies: Red Lion Hotels Corp, where he was Chairman of the Board; API Technologies Corp.; Integrated Silicon Solutions Inc.; Tower Jazz Semiconductor Ltd.; Integral Systems, Inc.; White Electronic Designs Corp.; Crown Crafts Inc.; Bitstream, a/k/a Marlborough Software Development; Plymouth Rubber Co.; Price Legacy Corp.; InfoLogix, Inc.; LCC International, Inc.; Aspect Medical Systems Inc.; and ModSys International Ltd.
We believe Mr. Keating’s extensive experience as an investment consultant, executive officer and board member provides a valuable perspective on our Board.
Scott C. Key joined the Harte Hanks Board on March 17, 2013. Through June 2015, Mr. Key served as President and Chief Executive Officer of IHS, Inc. Mr. Key also served on IHS’ board of directors. Mr. Key joined IHS in 2003, and served in a variety of roles of progressively greater responsibility, most recently as IHS’ Chief Operating Officer (in 2011), Senior Vice President, Global Products and Services (in 2010) and President and Chief Operating Officer of IHS Global Insight (September 2008 — December 2009). From 2007-2008, he served as President and Chief Operating Officer of IHS Jane’s and chairman of IHS Fairplay, and led an integrated sales team on a global basis. From 2003-2007, he served as IHS Senior Vice President of Corporate Strategy and Marketing, and led Energy Strategy, Products, Marketing and Software Development.
We believe Mr. Key’s extensive experience in global data- and analytics-intensive businesses brings a keen perspective as our company continues to develop more and different data-driven marketing offerings for our clients. In addition, his recent service as Chief Executive Officer of a fast growing company will provide a valuable perspective on our Board as we deploy our new strategy.
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Judy C. Odom has served as a director of Harte Hanks since 2003. Since November 2002, Ms. Odom has served on the board of directors of Leggett & Platt, Incorporated, a diversified manufacturing company, where she also serves as chair of the audit committee and as a member of its compensation and nominating and governance committees. In March 2014, Ms. Odom joined the board of directors of Sabre Corporation, a leading technology solutions provider to the global travel and tourism industry; she also serves as the chair of Sabre’s Audit Committee. From 1985 until 2002, she held numerous positions, most recently chief executive officer and chairman of the board, at Software Spectrum, Inc., a global business to business software services company, which she co-founded in 1983. Prior to founding Software Spectrum, she was a partner with the international accounting firm, Grant Thornton.
We believe that Ms. Odom’s qualifications to serve on our Board include her board service with several companies allowing her to offer a broad leadership perspective on strategic and operating issues facing companies today. Her experience co-founding Software Spectrum, growing it to a large public company before selling it to another public company and serving as board chair provides the insight and perspective of a successful entrepreneur and long-serving chief executive officer with international operating experience. As a partner in an international accounting firm she supervised audits of many companies in various industries.
Karen A. Puckett has served as a director of Harte Hanks since 2009, and was appointed our President & Chief Executive Officer (CEO) in September 2015. Ms. Puckett served in several executive positions with CenturyLink, Inc. and its predecessor companies for over 15 years until her departure in June 2015, most recently as its President of Global Markets and Chief Operating Officer. CenturyLink is the third largest telecom communications company in the U.S. and a leader in network services as well as a global leader in cloud infrastructure and hosted IT solutions for enterprise customers. CenturyLink provides data voice and managed services in local, national and select international markets. Ms. Puckett also serves as a director (and member of the audit and personnel committees, and formerly the finance committee) of Entergy Corporation, an integrated energy company engaged primarily in electric power production and retail distribution operations.
We believe that Ms. Puckett’s qualifications for our Board include her essential perspective as our current President & CEO, and her extensive prior leadership and operating experience at CenturyLink. We believe her involvement in the transformation and expansion of CenturyLink will provide the Board with key insights on all aspects of challenging and rapidly-changing business situations.
Alfred V. Tobia, Jr. has served as a director and Compensation Committee member of Harte Hanks since July 2017. Mr. Tobia is a co-Founder and Portfolio Manager for Sidus Investment Management, LLC and its affiliates, in which capacity he oversees the management of the Sidus equity funds and provides analysis to the firm’s credit fund. Mr. Tobia was previously a Senior Managing Director and Supervisory Analyst (1996 to 2000) within the data networking and telecommunication equipment sectors at Banc of America Securities (formerly Montgomery). From 1992 to 1996, he was a Senior Analyst at Wertheim Schroeder & Co., focusing on PC and entertainment software, data networking and special situations. Prior to that, Mr. Tobia was an analyst at Mabon Nugent & Co. (1986 to 1992), covering various sectors of technology.
Mr. Tobia has extensive financial experience in both public and private companies and executive experience through the management of a small-cap investment fund. Mr. Tobia’s background and insights provide valuable expertise in corporate finance, strategic planning, and capital and credit markets. We believe Mr. Tobia’s extensive financial experience will provide a valuable perspective on our Board.
Carlos M. Alvarado has served as the Vice President, Finance and Controller since June 2013. Prior to joining Harte Hanks, he was Director of Accounting for Visionworks of America, Inc., a subsidiary of Highmark’s vision holding company, HVHC Inc. Prior to joining HVHC, Mr. Alvarado spent six years in public accounting with Ernst & Young and Arthur Andersen, and two years at a retail grocery company.
Jon C. Biro was appointed our Executive Vice President and Chief Financial Officer in November 2017. Mr. Biro previously served as chief financial officer for (and then consultant to) Exterran Corporation from October 2015 through January 2017, and served as chief financial officer of Archrock, Inc., (formerly Exterran Holdings, Inc.) from September 2014. Prior to joining Exterran, Mr. Biro served as chief financial officer, chief accounting officer, treasurer and secretary for Consolidated Graphics, Inc. from January 2008 through January 2014.
Frank M. Grillo was appointed our Chief Marketing Officer in October of 2015, and now serves as our Executive Vice President, Sales & CMO. Mr. Grillo previously worked for CenturyLink, Inc. as a vice president of
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business marketing (beginning April 2012). Prior to CenturyLink, Mr. Grillo served in a variety of executive sales, operations and marketing roles for Cypress Communications (from September 2005 to January 2012) and Trinsic Communications (from March 2003 to August 2005).
Andrew P. Harrison is our Executive Vice President and Chief Human Resources Officer. Mr. Harrison also leads our contact center services. Mr. Harrison has worked in a variety of human resources and operational management and leadership roles for Harte Hanks for over 20 years.
Robert L. R. Munden joined the company in April 2010 as our General Counsel and Secretary, and also served as our Chief Financial Officer (in addition to his other roles) from January 2017 to November 2017. From April 2005 through March 2010, Mr. Munden served as Vice President and Corporate Counsel of Safeguard Scientifics, Inc. From June 2002 through April 2005, he served as Corporate Counsel, North America for Taylor Nelson Sofres, a market research company (now a division of WPP PLC). Prior to that, Mr. Munden served as General Counsel to an online marketing and database services firm, as an associate with a corporate law firm and as an armor and cavalry officer in the U.S. Army.
Code of Ethics and Other Governance Information
We have established a corporate compliance program as part of our commitment to responsible business practices in all of
The information required by this item regarding the communities in which we operate. The Board has adopted a Business Conduct Policy that applies to all of our directors, officers and employees, which promotes the fair, ethical, honest and lawful conduct in our business relationships with employees, customers, suppliers, competitors, government representatives, and all other business associates. In addition, we have adopted aSupplemental Code of Ethics applicablefor our Senior Financial Officers (Code of Ethics), audit committee financial experts, audit committee members and procedures for stockholder recommendations of nominees to our CEO and allBoard of Directors will be set forth in our senior financial officers. The Business Conduct Policy and2019 Proxy Statement under the caption “Corporate Governance” which information is incorporated herein by reference.
Our Code of Ethics
formmay be found on our website at www.hartehanks.com “Corporate Governance” section of the
foundation“Investors” tab, and a printed copy of
a compliance program that includes policies and procedures covering a variety of specific areas of professional conduct, including compliance with laws, conflicts of interest, confidentiality, public corporate disclosures, insider trading, trade practices, protection and proper use of company assets, intellectual property, financial accounting, employment practices, health, safety and environment, and political contributions and payments. The Business Conduct Policy forbids employees and directors from engaging in hedging activities with respect to our securities.Both our Business Conduct Policy and our Code of Ethics are available on our website at www.hartehanks.comwill be furnished without charge, upon written request to Harte Hanks, Inc., under the “Corporate Governance” subsection of our “Investors” section.Attn: Corporate Secretary, 9601 McAllister Freeway, Suite 610, San Antonio, Texas 78216. In accordance with New York Stock Exchange (“NYSE”)the rules of the NYSE and the SEC, rules, we currently intend to disclose any future amendments to our Code of Ethics, or waivers from our Code of Ethics for our CEO,Chief Executive Officer, Chief Financial Officer, (“CFO”) and Controller,Chief Accounting Officer, by posting such information on our website (www.hartehanks.com)(www.HarteHanks.com) within the time period required by applicable SEC and NYSE rules.
Audit Committee
The Board has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee is composed solely of directors who the Board has determined are independent. The current members of the Audit Committee are William F. Farley, Christopher M. Harte, Melvin L. Keating and Scott C. Key. The primary function of the Audit Committee is to assist the Board in fulfilling its oversight of (1) the integrity of our financial statements, including the financial reporting process and systems of internal controls regarding finance, accounting, and legal compliance, (2) the qualifications and independence of our independent auditors, (3) the performance of our internal audit function and independent auditors, and (4) our compliance with legal and regulatory requirements.
The Board has determined that Messrs. Farley, Harte, Keating and Key are financially literate, and that Messrs. Farley and Keating qualify as “audit committee financial experts” as such term is defined in the applicable SEC rules. The Board has also determined that Messrs. Farley, Harte, Keating and Key are independent under (1) applicable NYSE listing standards for purposes of serving on the Board and the Audit Committee and (2) additional audit committee independence standards under Rule 10A-3 of the SEC.
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In accordance with the Sarbanes-Oxley Act of 2002 and SEC rules thereunder, our CEO and CFO have signed certifications under Sarbanes-Oxley Section 302, which are filed as exhibits to this Form
10-K/A.10-K. In addition, our CEO most recently submitted an annual certification to the NYSE under Section 303A.12(a) of the NYSE listing standards on September
18, 2017.17, 2018.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and AnalysisThis Compensation Discussion and Analysis (“CD&A”) provides a discussion ofThe information required by this item regarding the compensation philosophy and objectives that underlieof our executive compensation program and how we evaluated and set our executives’ compensation for 2017. This CD&A provides qualitative information concerning how 2017 compensation was awarded to and earned by our executives, identifies the most significant factors relevant to our 2017 executive compensation decisions and gives context to the data presented in the tables included below in this Amendment No. 1. “Committee” within this CD&A means the Compensation Committee of the Board. Our “executive officers” are our senior executives who are listed above under the heading “Directors and Executive Officers.” Our “named executive officers” listed in the Summary Compensation Tableand directors and other compensation tables that follow are listed below, and are drawn from executive officers who served in 2017:
·Karen Puckett — President and Chief Executive Officer;
·Jon Biro — Executive Vice President and CFO (from November 9, 2017);
·Robert Munden — Executive Vice President, General Counsel & Secretary (and CFO from January 1, 2017 through November 9, 2017);
·Frank Grillo — Executive Vice President, Sales & CMO;
·Andrew Harrison — Executive Vice President, Contact Centers & Chief Human Resources Officer; and
·Shirish Lal — Executive Vice President, COO & CTO (resigned January 31, 2018).
Executive Summary
We seek to design and implement executive compensation programs that align our executives’ interests and motivations with those of our stockholders, while avoiding the encouragement of inappropriate risk-taking. In 2017, our total direct compensation program for our named executive officers consisted of base salary, annual cash incentives (based on pre-established financial goals), long-term equity incentives (stock appreciation rights (SARs), time-vesting restricted stock and performance units) and limited perquisites.
As further detailed below, 2017 presented challenges for our smaller leadership team as it focused on improving the company’s operating and financial performance. Factors and events most important to compensation matters were:
·Smaller Leadership Team: Through reorganized and consolidated roles, and in response to divestitures and other changesrequired information will be set forth in our business, our senior leadership team in 2017 was about half the size of our 2016 team (five for most of the year, compared to nine at the beginning of 2016).
·2019Financial Reporting Delays: The company’s failure to file financial reports timely through the second fiscal quarter negatively affected our stock price and business, added to management’s workload, and caused the Compensation Committee to delay the issuance of annual equity awards.
·Compensation Constraints: The Committee sought to balance the need to motivate its key leadership team with the company’s cash and dilution limits, consistent with stockholder interests.
·Equity Program: In light of poor share performance and limitations to the shares available for issuanceProxy Statement under the company’s equity incentive plan, the company reduced the value of grants
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to mitigate dilutioncaptions “Executive Compensation,” and used some cash-settled awards and weighted CEO awards heavily towards performance units.
·CFO Transition: Mr. Biro joined as the company’s CFO in November 2017, taking over from Mr. Munden (who thereafter remained as General Counsel & Secretary).
The company began 2017“Director Compensation,” which information is incorporated herein by reference. In accordance with the objective of stemming revenue declines while improving profitability as it increased its focus on revitalizing its marketing technology, data and database offerings after divesting its Trillium Software business. Despite making progress on service capabilities, financial performance suffered as several clients (including some of our largest) substantially reduced volumes or eliminated programs, which presented significant obstacles to stability and growth. The company improved its cash position through the year and secured new debt financing, but revenues declined 5.1%. Although improved from 2016, the company nevertheless recorded an operating loss from continuing operations of $40.9 million, and earnings per share was a loss of $6.76—each reflecting the write-off of our remaining goodwill of $34.5 million. Our stock price declined significantly, decreasing 37%, and we obtained approval for a reverse stock split in order to maintain a $1.00 minimum average share price as required for compliance with NYSE continued listing standards. (We effected the 1-for-10 reverse stock split on January 31, 2018, and all share amounts herein have been proportionately adjusted.)
Based on the economic environment, the company’s recent performance, anticipated changes to the company and its leadership, and the Committee’s compensation philosophy and objectives, the Committee took the following annual compensation actions for the named executive officers for 2017:
·Established target compensation for officers which was largely consistent with market benchmarks.
·Established goals for our short term annual incentive plan (the “2017 AIP”) with a view to motivating our executives toward objectives fundamental to improving stockholder value.
·Due to company performance, made no payments under the 2017 AIP.
·Granted long-term equity awards with a lower value (compared to prior years)—
·comprised of performance units (88% by value) and restricted stock for the CEO, and
·comprised of restricted stock, performance units and SARs for other executives—
to align participants with the company’s achievement of long-term stockholder value creation.
·Due to the company’s low share price and the limited number of shares available for issuance under our 2013 Omnibus Incentive Plan (the “2013 Plan”), we included cash-settling awards, which also had the effect of decreasing the equity dilution of awards granted.
·Held base salaries constant for all executives except
·Mr. Grillo, who assumed responsibility for sales after the departure of our former Executive Vice President of Sales in early 2017 and led key initiatives with service offering development;
·Mr. Munden, who served as CFO through November 9, 2017 (and whose salary was reduced to its previous level effective January 1, 2018); and
·Ms. Puckett, who agreed to receive stock in lieu of 20% of her base salary for the last four months of 2017.
The Committee engaged Meridian Compensation Partners, LLC (“Meridian”) as its independent compensation advisor to assist with benchmarking of executive officer compensation, and Meridian performed a comprehensive analysis of the company’s executive compensation program for 2017.
The remainder of this CD&A provides further detail on the compensation philosophy, process, and decisions for 2017. Certain information regarding other periods’ compensation determinations and policies is also included to the extent we believe it provides helpful context for our discussion of 2017 executive compensation.
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Executive Compensation Philosophy and Objectives
Our executive compensation program is designed to achieve a number of key objectives and thereby support our overall efforts to create long-term value for our stockholders:
·Attract and Retain Top Talent — Attract and retain high-performing individuals who will significantly contribute to our long-term success and the creation of long-term stockholder value by providing competitive compensation compared to peer companies, competitors or companies in the same market for executive talent.
·Pay for Performance — Motivate our executives to work in the best interests of our stockholders by closely tying compensation to company and individual performance on both a short-term and long-term basis.
·Place Significant Portion of Pay At Risk — Align executive compensation with stockholder interests by placing a significant portion of total direct compensation at risk, such that the executive will not realize value unless company performance goals are achieved (for example, annual bonuses and performance units with vesting dependent upon company performance) or our stock price appreciates (for example, SARs or restricted stock unit awards).
·Require Significant Ongoing Executive Stock Ownership — Align executive and stockholder interests by including a significant equity component in our total compensation awards and by requiring executives to accumulate and maintain a sizeable equity position through our stock ownership guidelines.
As an integral part of our compensation philosophy and objectives, we seek to design an executive compensation program that does not encourage inappropriate risks that would threaten the long-term value of our company. We believe our compensation philosophy has assisted in achieving our goals. The Committee reviews our compensation philosophy on a periodic basis to judge whether the goals and objectives are being met, and what, if any, changes may be needed to the philosophy. The Committee considered our compensation philosophy and objectives in establishing the elements and amounts of 2017 compensation for each of our named executive officers. Although a variety of modifications and alternatives were considered, our 2017 compensation philosophy was consistent for all of our executive officer positions, and was consistent with the philosophy for our 2016 compensation program.
Elements of 2017 Executive Compensation Program
The following table highlights the elements of our 2017 executive compensation program and the primary purpose of each element, which were consistent with our 2016 executive compensation program elements except that we eliminated our non-qualified deferred compensation program, which had not been used since 2013. The elements are also generally consistent for all of our executive officer positions. Each element is discussed in further detail below.
Element
|
| Objectives and Basis
|
| Form
|
| | | | |
Base Salary
| | Provide base compensation that is competitive for each role to reward and motivate individual performance
| | Cash
|
Annual Incentive
Plan
| | Annual incentive or “bonus” to drive company performance consistent with immediate or short-term objectives
| | Cash
|
Bonus Restricted
Stock Elections
| | Encourage greater stock ownership by executive officers by allowing each to elect to receive up to 30% of annual incentive plan (AIP) payments in the form of restricted stock vesting on the first anniversary of the grant, with executive officers receiving 125% of the value of the forgone cash bonus in shares of restricted stock
| | Restricted stock
|
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Element
|
| Objectives and Basis
|
| Form
|
| | | | |
Long-Term
Incentive Awards
| | Long-term incentive to drive company performance and align executives’ interests with stockholders’ interests, and to retain executives through long-term vesting and potential wealth accumulation
| | Restricted stock, performance awards and cash-settled phantom stock
|
Perquisites
| | Enhance the competitiveness of our executive compensation program through limited additional benefits
| | Health examination and death benefits
|
Severance Policy and
Agreements
| | Attract and retain key talent by providing certain compensation in the event of a termination without cause or change in control
| | Cash severance, equity vesting and COBRA reimbursement
|
Other
| | Offer other competitive benefits, such as 401(k) (with matching) medical, dental and other health and welfare benefits
| | Same benefit made generally available to our employees
|
Compensation Committee
The Committee began 2017 with Messrs. Carley and Copeland (Chair) and Ms. Odom comprising the Committee. In April 2017 Mr. Copeland resigned from the Committee after the Board determined he no longer met the independence requirements of the NYSE; see “Independence of Directors” below. In connection with Mr. Copeland’s departure from the Committee, the Board appointed Mr. Key as Committee Chair, and Mr. Harte joined as a Committee member. In July 2017 (after most compensation determinations for incumbent executive officers were made), Mr. Carley retired and was replaced by Mr. Tobia, resulting in the Committee’s current composition: Messrs. Key (Chair), Harte and Tobia and Ms. Odom.
The Board has determined that each member of the Committee meets the independence requirements of the rules of the NYSE. Each person serving onSEC, information to be contained in the Committee qualified as an “outside director” in accordance with §162(m) of the Internal Revenue Code (the “Code”) when such provision was applicable, and a “non-employee director” as defined in Rule 16b-32019 Proxy Statement under the Exchange Act with regard to compensation and benefit plans subject to SEC Rule 16b-3. Most members of thecaption “Compensation Committee either currently serve, or have served, as a director or senior executive of a large corporation, and have had significant experience with compensation matters relating to senior executives of these organizations.
The Committee’s purpose is to assist the Board in fulfilling its oversight responsibilities for compensation of executive officers and administration of the company’s equity incentive plans, with the goals of (1) supporting the company’s business objectives, (2) attracting, motivating and retaining high quality leadership, and (3) linking compensation with business objectives and performance. In accordance with its charter and NYSE rules, the Committee’s responsibilities include the following:
·reviewing and approving corporate goals and objectives relevant to CEO compensation, evaluating the CEO’s performance in light of those goals and objectives, and together with the other independent directors (as directed by the Board), determining and approving the CEO’s compensation level based on this evaluation;
·making recommendations to the Board with respect to non-CEO officer compensation, and incentive-compensation and equity-based plans that are subject to board approval;
·assisting the Board by (i) evaluating potential candidates for officer positions, (ii) recommending terms for the hiring, promotion and severance of officers, and (iii) overseeing the development of officer succession plans;
·participating with management in reviewing the annual goals and objectives with respect to compensation for the company’s officers and, to the extent the Committee deems necessary or appropriate, other key employees of the company or its subsidiaries (collectively, “Principal Executives”);
·periodically (but no less frequently than annually) evaluating the performance of the Principal Executives in light of established goals and objectives and, based upon this evaluation and any compensation recommendations for the Principal Executives made by the CEO, approving or (in
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the case of officers, and as directed by the Board) making recommendations to the Board with respect to the compensation for the Principal Executives; and
·periodically (but no less frequently than annually) evaluating the competitiveness of the company’s executive compensation program in reference to its peers and broader trends, including consideration of base salaries, annual incentives, long-term incentives and equity-based compensation, considering (among other things) the company’s performance and relative stockholder return, the value of similar incentive awards to similarly situated executives at comparable companies, and the awards given to such person in prior years.
The Committee may appoint subcommittees for any purpose that it deems appropriate and may delegate to subcommittees such power and authority as it deems appropriate. However, no subcommittee may consist of fewer than two members, and no subcommittee may be delegated any power or authority required by any law, regulation or listing standard to be exercised by the Committee as a whole. No subcommittees were formed or met in 2017. The Committee has delegated to our CEO a limited authority to grant stock options and restricted stock to non-officers, and monitors grant activity through regular reports. The Committee also delegated to the CEO the limited authority to allocate non-officer annual equity awards amongst employees. You may view the Committee’s full charter in the “Investors” section of our website at www.hartehanks.com under the “Corporate Governance.”
The Committee meets in executive session at most of its meetings (as it deems appropriate) to review and consider executive compensation matters without the presence of our executive officers. These executive sessions may also include other non-employee directors and outside experts retained by the Committee. The Committee met in executive session with other non-employee directors at four of its six 2017 meetings.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee of our Board is or has been an officer or employee of the company. All members of the Compensation Committee participate in decisions related to compensation of our executive officers. No interlocking relationship exists between our Board and the board of directors or compensation committee of any other company.
Other Participants in the Executive Compensation Process
In addition to the Committee and other non-Committee members of the Board who also may be in attendance at the Committee’s meetings, our management and, when engaged by the Committee from time to time, outside compensation consultants also participate in and contribute to our executive compensation process. Ultimately, the Committee exercises its independent business judgment with respect to recommendations and opinions of these other participants and the Committee (or our independent directors as a group) makes final determinations about our executive officer compensation.
Management
Ms. Puckett, our CEO, participated in the Committee’s executive compensation processes and attended most Committee meetings; however, she did not attend sessions when elements of her compensation were being considered. The company’s Chief Human Resources Officer (Mr. Harrison) attended most meetings (as appropriate), and the General Counsel (Mr. Munden) also attended each meeting. Officers were excluded from executive sessions.
Working with Messrs. Harrison and Munden, Ms. Puckett presented recommendations to the Committee on the full range of annual executive compensation decisions made in March and May (other than with respect to herself), including (1) the company’s 2017 AIP structure and participants, (2) long-term incentive compensation strategy, (3) competitive positioning of our executive compensation program, and (4) total direct compensation for each executive officer, including base salary adjustments, 2017 AIP targets, equity grants and perquisites. The Committee made final decisions about each officer’s 2017 compensation without the applicable executive officer being present, taking into account Ms. Puckett’s recommendations and views.
Compensation Consultants
The Committee believes that engaging a consultant for comprehensive reviews on a periodic basis is more appropriate than having regular annual engagements. The Committee engaged Meridian to assist the Committee with its evaluations and determinations for our 2017 executive compensation program. In this review, Meridian performed a comprehensive evaluation of our compensation philosophy, policies and practices for executive officers
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and other executive positions, and reviewed a new annual incentive plan design to be applied company-wide (including officers). The Committee also engaged Meridian to assist in the development of a new peer group, and to perform a comprehensive executive compensation analysis for its 2017 compensation determinations.
For the foregoing engagements, Meridian has been selected and retained by—and reported directly to—the Committee. Meridian has not been separately engaged by our management, but has provided to management corresponding evaluations of selected non-executive officer positions and compensation policy and practice matters. Harte Hanks has no relationship with Meridian (other than the relationship undertaken by the Committee), and the Committee re-evaluated and confirmed Meridian’s independence in accordance with its charter and NYSE requirements prior to engaging Meridian.
Principal Factors That Influenced 2017 Executive Compensation
When making its 2017 annual compensation decisions, the Committee considered the compensation philosophy and principles that underlie our executive compensation program, including the desire to link executive compensation to annual and long-term performance goals and to be able to retain (and as necessary, attract) high performing individuals who will significantly contribute to our long-term success and the creation of long-term stockholder value. The Committee did not use formulas to rigidly set the compensation of our executives based solely on market data or on any one factor in isolation, or assign a specific weighting or ranking to the various factors it considered. Rather, the Committee’s ultimate decisions were influenced by a number of factors that were collectively taken into consideration in the Committee’s business judgment and that included a number of subjective determinations in addition to the specific formula-based performance criteria established in our annual incentive plan and long term incentive performance awards. In establishing the individual elements and amounts of 2017 executive compensation, the principal factors taken into consideration by the Committee included the following:
·anticipated reorganization and consolidation of leadership roles, resulting in fewer leaders each with greater and/or broader responsibility;
·possible divestitures and other changes in our business;
·competitive market data to assess how our executive pay compared to other companies, considering the individual elements of our compensation program, the relative mix of those compensation elements and total direct compensation amounts, with then-current market data provided by Meridian (which included recommendations based on Meridian’s analysis of turnaround situations);
·input from non-Committee members of the Board (including our CEO) with regard to base salary proposals, long-term incentive awards, individual executive officer performance and related matters;
·recent company performance compared to (i) our financial and operational expectations for our company as a whole and (ii) our peers and other market indicators;
·the need to attract and retain a pool of highly-qualified leadership candidates for positions necessitated by our evolving service offerings, financial condition and organizational changes;
·ongoing and anticipated efforts to transform our business operations in line with our strategy, that were expected to result in continued significant additional work commitments by our executive officers;
·a general assessment of individual executive officer performance and contributions in support of our strategies, individual officer responsibilities, tenure and experience in his or her position and the overall financial performance of the businesses or functional areas for which an officer is responsible;
·providing competitive compensation to reflect new or expanded roles for some of our executives;
·retention considerations in light of a recent history of low bonus payouts to executive officers based on recent company performance and diminished equity compensation values because of declining stock price and earnings per share performance;
·individual officer compensation history, including the cumulative effect of equity awards granted in prior years and value realized from prior equity awards;
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·internal pay equity (i.e., considering pay for similar jobs and jobs at different levels within the company and considering the relative importance of a particular position to us); and
·tax and regulatory considerations, including our policy to take reasonable and practical steps to maximize the tax deductibility of compensation payments to executives under §162(m) of the Code, the impact of expensing equity grants under Statement of Financial Accounting Standards (“SFAS”) No. 123(R) (“SFAS 123R”), and the impact of §409A of the Code relating to non-qualified deferred compensation.
The Committee also had to review compensation matters outside the usual annual compensation review and setting process. Compensation determinations for Mr. Biro (who was hired well after our annual determinations) were also affected by the numerous events cited above under the heading “Executive Summary” and:
·perceived advantages, disadvantages, strengths and weaknesses of other candidates considered;
·the scope and importance of the role, and Mr. Biro’s other skills and capabilities, to the company’s success;
·the compensation received by his immediate predecessors in the company;
·timing and geographic considerations (such as when he would be available to start); and
·the compensation he received in his recent employment.
Tally Sheets
To assist the Committee in making its 2017 annual executive compensation determinations, the Committee reviewed tally sheets for each executive officer, as it has done in prior years. Tally sheets are used as a reference to ensure that Committee members understand the total compensation provided to executives each year, over a multi-year period and in various change in control or other termination events. The Committee uses tally sheets to consider individual elements of our compensation program, the relative mix of those compensation elements and total annual and long-term compensation amounts provided to a particular executive. The tally sheets illustrate, for each executive officer:
·cash compensation (base pay, bonus and (until discontinued) automobile allowance) for the current year under consideration and each of the past two years;
·values of long-term equity compensation awards granted (options, restricted stock, phantom stock and performance awards) for the current year under consideration and each of the past two years;
·changes in value of vested and unvested equity holdings;
·salary continuation benefits (similar in effect to life insurance benefits);
·estimated pension benefits upon retirement;
·the value, and changes in value, of previous equity compensation awards;
·stock ownership guideline compliance; and
·estimated amounts the executive could realize upon a change in control or termination of employment.
For comparison purposes, the tally sheets also incorporate applicable competitive market compensation data for base salary, annual incentive awards and long-term incentive awards.
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Setting the Pay Mix—Cash Versus Equity; Fixed Versus Variable
We believe a mixture of both long-term and short-term compensation elements provides the proper balance and incentives. The Committee reviews each of these elements separately and then all of the elements combined to determine the amount and mix of compensation for our executives. As has been our practice, in 2017 all short-term incentives were payable in cash. All 2017 long-term incentives were in the form of equity-based awards, and like 2016, some of these awards were linked to equity value but payable only in cash to reduce dilution. Due to insufficient shares available in the 2013 Plan and cash constraints, in 2017 the Committee was unable to award the targeted amount of equity awards (which were based on benchmarks), which caused lower actual equity award values (except for Ms. Puckett); see “Long-Term Incentive Awards” below for further details. The following chart and table show the split of 2017 target compensation for our named executive officers between equity (including equity-linked) and cash:
2017 Target Cash v. Target Equity Compensation for Named Executive Officer
By Individual
Named Executive
Officer | | Target Cash (1) | | Target Equity (2) | |
Karen Puckett (3) | | $ | 1,440,161 | | $ | 1,801,626 | |
Jon Biro | | 560,000 | | 599,997 | |
Robert Munden | | 622,050 | | 344,763 | |
Frank Grillo | | 622,050 | | 250,733 | |
Andrew Harrison | | 497,805 | | 188,051 | |
Shirish Lal | | 720,475 | | 438,803 | |
| | | | | | | |
All NEOs
| | Equity
| | | |
All NEOs
| | Cash
| | | |
(1)Target Cash is the sum of base salary at December 31, 2016 plus column (d) (target annual incentive) from the Grants of Plan Based Awards table below, but also including a 60% target annual incentive award for Mr. Biro. No annual incentive award payments were made in respect of 2017.
(2)Target Equity is the sum of the amounts in column (l) (grant date fair value of stock and option awards) from the Grants of Plan Based Awards table below.
(3)Reflects $51,639 of base salary taken in the form of stock as “Target Equity.”
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The Committee believes that a substantial portion of the potential cash compensation should be subject to meeting financial performance criteria, and thus “at risk” or variable. In 2017, 43% of the potential cash compensation (assuming target annual incentive payout) for the named executive officers was “at risk.” Over 60% of potential cash compensation was “at risk” assuming maximum annual incentive payout.
2017 Target Cash Compensation for Named Executive Officers: Fixed vs. Variable or “At Risk”
By Individual
Named Executive Officer | | Target
Fixed (1) | | Target
Variable (2) | |
Karen Puckett | | $ | 745,900 | | $ | 745,900 | |
Jon Biro | | 350,000 | | 210,000 | |
Robert Munden | | 377,000 | | 245,050 | |
Frank Grillo | | 377,000 | | 245,050 | |
Andrew Harrison | | 301,700 | | 196,105 | |
Shirish Lal | | 411,700 | | 308,775 | |
| | | | | | | |
All NEOs
| | Fixed
| | | |
All NEOs
| | Variable
| | | |
(1)Fixed is base salary at December 31, 2017; excludes any retention or signing bonuses.
(2)Target Variable is 2017 target potential annual incentive compensation (variable) for the named executive officers from column (d) in the Grants of Plan Based Awards Table (but also including a 60% target annual incentive award for Mr. Biro); excludes any retention or signing bonuses.
The Committee also reviewed the compensation risks associated with the pay mix of its executive officers, and in that context considers risk as well as motivation when establishing performance criteria and compensation structures. For 2017, the Committee reviewed the company’s incentive compensation plans to determine whether the company’s compensation policies and practices foster risk taking above the level of risk associated with the company’s business model. In the course of its examination, the Committee evaluated, among other things:
·whether any of our service offerings, operations or functions has much more inherent risk, a significantly different compensation structure, or different profitability basis or results;
·whether the compensation mix is appropriately balanced between annual and long-term incentive awards;
·the relationship between annual and long-term performance measures and payouts, and whether measures are aligned (or complementary) to ensure that they encourage consistent behaviors and sustainable results without conflict;
·whether long-term performance measures and equity vehicles encourage excessively risky behavior;
·whether targets require performance at such a high level that executives would take improper risks to achieve them;
·the overlap of performance criteria and vesting periods to reduce incentives to maximize performance in any one period;
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·whether the mix of equity incentives serve the best interests of stockholders by rewarding the right measures;
·the effect of dilution on stockholders and the company’s equity burn rate; and
·the report of Meridian regarding the risks of our compensation program.
On the basis of this review, the Committee determined that the company’s incentive compensation plans are appropriately structured to not encourage executive officers to take unnecessary or excessive risks and do not create risks that are reasonably likely to have a material adverse effect on the company.
Market Benchmarking
As mentioned above, the Committee typically refers to executive compensation surveys and other benchmark data when it reviews and approves executive compensation. This market data is intended to reflect compensation levels and practices for executives holding comparable positions at comparable companies, which helps the Committee set compensation at levels designed to attract and retain high performing individuals. Market data typically consists of (1) publicly available data from a selected group of peer companies, and (2) more broad-based, aggregated survey data of a large number of companies of similar size or in similar industries.
In selecting the peer companies, the Committee considers a variety of criteria, including industry, revenues, market capitalization and assets. The Committee also believes that it is important to include a sufficient number of peer group companies to enhance the overall comparability of the peer company data for purposes of setting our executives’ compensation. Working with Meridian, the Committee conducted a comprehensive peer group review for 2017. The Committee selected from U.S.-listed companies based on those which have products or services which are competitive (or complementary) to our current and anticipated products and services, and represent a range of sizes (in terms of revenues, profits and employees) and history. Our 2017 peer group consisted of the following companies:
2017 Compensation Peer Group
Acxiom Corporation
| Hubspot, Inc.
| NCI, Inc.
|
| | |
Advisory Board Co.
| Information Services Group
| Neustar, Inc.
|
| | |
CIBER, Inc.
| Marin Software, Inc.
| Rocket Fuel, Inc.
|
| | |
Forrester Research, Inc.
| MDC Partners, Inc.
| Sykes Enterprises, Incorporated
|
| | |
Hackett Group, Inc.
| National Cinemedia, Inc.
| Teletech Holdings, Inc.
|
The Committee compares each executive’s total direct compensation (comprised of salary, total potential bonus opportunity and estimated long-term incentive compensation value), both separately and in the aggregate, to amounts paid for similar positions based on the benchmark data. In looking at overall compensation for our executive officers, in general, and in response to the Meridian reports and current market practices, the Committee considers its philosophy of targeting each element of compensation (as well as target total direct compensation) to fall at approximately the 50th percentile of market compensation over time, but tolerating individual variations due to factors such as individual performance, company performance, tenure, promotion, market factors and internal pay equity.
As discussed above, however, benchmark data is merely a starting point; the Committee does not rigidly apply formulas to set the compensation of our executives based solely on market data or on any one factor in isolation. Rather, the Committee’s ultimate determinations are influenced by a number of factors that are collectively taken into consideration in the Committee’s business judgment, as further described above under the heading “Principal Factors That Influenced 2017 Executive Compensation.” Accordingly, the Committee retains discretion to set compensation levels using a combination of elements that it believes are appropriate, and the CommitteeReport” is not required to set compensation levels at specific benchmark data percentiles.
Based on the total target direct annual compensation approved by the Committee’s for our incumbent named executive officers compared to the peer and market data reviewed by the Committee, Ms. Puckett and Mr. Grillo were above the 50th percentile, Messrs. Lal and Munden at the 50th percentile, and Mr. Harrison was below the 50th percentile. Mr. Biro’s initial compensation package (assessed by the Committee when he was hired) was targeted to be at approximately the 50th percentile.
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Additional Analysis of Executive Compensation Elements
The following discussion provides additional information and analysis regarding the specific elements of our 2017 executive compensation program. This discussion should be read in conjunction with the remainder of this CD&A (including the section above, “Principal Factors That Influenced 2017 Executive Compensation”) and the compensation tables that follow.
Base Salary
We set executive base salaries at levels we believe are appropriate based on each individual executive’s roles, responsibilities and experience in his or her position. We believe that a competitive base salary, providing a fixed level of income over a certain period, is a necessary and important element to include in the compensation packages for our executives. We review base salaries for executive officers on an annual basis, and at the time of hire, promotion or other change in responsibilities. When hiring a new executive, the Committee conducts a benchmark analysis to assess market rates for compensation. Base salary changes also impact target bonus amounts and potential cash severance amounts, which are based on a percentage of base salary.
When reviewing each executive’s base salary in March 2017, the Committee considered, in addition to the other factors:
·the level of responsibility and complexity of the executive’s job;
·the relative importance of the executive’s role and responsibilities in and for Harte Hanks;
·whether, in the Committee’s business judgment and taking into account input from our CEO and other Board members, prior individual performance was particularly strong or weak;
·how the executive’s salary compares to the salaries of other company executives;
·how the executive’s salary compares to market salary information for the same or similar positions (making due consideration for how closely the benchmarked position matched the specific role of our executive);
·the combined potential total direct compensation value of an executive’s salary, annual bonus opportunity and long-term incentive awards;
·the economic environment; and
·recent company performance compared to (i) our financial and operational expectations for our company as a whole, (ii) performance of the functions or operations for which the executive is responsible and (iii) our peers and other market indicators.
Based upon these factors, especially financial performance, the Committee determined that only Mr. Grillo should have his salary increased (from 311,700 to $377,000) as he had assumed responsibility for sales in addition to his existing chief marketing officer responsibilities. For Mr. Biro (hired after the annual compensation determinations), base salary was negotiated based on market benchmarks, timing considerations, prior salary history, equity vs. cash mix, and the salary of other executive officers. The only change made to executive officer salaries subsequent to the annual compensation determinations was that in connection with Mr. Biro’s hiring, Mr. Munden’s salary was reduced to its prior level ($317,000) effective January 1, 2018. Although it did not affect her base salary rate, Ms. Puckett did agree to receive common stock in lieu of cash for 20% of her base salary for the last four months of 2017, and in February 2018, Ms. Puckett’s 2018 base salary was reduced by 35% to $485,000.
Annual Incentive Compensation
We provide an annual incentive opportunity for executive officers to drive company and, where appropriate, business line performance on a year-over-year basis. This annual short-term cash incentive opportunity provides an incentive for our executives to manage our businesses to achieve targeted financial results. Our 2017 AIP for executives was administered under the 2013 Plan, which was approved by our stockholders in May 2013. For the 2017 AIP, bonus opportunity amounts were expressed as a percentage of year-end base salary, as set forth below. Mr. Biro (who joined the company in November 2017) was not eligible for the 2017 AIP.
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2017 AIP Opportunity (as % of Base Salary)
Named Executive Officer | | Threshold | | Target | | Maximum | |
Karen Puckett | | 25.00 | % | 100 | % | 200 | % |
Robert Munden | | 16.25 | % | 65 | % | 130 | % |
Frank Grillo | | 16.25 | % | 65 | % | 130 | % |
Andrew Harrison | | 16.25 | % | 65 | % | 130 | % |
Shirish Lal | | 18.75 | % | 75 | % | 150 | % |
Actual annual incentive compensation awards for our executive officers are determined based on achievement against the Committee’s previously established financial performance goals, as certified by the Committee, typically at its regular February meeting. For 2017, the Committee also adopted individual non-financial goals to better align the leadership team’s incentives with short-term operational goals. The financial performance goals are based on the strategic financial and operating performance objectives for our company and those of our business segments. In setting the financial performance targets, the Committee considers target company performance under our annual operating plan, the potential payouts based on achievement at different levels and whether the portion of incremental earnings paid as bonuses rather than returned to stockholders or reinvested in our business is appropriate. The Committee reserves the right to adjust the financial performance targets during the year, but did not do so in 2017.
The 2017 AIP for executives continued the uniform approach to the annual incentive plan first adopted in 2014, with a goal of emphasizing the integration of the business and cross-functional/operational responsibilities (except as to the portion that was payable in respect of individual goals); the Committee viewed this as necessary to achieve the objectives of our strategic plan by providing a direct incentive to achieve optimal company-wide results. Additionally, the 2017 AIP had limitations that required that any payments made be affordable to the stockholders, i.e., that the incremental profit generated by achievement was not negated by payments under the incentive plan.
The determination of any amount ultimately payable to each executive under the 2017 AIP was based on the following performance levels relative to our Board-approved target revenue performance ($404.6 million) and EBITDA performance ($19.9 million), weighted evenly. Additionally, 10% of each executive’s potential 2017 AIP payment was based on non-financial performance objectives related to strategic goals and restructuring. In establishing the performance criteria and the incremental target performance levels for each performance criteria, the Committee anticipated that the executives would be likely to receive at least the threshold portion of their year-end cash bonuses, with higher levels of payout being progressively more difficult and less likely to occur. Achieving the maximum bonus award was anticipated, at the time of establishing the award, to be very difficult to achieve based on our company’s annual plan performance assumptions and outlook for the company.
Bonus: Financial Performance Measures/Levels
Revenue (45% weight) | | Operating Income (45% weight) | | | |
Performance
(% of Target) | | Payout Level
(% of Target) | | Performance
(% of Target) | | Payout Level
(% of Target) | | | |
105 | | 200 | | 125 | | 200 | | Maximum | |
100 | | 100 | | 100 | | 100 | | Target | |
95 | | 25 | | 83 | | 25 | | Threshold | |
Bonus: Non-Financial Performance Measures
Objective
|
| Measure(s)
|
| Executives
|
Wipro
| | Expense reductions run rate improvement; $10 million sales funnel with $3 million in closed sales by end of 2017
| | Puckett, Grillo, Lal
|
Opera/SignalHub Platform
| | Two existing customers and two new customers on new platform generating revenue by year-end
| | Puckett, Grillo, Lal
|
Improve Liquidity
| | New credit facility in place; reduce overhead $10-$20 million; improve revenue to expense ratio in operations
| | all
|
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Objective
|
| Measure(s)
|
| Executives
|
Build Agile Marketing Platform
| | Produce leads (inbound requests to meet) that generate $15.5 million of closed 2017 sales
| | Puckett, Grillo
|
Divest 3Q Digital
| | Initiate sales process, provided updates and recommendations, and made clear, prudent, and timely steps to bring sale to closure; signed term sheet for sale and/or extension of earnout obligation
| | Puckett, Munden
|
Assess Strategic Options (non-Engagement Agency)
| | Assess strategic options and recommend a go-forward plan; provide updates and timely execution, as appropriate
| | Puckett, Lal, Harrison
|
Acqui-Hires
| | Create acqui-hire approach and roadmap for board discussion; execute as liquidity/financial structure enables
| | Puckett, Grillo, Lal, Munden
|
Based on the company’s actual revenue performance and EBITDA performance, the Committee determined that no payments were earned under the 2017 AIP for the non-financial performance measures set forth above. Although all executives had achievements toward their non-financial performance goals, the Committee determined that due to the Company’s financial performance no payments would be made in respect of those measures (and no discretionary bonuses or stock awards made in respect of 2017 performance).
Bonus Restricted Stock Elections
As part of our executive compensation program, an executive officer may elect to receive up to 30% of his bonus in the form of restricted stock. An executive who so elects receives 125% of the value of the forgone cash portion of the bonus in shares of restricted stock. This program is considered by the Committee each year, and was approved again with respect to 2017 executive bonuses, which were potentially payable in early 2018. The Committee believes this program encourages the accumulation of executive stock ownership, and provides another avenue for our executive officers to reach compliance with our stock ownership guidelines. Because none of our named executive officers received an annual incentive plan payout for 2017, no grants were made under this program.
Long-Term Incentive Awards
We design our long-term incentive compensation program to drive company performance over a multi-year period, align the interests of executives with those of our stockholders and retain executives through long-term vesting and wealth accumulation. The Committee believes that a significant portion of executive compensation should be dependent on value created for our stockholders. The Committee reviews long-term incentive compensation strategy and vehicles as part of its annual executive compensation determinations. Under our 2013 Plan we may issue various equity securities to directors, officers, employees and consultants. The 2013 Plan forms the basis of our long-term incentive plan for executives. Under the 2013 Plan, the Committee has used the following long-term incentive vehicles:
Award Type
|
| Purpose/Description
|
| Vesting
|
| Settlement
|
Stock Options
Stock Appreciation Rights (SARs)
| | align our executives’ interests with the interests of stockholders by having value only if our stock price increases over time
| | 4 years (25% per year)
| | stock (Options)
cash (SARs)
|
Performance Units
| | motivate executives to achieve long-term performance by tying pay-out to a multi-year measurement period and specific, measurable goals that align with company plans and objectives
| | performance (3-year cliff)
| | stock and/or cash
|
Restricted Stock Units
Phantom Stock
| | retain key employees by providing awards that will have value if they vest even without stock price appreciation
| | 3 years (33% per year)
4 years (25% per year)
| | stock (Restricted)
cash (Phantom)
|
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The Committee has established standardized vesting terms for equity awards: stock options, SARs and phantom stock vest in four equal annual installments, restricted stock vests in three equal installments, and performance awards vest after a performance period spanning three calendar years. Stock options and SARs have an exercise price equal to the market value of our common stock on the date of grant, and have a term of ten years (assuming continued service). The Committee determined, in accordance with its discretion under the 2013 Plan, that equity awards granted before 2015 will vest in full upon a change of control (as defined in the 2013 Plan); however, in 2015 the Committee reconsidered this policy and no longer intends to grant awards which automatically accelerate upon a change in control. Stock option and restricted stock awards granted in or after 2014 also vest upon the death or permanent disability of the recipient.
Performance awards represent the right to receive one share of common stock or the cash equivalent (as provided in the award agreement) for each vested unit, with performance determined on a future date (currently set about three years after the grant date). The Committee chooses objective performance criteria intended to align executive’s interests with the company’s long-term interests. Based on the company’s performance for the three years ending 2017, none of the performance units issued in 2015 (with a 2017 operating income performance measure set by the Committee) vested.
Our Board previously adopted a policy of granting annual awards on a fixed date each year, April 15, but due to the delay in the filing of our Annual Report on Form 10-K for fiscal year 2016, in 2017 the Committee determined to delay issuance of annual equity awards until after the issuance of the Annual Report in June. We also grant interim awards from time to time in connection with mid-year hires, acquisitions, promotions or other reasons, based on a date selected by the Committee on or after the date of the Committee action at a meeting or by unanimous written consent. For employee hires, our practice has been to grant awards on the third business day of employment.
As a consequence of the company’s share price decline, for 2017 the Committee evaluated a variety of award types and combinations, trying to balance (i) the need for motivation that is best achieved with equity vehicles, (ii) stockholder dilution, (iii) share availability under the 2013 Plan, and (iv) decreasing cash liquidity. For 2017, the Committee approved a combination of SARs, restricted stock and performance awards for our executive officers. With the company’s share price at historic lows, the Committee believed granting SARs to executives would provide a meaningful incentive to achieve share price appreciation. The Committee also focused performance award objectives to address the company’s most pressing needs: a combination of organic revenue growth, organic EBITDA margin growth, and EBITDA margin for certain operations, and for Ms. Puckett, timely filing of required financial reports beginning with the Quarterly Report on Form 10-Q for the third quarter of 2017. The Committee determined that this combination of awards—weighted toward awards with some performance aspect—would be the best way to align our executive compensation program with the company’s needs and stockholders’ expectations for improved performance. The award structure and size adopted by the Committee also addressed the norms for such grants identified in the Meridian report, as well as other market data for how companies facing historically low stock prices have structured awards.
When reviewing each executive’s proposed equity awards for 2017, the Committee considered the level of responsibility and complexity of the executive’s job, how the executive’s target equity award value compares to the target equity award values of other Harte Hanks executives and to market benchmarks for the same or similar positions developed by Meridian. Specific target grant size was a rounded grant date value based on benchmark data provided by Meridian. The Committee set two other parameters for 2017, (i) a dilution limit of 1.5 million shares (so that any target award value above that amount would be granted in the form of cash-settling award vehicles), and (ii) an allocation of 55% (or 88% in the case of the CEO) of target award value to performance-based awards. For purposes of sizing the awards, target grant values were divided by the share price on the award date; however, due to the low share price on the grant dates, the dilution limit set by the Committee resulting in actual awards being approximately 65% of the target award level for executives other than the CEO.
The only exception to the foregoing was Mr. Biro, who joined the company as CFO in November of 2017: his initial equity awards were in lieu of an annual grant with the size being negotiated based on position benchmark data provided by Meridian, with some increase as a trade-off for reduction in other compensation elements. Mr. Biro’s awards were made as inducement grants outside the 2013 Plan, but otherwise on similar terms, and consisted of stock options, performance units (with the same performance measures as other officers) and restricted stock as reflected in the table below.
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2017 Equity Awards
Named Executive Officer | | Restricted Stock
(units) | | Options / SARs
(shares/units) (1) | | Performance Awards
(Revenue/EBITDA)
(units—maximum) (2) | | Performance Awards
(Financial Reporting)
(units—maximum) (3) | |
Karen Puckett | | 21,126 | | 0 | | 42,253 | | 109,887 | |
Jon Biro | | 24,000 | | 33,855 | | 18,000 | | 0 | |
Robert Munden | | 15,492 | | 23,239 | | 7,746 | | 0 | |
Frank Grillo | | 11,267 | | 16,901 | | 5,633 | | 0 | |
Andrew Harrison | | 8,450 | | 12,676 | | 4,225 | | 0 | |
Shirish Lal | | 19,718 | | 29,577 | | 9,859 | | 0 | |
(1)SARs for all except Biro, who received stock options.
(2)Settling in shares of common stock.
(3)Settling in cash.
Perquisites
Consistent with previous years, our 2017 executive compensation program included limited executive perquisites. The aggregate incremental cost of providing perquisites and other benefits to our named executive officers is included in the amount shown in the All Other Compensation column of the Summary Compensation table below and detailed in the subsequent All Other Compensation table. We believe the limited perquisites we provide to our executives are representative of comparable benefits offered by companies with whom we compete for executive talent, and therefore offering these benefits serves the objective of attracting and retaining top executive talent by enhancing the competitiveness of our compensation program.
In establishing the elements and amounts of each executive’s 2017 compensation, the Committee took into consideration, as one of the relevant factors, the value of these perquisites to our executives. Tally sheets are used as a reference to ensure that Committee members understand the total compensation provided to executives each year and over a multi-year period, including the amount of each executive’s salary continuation death benefit. For 2017, our perquisites were:
·Salary Continuation Benefits — We provide salary continuation benefits (which are similar in effect to life insurance benefits) to our executive officers. This benefit provides the estates of our executive officers ten annual payments (of $90,000 for our CEO and $70,000 for Executive Vice Presidents) in the event of their death while employed by the company.
·Annual Health Examination — We reimburse the executive for an annual comprehensive health examination at the Cooper Clinic (or similar clinic) for our CEO, Executive Vice Presidents and Senior Vice Presidents (with a cost estimated to be $5,000).
The Annual Health Examination benefit was not used by any executive, and was terminated by the Committee in 2018. In addition, under Ms. Puckett’s employment agreement, we have agreed to reimburse:
·up to 12 months of temporary housing expenses (not to exceed $3,000 per month) at a location proximate to one of the company’s significant business operations;
·at her election, either (i) the reasonable moving and closing costs for the purchase of her new primary residence and sale of her current primary residence or (ii) half of the amount of any loss she incurs on the sale of her current primary personal residence, not to exceed $250,000, but only if she establishes a primary personal residence within 30 miles of one of the company’s primary business locations (or any other location mutually agreeable to the Committee and Ms. Puckett) during the first 24 months of her employment with the company; and
·up to $10,000 in legal fees incurred by her for review and negotiation of her employment agreement.
Ms. Puckett was reimbursed for her legal fees, but did not seek the other reimbursements described above.
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Pension and Retirement
We have established an unfunded, non-qualified pension restoration plan (the “Restoration Pension Plan”), which we froze (as to new participants and benefit accrual based on continued service) on April 1, 2014. Executives holding office prior to the freeze date are the only designated participants in our Restoration Pension Plan. These pension benefits were designed to attract and retain key talent by providing our executives with a competitive retirement income program to supplement savings through our 401(k) plan.
The annual pension benefit under the Restoration Pension Plan is largely computed by multiplying the number of years of employment by a percentage of the participant’s final average earnings (earnings during the highest five consecutive years prior to April 1, 2014). All benefits payable under the Restoration Pension Plan are to be paid from our general assets, but we are not required to set aside any funds to discharge our obligations under the Restoration Pension Plan. There were no changes to the benefits provided to our named executive officers under our pension plans in 2017, although we amended the Restoration Pension Plan on October 11, 2016 to make discretionary the funding of a trust for the benefit of participants. Further details about our pension plans are shown in the “Pension Benefits” section below.
Severance Arrangements—Generally
In 2017 we had four types of severance arrangements with our executive officers, each addressing or intended to address different employment and/or termination circumstances:
·our executive severance policy (the “Executive Severance Policy”);
·“change in control” severance agreement (the “CIC Agreements”);
·severance agreements with Messrs. Harrison and Munden (the “Severance Agreements”); and
·an employment agreement with our CEO (the “CEO Agreement”).
Severance Arrangements—Executive Severance Policy
In January 2015, we adopted an Executive Severance Policy applicable to corporate officers and certain other executive employees designated by the Committee. The Executive Severance Policy applies only for executives in circumstances when they do not have a specific agreement that determines their rights to severance, such as the CIC Agreements, Severance Agreements and CEO Agreement described below. The Executive Severance Policy provides executives whose employment is terminated without “cause,” (i) severance payments equal to such executive’s then-current base salary for the applicable severance period (two years for our CEO and one year for all others) and (ii) subject to certain conditions, up to a year of contributions toward health care coverage. In exchange, executives are required to deliver a full release to the company, and adhere to non-competition and non-solicitation covenants. The Executive Severance Policy does not provide any acceleration of vesting for equity awards in the event of an executive’s termination. The Executive Severance Policy can be amended upon six months’ notice by the Committee, and it terminates immediately prior to a change of control of the company. The foregoing is merely a summary of the Executive Severance Policy, and is subject to the Severance Policy itself as filed January 30, 2015 on a Form 8-K with the SEC.
Severance Arrangements—CIC Agreements
The CIC Agreements are designed to allow us to attract and retain key talent by providing defined compensation in the event of a change in control. The payout levels and other terms of the severance agreements are based on the Committee’s review of publicly available market data regarding severance agreements and prior iterations of these agreements. Our current form of CIC Agreement has been accepted by all of our officers. The CIC Agreements provide that if, after a change in control, an executive (i) is terminated other than for “cause” (as defined in the agreement), death or disability or (ii) elects to terminate his employment for “good reason,” then such executive is entitled to severance compensation and a cash payment sufficient to cover health insurance premiums for a period of 24 months. The amount of severance compensation is the sum of (A) the executive’s annual base salary in effect immediately prior to the change in control or termination date, whichever is larger, plus (B) the executive’s target-level bonus or incentive compensation, multiplied by 1.0 for vice presidents, 2.0 for senior vice presidents and executive vice presidents, and 3.0 for the CEO. The foregoing severance multiples were reduced by 0.5 for levels below CEO as a result of changes made in the form of CIC Agreement in 2015, but incumbent officers retained their earlier-awarded higher multiples (as reflected in the “Potential Payments Upon Termination or Change in Control” section below). With respect to equity awards, the CIC Agreements provide that so long as such awards are assumed or replaced with equivalent awards by the acquirer, there will be no “single-trigger”
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acceleration of equity awards. The foregoing is merely a summary of the most important changes to the CIC Agreements, and is subject to the revised CIC Agreement itself as filed March 19, 2015 on a Form 8-K with the SEC.
Pursuant to amendments dated February 1, 2018 (the “CIC Amendments”), the CIC Agreements with incumbent executive officers were amended to: (i) reduce to 2.0 the multiple of annual salary and bonus potentially payable as severance compensation to the president and any senior vice president or executive vice president, and (ii) reduce the acceleration of vesting (under applicable circumstances) of performance-based equity awards so that rather than full vesting acceleration on the applicable acceleration date, the awards vest pro-rata based on the period of employment from the grant date through the applicable acceleration date. The foregoing is merely a summary of the most important changes to the CIC Amendments, and is subject to the revised CIC Amendment itself as filed February 2, 2018 on a Form 8-K with the SEC.
Severance Arrangements—Severance Agreements
The Severance Agreements were designed to promote the retention of key executives during our 2013 CEO transition, to allow our new CEO at the time to be able to rely on a stable base of executive leaders familiar with our business. The Severance Agreements provide that if an officer is terminated other than (1) by reason of such officer’s death or disability, or (2) for cause, then:
·the company shall pay such officer a lump sum cash payment equal to 1.5 times such officer’s then-current annual base salary;
·for a period of up to 18 months, the company will reimburse such officer for healthcare coverage as then elected to the extent such costs exceed his or her employee contribution prior to the termination date; and
·all outstanding, unvested shares of time vesting restricted common stock held by such officer shall automatically become fully vested.
Severance Arrangements—CEO Agreement
Our CEO Agreement with Karen Puckett provides the following severance benefits in addition to the benefits Ms. Puckett has under the Executive Severance Policy and CIC Agreements:
·she is also entitled to severance compensation if employment is terminated by her for good reason (as defined in the employment agreement);
·the initial (inducement) restricted stock and option grants (but no subsequent grants) would vest one additional tranche upon a termination without cause or for good reason; and
·she would receive severance compensation equal to two times then-current base salary for most terminations not connected to a change in control.
Discretionary Bonuses and Equity Awards
We pay sign-on and other bonuses and grant new-hire equity awards when necessary or appropriate to attract executive talent. Executives we recruit may have a significant amount of unrealized value in the form of unvested equity and other forgone compensation opportunities. Sign-on bonuses and special equity awards are an effective means of offsetting the compensation opportunities executives lose when they leave a former company to join Harte Hanks. The value of these awards was generally determined by reference to market benchmarks for such positions, negotiation with the candidates, and pro-ration for the term of service. As discussed above, Mr. Biro received equity awards in connection with his hiring, with the grant being sized as (and made in lieu of) any additional annual award for 2017. The allocation for these awards among our typical award features generally followed the same allocation adopted by the Committee for executives of the same level. Although Mr. Biro did not receive a sign-on bonus, in 2016 we did pay Mr. Lal a $200,000 sign-on bonus to offset the value of equity awards he was forfeiting at his prior employer to take employment with the company.
We also may grant discretionary cash and equity awards from time to time when appropriate to retain key executives, to recognize expanded roles and responsibilities or for other reasons deemed appropriate by the Committee in its business judgment. The only such discretionary grant applicable to 2017 was the retention bonus of $125,000 granted to Mr. Munden by the Committee in 2016 (and paid in early 2018) in respect of his continued service to the company through December 31, 2017. Aside from this grant, no other discretionary retention or recognition grants were made to named executive officers in 2017. Previously, in connection with our 2015 CEO
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transition, to ensure stability of senior leadership we offered retention bonuses to certain executive officers, including Messrs. Harrison and Munden, which provide for payment of a bonus of 25% of base salary if they remain employed by the company on July 1, 2016; payment of this bonus was made in 2016. The retention and sign-on bonuses described above are reflected in column (d) of the Summary Compensation Table below.
Internal Pay Equity
While comparisons to compensation levels at companies in our peer group are helpful in assessing the overall competitiveness of our compensation program, we believe that our executive compensation program also must be internally consistent and equitable to achieve our compensation objectives. Our compensation philosophy is consistent for all of our executive officer positions and, although the amounts vary, the elements of our executive compensation program are also consistent for our executives. In setting the various amounts and elements of 2017 compensation for our named executive officers, the Committee viewed each named executive officer’s compensation amounts and elements against those of the other named executive officers. The Committee did not establish any fixed formulas or ratios. Rather, the Committee’s ultimate compensation determinations were influenced by a number of factors, including internal pay equity, that were taken into consideration together in the Committee’s business judgment. We believe the total 2017 compensation we paid to each of our named executive officers was appropriate in relation to the other named executive officers, in light of their respective responsibilities, tenure and experience.
Stock Ownership Guidelines & Hedging Policies
The Committee believes that stock ownership requirements encourage officers to maintain a significant financial stake in our company, thus reinforcing the alignment of their interests with those of our stockholders. Consistent with this philosophy, we have stock ownership guidelines that require all officers to acquire and hold significant levels of our common stock. Under these guidelines (revised in February 2018), a corporate officer must reach the minimum required level of common stock ownership no later than five years from commencement of employment (and sooner in some cases). Officers promoted to a level with a higher minimum equity ownership level have three years to reach the higher level of ownership. The target ownership level (relative to base annual salary) is 500% for the CEO, 200% for executive vice presidents and senior vice presidents, and 100% for vice presidents.
The recent stock ownership of our executive officers is reflected in the section above entitled “Security Ownership of Management and Principal Stockholders.” For purposes of measuring compliance with these stock ownership guidelines, all common stock (including restricted stock units) owned by an executive officer is included. Compliance with the target ownership level is measured by the greater of (i) the aggregate of the consideration paid for qualifying shares (but for unvested awards, the grant date value), or (ii) the result of multiplying the number of qualifying shares by the average closing price of the Company’s Common Stock over the trailing 12 months. Neither options nor performance awards are included in the compliance calculation.
If an officer has not previously met the minimum equity ownership level, the officer must retain half of the “net shares” related to any option exercise or vesting of restricted stock or performance awards. “Net shares” means the number of shares remaining after the sale of shares to cover the exercise price of options and the sale of shares sufficient to pay taxes related to the exercise of options or vesting of restricted stock or performance awards. If an executive officer has previously met the applicable target ownership level, then so long as such officer maintains the number of shares needed for compliance at that time, the officer will be deemed to be in compliance notwithstanding any stock price fluctuations.
The ownership guidelines, and compliance by officers with the guidelines, are reviewed annually by the Committee. Any remedial action for failure to comply with the stock ownership guidelines is to be determined by the Committee on a case-by-case basis. Although none of our executive officers have sold shares of the company’s stock during their tenure as executive officers, currently, none of our officers have met the holding requirements under the guidelines. Ms. Puckett will have through September 2020, Mr. Grillo through October 2020, and Mr. Biro through November 2022 to establish compliance.
As part of our Business Conduct Policy, we have adopted an insider trading policy that, among other things, forbids officers from engaging in hedging activities with respect to our securities.
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Clawback Policy
In February 2018, the Board adopted a clawback policy. This policy formalized the company’s long-standing practice of including in award agreements (or other applicable documents which provide the terms of incentive compensation) a provision that makes such incentive compensation subject to forfeiture, reimbursement and/or recoupment in the event the company is required to prepare an accounting restatement of its financial statements due to the company’s material noncompliance with any financial reporting requirement under the securities laws. Under the clawback policy, incentive compensation includes the following (provided that such compensation is granted, earned or vested based wholly or in part on the attainment of a financial reporting measure): annual bonuses/incentive plan awards and other short- and long-term cash incentives; stock options; stock appreciation rights; restricted stock awards and/or units; performance unit awards; and any other compensation designated as “Incentive Compensation” by the Compensation Committee at the time such compensation is made, granted or awarded.
Tax Deductibility of Executive Compensation
For tax years prior to 2018, §162(m) of the Code prevents us from taking a tax deduction for non-performance-based compensation over $1 million in any fiscal year paid to certain senior executive officers. In designing our executive compensation program, we consider the effect of §162(m) together with other factors relevant to our business needs. We seek to design our annual cash incentive and long-term performance unit awards and stock option awards to be tax-deductible to Harte Hanks, so long as preserving the tax deduction does not inhibit our ability to achieve our executive compensation or other objectives. The Committee does have discretion to design and use compensation elements that are not deductible under §162(m) if the Committee believes that paying non-deductible compensation is appropriate to achieve our executive compensation objectives. The inducement awards made to Mr. Biro (and in 2015 to Ms. Puckett and Mr. Grillo, and in 2016 to Mr. Lal) will not qualify as deductible compensation to the extent they (or they cause aggregate compensation in the applicable year to) exceed $1 million.
Review of and Conclusion Regarding All Components of Executive Compensation
The Compensation Committee has reviewed all components of the named executive officers’ 2017 compensation, including salary, bonus, long-term equity incentive compensation, accumulated realized and unrealized equity compensation gains (and losses), the value to the executive and the cost to the company of all perquisites and other personal benefits and any payments that may be payable under their respective severance agreements due to termination of their employment or a change in control of the company. The Committee also notes that company financial performance has been unsatisfactory for some time, and that performance is further reflected in the company’s stock price and stockholder value. Although the company’s compensation programs have not resulted in the desired improvements in company performance, the use of performance-based compensation has had the intended effect of reducing compensation for executive officers when stockholders suffer: no equity-based performance awards have vested in the past six years, nor have any significant annual incentive plan bonuses been paid (and none in the past four years). Likewise, the use of equity awards for a significant portion of executive officer compensation has subjected them to the same diminished value felt by stockholders.
The Committee, like the company’s executive officers, are challenged by the steep declines faced by the business. Nevertheless, the company operates in an environment where there is competition for talent, and when executive officers take on additional responsibilities as they navigate a turn-around, providing meaningful compensation that serves to reward their efforts, if successful, is essential. Based upon the Compensation Committee’s review, the Committee believes the compensation for our executive officers is competitive and that our compensation practices have enabled Harte Hanks to attract and retain the executive talent needed for the challenging turn-around the company is facing. The Committee also finds the named executive officers’ total compensation to be fair and reasonable for our circumstances, and consistent with the Committee’s and the company’s executive compensation philosophy.
Compensation Committee Report
The material in this report is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in such filing.
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The Compensation Committee of the Board of Directors has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K and contained in this Amendment No. 1. Based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Amendment No. 1.
| Compensation Committee
|
| Scott C. Key, Chair
|
| Christopher M. Harte
|
| Judy C. Odom
|
| Alfred V. Tobia, Jr.
|
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Important Note Regarding Compensation Tables
The following compensation tables in this Amendment No. 1 have been prepared pursuant to SEC rules. Although some amounts (e.g., salary and non-equity incentive plan compensation) represent actual dollars paid to an executive, other amounts are estimates based on certain assumptions about future circumstances (e.g., payments upon termination of an executive’s employment) or they may represent dollar amounts recognized for financial statement reporting purposes in accordance with SFAS 123R, but do not represent actual dollars received by the executive (e.g., dollar values of stock awards and option awards). The footnotes and other explanations to the Summary Compensation table and the other tables herein contain important estimates, assumptions and other information regarding the amounts set forth in the tables and should be considered together with the quantitative information in the tables.
Summary Compensation Table
The following table sets forth information regarding compensation earned for 2017, 2016 and 2015 by our named executive officers. The amounts in column (i) are further described in the All Other Compensation table included below. None of the named executive officers received non-equity plan incentive compensation during the reporting period.
| | | | Salary | | Bonus (1) | | Stock
Awards (2) | | Option
Awards (2) | | Change in Pension
Value and
Nonqualified Deferred
Compensation
Earnings (3) | | All Other
Compensation | | Total | |
Name and Principal Position | | Year | | ($) | | ($) | | ($) | | ($) | | ($) | | ($) | | ($) | |
(a) | | (b) | | (c) | | (d) | | (e) | | (f) | | (h) | | (i) | | (j) | |
Karen Puckett (4) | | 2017 | | $ | 694,261 | | $ | — | | $ | 1,749,987 | | $ | — | | $ | — | | $ | 1,149 | | $ | 2,445,396 | |
President and | | 2016 | | $ | 741,986 | | $ | — | | $ | 1,502,509 | | $ | — | | $ | — | | $ | 23,860 | | $ | 2,268,355 | |
Chief Executive Officer | | 2015 | | $ | 234,615 | | $ | — | | $ | 1,610,086 | | $ | 577,115 | | $ | — | | $ | 88,657 | | $ | 2,510,473 | |
| | | | | | | | | | | | | | | | | |
Jon Biro | | 2017 | | $ | 49,808 | | $ | — | | $ | 420,000 | | $ | 179,997 | | $ | — | | $ | — | | $ | 649,805 | |
Executive Vice President | | 2016 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
and Chief Financial Officer | | 2015 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | | | | | | | |
Robert Munden | | 2017 | | $ | 374,635 | | $ | 125,000 | | $ | 225,409 | | $ | 119,355 | | $ | 22,590 | | $ | 11,275 | | $ | 878,263 | |
Executive Vice President, CFO (1/17 to 11/17) | | 2016 | | $ | 313,820 | | $ | 79,175 | | $ | 298,028 | | $ | — | | $ | 11,768 | | $ | 17,088 | | $ | 719,879 | |
General Counsel & Secretary | | 2015 | | $ | 316,731 | | $ | — | | $ | 296,803 | | $ | 98,936 | | $ | — | | $ | 36,549 | | $ | 749,019 | |
| | | | | | | | | | | | | | | | | |
Frank Grillo | | 2017 | | $ | 361,931 | | $ | — | | $ | 163,930 | | $ | 86,803 | | $ | — | | $ | 1,247 | | $ | 613,910 | |
Executive Vice President, | | 2016 | | $ | 308,550 | | $ | — | | $ | 273,892 | | $ | — | | $ | — | | $ | 13,433 | | $ | 595,875 | |
Chief Marketing Officer | | 2015 | | $ | 51,923 | | $ | — | | $ | 55,976 | | $ | 83,472 | | $ | — | | $ | 11,826 | | $ | 203,197 | |
| | | | | | | | | | | | | | | | | |
Andrew Harrison | | 2017 | | $ | 301,700 | | $ | — | | $ | 122,948 | | $ | 65,103 | | $ | 56,840 | | $ | 11,714 | | $ | 558,305 | |
Executive Vice President, Human | | 2016 | | $ | 298,595 | | $ | 75,425 | | $ | 298,028 | | $ | — | | $ | 29,200 | | $ | 17,527 | | $ | 718,775 | |
Resources and Contact Centers | | 2015 | | $ | 301,154 | | $ | 2,000 | | $ | 296,803 | | $ | 98,936 | | $ | — | | $ | 38,001 | | $ | 736,894 | |
| | | | | | | | | | | | | | | | | |
Shirish Lal (5) | | 2017 | | $ | 411,700 | | $ | — | | $ | 286,897 | | $ | 151,906 | | $ | — | | $ | 1,054 | | $ | 851,557 | |
Executive Vice President, Chief | | 2016 | | $ | 323,980 | | $ | 200,000 | | $ | 338,759 | | $ | 149,999 | | $ | — | | $ | 1,620 | | $ | 1,014,358 | |
Operating Officer & Chief Technology Officer | | 2015 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
(1)For Mr. Harrison in 2015, represents divisional anniversary bonus. For 2016, represents a signing bonus for Mr. Lal, and retention bonuses for Messrs. Harrison and Munden. For 2017, represents retention bonus for Mr. Munden (paid in 2018).
(2)The amounts in columns (e) and (f) reflect the full grant date fair value of the awards calculated in accordance with FASB ASC Topic 718. For a discussion of valuation assumptions, see note H of our audited financial statements for the fiscal year ended December 31, 2017 included in the Original Filing. For performance based stock units the fair value assumed such awards vested based on probable outcome of the performance conditions as of the grant date. For Ms. Puckett, 2014 amount reflects stock award made in respect of her service as an independent director, and in 2015 includes $59,993 for similar stock grants.
(3)The amounts in column (h) reflect an estimate of the actuarial increase in the present value of the named executive officer’s benefits under the Restoration Pension Plan, determined using interest rate and mortality rate assumptions consistent with those used in our audited financial statements and described in note H of our audited financial statements for the fiscal year ended December 31, 2017 included in the Original Filing. There can be no assurance that the amounts shown will ever be realized by the named executive officers.
(4)Ms. Puckett served as a director before her appointment as President and CEO effective September 14, 2015.
(5)Mr. Lal resigned from the company effective January 31, 2018.
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All Other Compensation
Name | | Year | | Insurance
Premiums (1) | | Auto
Allowance | | Company
401(k) Plan
Contributions | | Restricted
Stock
Dividends (2) | | Other (3) | | Total | |
Karen Puckett | | 2017 | | $ | 1,149 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,149 | |
| | 2016 | | $ | 1,150 | | $ | 3,975 | | $ | — | | $ | 18,735 | | $ | — | | $ | 23,860 | |
| | 2015 | | $ | — | | $ | 5,300 | | $ | — | | $ | 23,357 | | $ | 60,000 | | $ | 88,657 | |
| | | | | | | | | | | | | | | |
Robert Munden | | 2017 | | $ | 475 | | $ | — | | $ | 10,800 | | $ | — | | $ | — | | $ | 11,275 | |
| | 2016 | | $ | 475 | | $ | 2,925 | | $ | 10,600 | | $ | 3,088 | | $ | — | | $ | 17,088 | |
| | 2015 | | $ | 475 | | $ | 11,700 | | $ | 10,600 | | $ | 13,774 | | $ | — | | $ | 36,549 | |
| | | | | | | | | | | | | | | |
Frank Grillo | | 2017 | | $ | 767 | | $ | — | | $ | 480 | | $ | — | | $ | — | | $ | 1,247 | |
| | 2016 | | $ | 767 | | $ | 2,925 | | $ | 8,624 | | $ | 1,117 | | $ | — | | $ | 13,433 | |
| | 2015 | | $ | — | | $ | 1,950 | | $ | 8,759 | | $ | 1,117 | | $ | — | | $ | 11,826 | |
| | | | | | | | | | | | | | | |
Andrew Harrison | | 2017 | | $ | 914 | | $ | — | | $ | 10,800 | | $ | — | | $ | — | | $ | 11,714 | |
| | 2016 | | $ | 914 | | $ | 2,925 | | $ | 10,600 | | $ | 3,088 | | $ | — | | $ | 17,527 | |
| | 2015 | | $ | 914 | | $ | 11,700 | | $ | 10,600 | | $ | 14,787 | | $ | — | | $ | 38,001 | |
| | | | | | | | | | | | | | | |
Shirish Lal | | 2017 | | $ | 1,054 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,054 | |
| | 2016 | | $ | 1,054 | | $ | 566 | | $ | — | | $ | — | | $ | — | | $ | 1,620 | |
| | 2015 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
(1)Reflects annual premium paid by Harte Hanks for life insurance policies obtained in connection with providing salary continuation benefits to each of the named executive officers; see “Perquisites” included above in the CD&A.
(2)Reflects dividends paid by Harte Hanks during the year on shares of restricted stock held by each of the named executive officers; such dividends are paid at the same rate as paid on other shares of common stock.
(3)Amounts for Ms. Puckett board service fees of $50,000 earned during her tenure as an independent director, and reimbursement of $10,000 in legal fees incurred in connection with the negotiation of her employment agreement.
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Grants of Plan Based Awards
The following table sets forth information regarding grants of equity-based awards during 2017 to our named executive officers. All equity awards described below were granted pursuant to our 2013 Plan, except for inducement awards made to Ms. Puckett and Messrs. Biro, Grillo and Lal in connection with their hiring. Dividends are not paid in respect of restricted stock units, performance awards or stock options. See “Potential Payments Upon Termination or Change in Control” below for other circumstance in which equity awards may vest. Other than the amounts reported in the Summary Compensation table above, there were no non-equity incentive plan awards granted in 2017.
| | | | | | Estimated Future Payouts Under
Non-Equity Incentive Plan Awards | | Estimated Future Payouts Under
Equity Incentive Plan Awards | | All Other
Stock
Awards:
Number of
Shares of
Stock | | All Other
Option
Awards:
Number of
Securities
Underlying | | Exercise
or Base
Price of
Option | | Grant Date
Fair Value of
Stock and
Option | |
| | | | Grant | | Threshold | | Target | | Maximum | | Threshold | | Target | | Maximum | | or Units | | Options | | Awards | | Awards | |
Name | | Award | | Date | | ($) | | ($) | | ($) | | (#) | | (#) | | (#) | | (#) | | (#) | | ($/Sh) (2) | | ($) (3) | |
(a) | | Type (1) | | (b) | | (c) | | (d) | | (e) | | (f) | | (g) | | (h) | | (i) | | (j) | | (k) | | (l) | |
Karen Puckett | | AIP | | 7/13/17 | | $ | 186,475 | | $ | 745,900 | | $ | 1,491,800 | | | | | | | | | | | | | | | |
| | PSU(S) | | 7/14/17 | | | | | | | | 21,127 | | | | 42,253 | | | | | | $ | 10.10 | | $ | 426,755 | |
| | PSU(C) | | 7/14/17 | | | | | | | | 109,887 | | | | 109,887 | | — | | | | $ | 10.10 | | $ | 1,109,859 | |
| | RSU | | 7/14/17 | | | | | | | | | | | | | | 21,126 | | | | $ | 10.10 | | $ | 213,373 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Jon Biro | | Option | | 11/13/17 | | | | | | | | | | | | | | | | 33,855 | (4) | $ | 10.00 | | $ | 179,997 | |
| | RSU | | 11/13/17 | | | | | | | | | | | | | | 24,000 | | | | $ | 10.00 | | $ | 240,000 | |
| | PSU(S) | | 11/13/17 | | | | | | | | 7,200 | | 7,200 | | 18,000 | | | | | | $ | 10.00 | | $ | 180,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Robert Munden | | AIP | | 2/16/17 | | $ | 61,263 | | $ | 245,050 | | $ | 490,100 | | | | | | | | | | | | — | | — | |
| | PSU(S) | | 6/23/17 | | | | | | | | 3,098 | | 3,098 | | 7,746 | | | | | | $ | 9.70 | | $ | 75,136 | |
| | CSAR | | 6/23/17 | | | | | | | | | | | | | | | | 23,239 | (4) | $ | 9.70 | | $ | 119,355 | |
| | RSU | | 6/23/17 | | | | | | | | | | | | | | 15,492 | | | | $ | 9.70 | | $ | 150,272 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Frank Grillo | | AIP | | 2/16/17 | | $ | 61,263 | | $ | 245,050 | | $ | 490,100 | | | | | | | | | | | | — | | — | |
| | PSU(S) | | 6/23/17 | | | | | | | | 2,253 | | 2,253 | | 5,633 | | | | | | $ | 9.70 | | $ | 54,640 | |
| | CSAR | | 6/23/17 | | | | | | | | | | | | | | | | 16,901 | (4) | $ | 9.70 | | $ | 86,803 | |
| | RSU | | 6/23/17 | | | | | | | | | | | | | | 11,267 | | | | $ | 9.70 | | $ | 109,290 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Andrew Harrison | | AIP | | 2/16/17 | | $ | 49,026 | | $ | 196,105 | | $ | 392,210 | | | | | | | | | | | | | | | |
| | PSU(S) | | 6/23/17 | | | | | | | | 1,690 | | 1,690 | | 4,225 | | | | | | $ | 9.70 | | $ | 40,983 | |
| | CSAR | | 6/23/17 | | | | | | | | | | | | | | | | 12,676 | (4) | $ | 9.70 | | $ | 65,103 | |
| | RSU | | 6/23/17 | | | | | | | | | | | | | | 8,450 | | | | $ | 9.70 | | $ | 81,965 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Shirish Lal | | AIP | | 2/16/17 | | $ | 77,194 | | $ | 308,775 | | $ | 617,550 | | | | | | | | | | | | — | | — | |
| | PSU(S) | | 6/23/17 | | | | | | | | 3,944 | | 3,944 | | 9,859 | | | | | | $ | 9.70 | | $ | 95,632 | |
| | CSAR | | 6/23/17 | | | | | | | | | | | | | | | | 29,577 | (4) | $ | 9.70 | | $ | 151,906 | |
| | RSU | | 6/23/17 | | | | | | | | | | | | | | 19,718 | | | | $ | 9.70 | | $ | 191,265 | |
(1)Type of Award: AIP = Annual Incentive Plan (cash); PSU(S) = Performance Award (unit settling in stock); RSU = Restricted Stock Unit Award (settling in stock); PSU(C) = Performance Award (unit settling in cash); Option = Stock Option; CSAR = Stock Appreciation Right (unit settling in cash); see Additional Analysis of Executive Compensation Elements—Long Term Incentive Awards above for more details.
(2)The amount shown in column (k) is based upon the closing market price of our common stock on the grant date, as reported on the NYSE.
(3)The amounts shown in column (l) represent the full grant date fair value of the options and awards calculated in accordance with FASB ASC Topic 718. For a discussion of valuation assumptions, see note H of our audited financial statements for the fiscal year ended December 31, 2017 included in the Original Filing.
(4)Options and CSARs were granted at exercise prices equal to the market value of our common stock on the grant date. Options and CSARs expire on the tenth anniversary of the grant date and vest in four equal annual installments, one on each of the first four anniversary of the grant date.
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Outstanding Equity Awards at Year End
The following table sets forth information regarding outstanding equity awards held at the end of 2017 by our named executive officers. Most of these equity awards were issued pursuant to the 2013 Plan, except for the initial grants made to Ms. Puckett and Messrs. Grillo and Lal, which were issued as inducement awards outside our stockholder-approved plans as permitted by NYSE regulations. The 2013 Plan is filed as an exhibit to the Original Filing, as are the award documents for the inducement awards.
| | Option Awards | | Stock Awards | |
Name | | Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable | | Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable | | Option
Exercise
Price ($) | | Option
Expiration
Date | | Number of
Shares or
Units of Stock
That Have Not
Vested (#) | | Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($) | | Equity Incentive
Plan Awards:
Number of
Unearned
Shares, Units or
Other Rights
That Have Not
Vested (#) | | Equity
Incentive Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other Rights
That Have Not
Vested
($) (1) (2) | |
(a) | | (b) | | (c) | | (e) | | (f) | | (g) | | (h) | | (i) | | (j) | |
Karen Puckett | | 43,368 | | 43,368 | (3) | $ | 37.90 | | 9/17/2025 | | 258 | (10) | $ | 2,451 | | 34,980 | (19) | $ | 332,310 | |
| | | | | | | | | | 7,080 | (11) | $ | 67,260 | | 26,109 | (20) | $ | 248,036 | |
| | | | | | | | | | 12,334 | (12) | $ | 117,173 | | 18,500 | (21) | $ | 175,750 | |
| | | | | | | | | | 8,430 | (13) | $ | 80,085 | | 42,253 | (22) | $ | 401,404 | |
| | | | | | | | | | 21,126 | (14) | $ | 200,697 | | 109,887 | (23) | $ | 1,043,927 | |
Jon Biro | | — | | 33,855 | (4) | $ | 10.00 | | 11/13/2027 | | 24,000 | (15) | $ | 228,000 | | 18,000 | (22) | $ | 171,000 | |
Robert Munden | | 4,000 | | — | | $ | 131.90 | | 4/9/2020 | | 773 | (16) | $ | 7,344 | | 1,778 | (24) | $ | 16,891 | |
| | 1,200 | | — | | $ | 123.10 | | 2/5/2021 | | 2,934 | (12) | $ | 27,873 | | 3,778 | (20) | $ | 35,891 | |
| | 2,800 | | — | | $ | 99.10 | | 2/5/2022 | | 1,719 | (13) | $ | 16,331 | | 4,400 | (21) | $ | 41,800 | |
| | 6,000 | | — | | $ | 72.50 | | 9/18/2022 | | 15,492 | (14) | $ | 147,174 | | 7,746 | (22) | $ | 73,587 | |
| | 3,455 | | 1,152 | (5) | $ | 82.30 | | 4/15/2024 | | | | | | | | | |
| | 2,396 | | 2,396 | (6) | $ | 76.80 | | 4/15/2025 | | | | | | | | | |
| | — | | 23,239 | (7) | $ | 9.70 | | 6/23/2027 | | | | | | | | | |
Frank Grillo | | 5,065 | | 5,065 | (8) | $ | 42.60 | | 10/28/2025 | | 438 | (17) | $ | 4,161 | | 2,833 | (20) | $ | 26,914 | |
| | — | | 16,901 | (7) | $ | 9.70 | | 6/23/2027 | | 2,200 | (12) | $ | 20,900 | | 3,300 | (21) | $ | 31,350 | |
| | | | | | | | | | 1,289 | (13) | $ | 12,246 | | 5,633 | (22) | $ | 53,514 | |
| | | | | | | | | | 11,267 | (14) | $ | 107,037 | | | | $ | — | |
Andrew Harrison | | 400 | | — | | $ | 159.00 | | 2/5/2018 | | 773 | (16) | $ | 7,344 | | 1,778 | (24) | $ | 16,891 | |
| | 1,125 | | — | | $ | 60.40 | | 2/5/2019 | | 2,934 | (12) | $ | 27,873 | | 3,778 | (20) | $ | 35,891 | |
| | 1,200 | | — | | $ | 119.00 | | 2/5/2020 | | 1,719 | (13) | $ | 16,331 | | 4,400 | (21) | $ | 41,800 | |
| | 400 | | — | | $ | 123.10 | | 2/5/2021 | | 8,450 | (14) | $ | 80,275 | | 4,225 | (22) | $ | 40,138 | |
| | 800 | | — | | $ | 99.10 | | 2/5/2022 | | | | | | | | | |
| | 4,000 | | — | | $ | 72.50 | | 9/18/2022 | | | | | | | | | |
| | 3,455 | | 1,152 | (5) | $ | 82.30 | | 4/15/2024 | | | | | | | | | |
| | 570 | | — | | $ | 77.60 | | 2/5/2025 | | | | | | | | | |
| | 2,396 | | 2,396 | (6) | $ | 76.80 | | 4/15/2025 | | | | | | | | | |
| | — | | 12,676 | (7) | $ | 9.70 | | 6/23/2027 | | | | | | | | | |
Shirish Lal | | 3,009 | | 9,028 | (9) | $ | 28.50 | | 3/16/2016 | | 4,912 | (18) | $ | 46,664 | | 4,121 | (20) | $ | 39,150 | |
| | — | | 29,577 | (7) | $ | 9.70 | | 6/23/2027 | | 19,718 | (14) | $ | 187,321 | | 4,800 | (21) | $ | 45,600 | |
| | — | | — | | $ | — | | | | — | | $ | — | | 9,859 | (22) | $ | 93,661 | |
(1)Based upon the closing market price of our common stock as of December 31, 2017 ($9.50), as reported on the NYSE.
(2)In 2015, 2016 and 2017, our Compensation Committee awarded our executives performance-based stock units which are payable, if earned, in shares of common stock or cash. The payout levels range from 0% to a maximum of 100% of the performance units granted.
(3)These options vest in two equal annual installments on September 17 of 2018 - 2019.
(4)These options vest in four equal annual installments on November 13 of 2018 - 2021.
(5)These options vested on April 15 of 2018.
(6)Half of these options vest on April 15, 2018; the remainder vest on April 15, 2019.
(7)These SARs vest in four equal annual installments on June 23 of 2018 - 2021.
(8)These options vest in two equal annual installments on October 28 of 2019 - 2020.
(9)These options would have vested in three equal annual installments on March 16 of 2018 — 2020.
(10)Restricted stock vested on February 5, 2018.
(11)Restricted stock vests on September 17, 2018.
(12)Half of this restricted stock vested on April 15, 2018; the remainder vests April 15, 2019.
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(13)One third of this phantom stock vested on April 15, 2018; the remainder vests in two equal annual installments on April 15 of 2019 — 2020.
(14)Restricted stock unit vests in three equal annual installments on July 14 of 2018 — 2020.
(15)Restricted unit stock vests in three equal annual installments on November 13 of 2018 — 2020.
(16)Restricted stock vested on April 15, 2018.
(17)Restricted stock vests on October 28, 2018.
(18)Restricted stock would have vested in two installments on March 16 of 2018 — 2019.
(19)Performance stock unit vests (payable in stock) February 15, 2019, subject to relative TSR performance conditions.
(20)Performance stock unit vests (payable in cash) February 15, 2019, subject to revenue performance conditions.
(21)Performance stock unit vests (payable in stock) February 15, 2018, subject to operating income performance conditions.
(22)Performance stock unit would vest (payable in stock) February 15, 2020, subject to revenue and EBITDA performance conditions.
(23)Performance stock unit would vest (payable in cash) February 15, 2020, subject to timely financial reporting performance conditions.
(24)Performance stock unit would vest (payable in stock) February 15, 2018, subject to operating income performance conditions; conditions were not met, so no units vested.
Option Exercises and Stock Vested
The following table sets forth information for our named executive officers regarding option exercises and equity vesting during 2017, calculated as the aggregate market value of the vested shares based on the closing price of our common stock on the vesting date. Awards indicated as restricted stock are settled in shares, and awards indicated as phantom stock are settled in cash.
| | | | Stock Awards | |
Name | | | | Number of
Shares Acquired
on Vesting (#) | | Value Realized
on Vesting ($) | |
(a) | | | | (d) | | (e) | |
Karen Puckett | | Restricted Stock | | 13,789 | | $ | 149,284 | |
| | Phantom Stock | | 2,809 | | 35,955 | |
| | | | | | | |
Jon Biro | | Restricted Stock | | — | | — | |
| | Phantom Stock | | — | | — | |
| | | | | | | |
Robert Munden | | Restricted Stock | | 2,896 | | 37,069 | |
| | Phantom Stock | | 572 | | 7,322 | |
| | | | | | | |
Frank Grillo | | Restricted Stock | | 1,538 | | 18,504 | |
| | Phantom Stock | | 429 | | 5,491 | |
| | | | | | | |
Andrew Harrison | | Restricted Stock | | 2,896 | | 37,069 | |
| | Phantom Stock | | 572 | | 7,322 | |
| | | | | | | |
Shirish Lal | | Restricted Stock | | 2,456 | | 35,612 | |
| | Phantom Stock | | — | | — | |
| | | | | | | | |
Pension Benefits—Restoration Pension Plan
The table below under this heading sets forth information regarding estimated payments or other benefits payable at, following or in connection with retirement to which our named executive officers are entitled under our Restoration Pension Plan. The Restoration Pension Plan is administered by a committee comprised of Messrs. Biro, Copeland, Harrison and Munden.
The purpose of this unfunded, non-qualified pension plan is to provide executives with the benefits they would receive if our qualified defined benefit plan (in which no current named executive participates) were not subject to the benefit and compensation limits imposed by Section 415 and Section 401(a)(17)liabilities of the Code and had benefit accruals under such plan not been frozen at December 31, 1998. The Restoration Pension Plan was itself frozen to participation and benefit accruals as of April 1, 2014; all current participants—current or former executive officers—are fully vested. Benefits accrued and vested after December 31, 2004 under the Restoration Pension Plan are subject to non-qualified deferred compensation rules under Section 409A of the Code. The Restoration Pension Plan provides benefits based on a formula that takes into account the executive’s earnings for each fiscal year. For purposes of the calculation of the monthly amount payable starting after retirement under the Restoration Pension Plan, the following definitions apply:
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“Average Monthly Compensation” means the monthly average of the five consecutive years’ compensation out of the last ten complete years on April 1, 2014 that gives the highest average. For purposes of determining the gross benefit under the Restoration Pension Plan, compensation includes W-2 compensation (subject to certain exclusions) plus any compensation deferred under a Section 125 or Section 401(k) plan, but only recognizes up to 100% of the target bonus amount for years prior to 2001 and up to 50% of the target bonus amount for years after 2000. The compensation for the gross Restoration Pension Plan benefit is not limited by the Code Section 401(a)(17) pay limit.
“Normal Retirement Date” means the date upon which a participant reaches age 65.
“Covered Compensation” means a 35-year average of the Maximum Taxable Wages (MTW) under social security. The MTW is the annual limit on wages subject to the FICA tax for social security. The 35-year period ends with the year the employee reaches eligibility for an unreduced social security benefit (age 65, 66, or 67 depending on the year the employee was born). For years after 2014 (the year of the Restoration Pension Plan freeze) and prior to the end of the 35-year period, the MTW from 2014 is used.
The monthly amount is the lesser of the sum of A and B multiplied by C and D as defined below:
A =1.0 percent of the Average Monthly Compensation multiplied by the projected number of years of credited service at the Normal Retirement Date.
B =0.65 percent of the Average Monthly Compensation in excess of 1/12 of Covered Compensation multiplied by the number of years of projected credited service at the Normal Retirement Date up to 35 years.
C =Ratio of credited service at April 1, 2014 to projected credited service at the Normal Retirement Date.
D =50 percent of Average Monthly Compensation.
Participants are eligible for early retirement upon attainment of age 55 if they are vested (as all current participants are). The monthly amount payable upon early retirement is equal to the monthly accrued benefit at the date of termination multiplied by an early retirement factor as decreased by certain plan and Internal Revenue Service-prescribed early retirement factors. We do not have a policy for granting extra years of credited service. In the event of a change of control (as defined in the Restoration Benefit Plan), our then-current obligations may, in our discretion, be funded through the establishment of a trust fund.
The amounts reported in the following table equal the present value of the accumulated benefit through December 31, 2017 for our named executive officers under the Restoration Pension Plan based on the assumptions described in note (1); only Messrs. Harrison and Munden are participants in the Restoration Pension Plan. No executive officer received payments under the Restoration Pension Plan in 2017.
| | | | Number of Years of
Credited Service | | Present Value of
Accumulated Benefit (1) | |
Name | | Plan Name | | (#) | | ($) | |
(a) | | (b) | | (c) | | (d) | |
Robert Munden | | Restoration Benefit Plan | | 4.000 | | $ | 145,449 | |
Andrew Harrison | | Restoration Benefit Plan | | 18.583 | | $ | 347,493 | |
(1)The accumulated benefit is based on service and earnings, as described above, considered by the plans for the period through December 31, 2016. The present value has been calculated using a discount rate of 3.67% and assuming the named executive officers will live and retire at the normal retirement age of 65 years. For purposes of calculating the actuarial present value, no pre-retirement decrements are factored into the calculations. The mortality assumption is based on the RP2006 generational mortality tables projected using Scale MP2016.
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Potential Payments Upon Termination or Change in Control
Payments Pursuant to Severance Agreements
In 2017 we had four types of severance arrangements with our executive officers, each addressing or intended to address different employment and/or termination circumstances:
·the Executive Severance Policy;
·the CIC Agreements;
·Severance Agreements with Messrs. Harrison and Munden; and
·CEO Agreement with Ms. Puckett.
Please see the descriptions of these arrangements under the heading “Severance Arrangements—Generally” above.
Payments Made Upon Retirement
For a description of the pension plans in which the named executive officers participate, see the Pension Benefits table above under the heading “Pension Benefits — Restoration Pension Plan”. The tables below provide the estimated pension benefits that would have become payable if the named executive officer had ceased to be employed as of December 31, 2016. None of our current named executive officers is eligible for early retirement.
Payments Made Upon Death or Disability
For a discussion of the supplemental life insurance benefits for the named executive officers, see the section above entitled “Perquisites” and the All Other Compensation table above. The tables below provide the amounts the beneficiaries of each named executive officer would have received had such officer died on December 31, 2016. The company pays for long-term disability insurance for all salaried employees, and the table below provides the estimated amounts payable to our named executive officers (or their guardians) if they had become eligible for payments under such policy on December 31, 2016.
Potential Termination and Change in Control Benefits
The following table illustrates an estimated amount of compensation potentially payable to each named executive officer upon termination of such executive’s employment under various scenarios. Any amount ultimately received will vary based on a variety of factors, including the reason for such executive’s termination of employment, the date of such executive’s termination of employment, and the executive’s age upon termination of employment. The amounts shown assume that such event occurred as of December 31, 2017, and, therefore are estimates of the amounts that would have been paid to such executives upon such event. Actual amounts to be paid can only be determined at the time of the event triggering the payment obligations. No additional payments are required in the event of a termination for cause in connection with a change in control. Mr. Lal resigned effective January 31, 2018, and no payments (other than for wages and benefits accrued prior to termination) were made.
The following table does not reflect the reduced amounts payable as a result of the CIC Amendments effected in February 2018; see “Severance Arrangements—CIC Agreements” above.
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| | No Change in Control | | Change in Control | |
| | Disability | | Death | | Termination
Without
Cause | | No
Termination (1) | | Termination
Without Cause or
For Good Reason | |
Karen Puckett | | | | | | | | | | | |
Retirement Benefits | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Disability Benefits | | 1,242,998 | | — | | — | | — | | — | |
Salary Continuation (2) | | — | | 900,000 | | — | | — | | — | |
Cash Severance (3) | | — | | — | | 1,491,800 | | — | | 4,475,400 | |
Health Benefits (3) (4) | | — | | — | | 29,294 | | — | | 42,576 | |
Equity Vesting Acceleration (3) (5) | | 467,666 | | 467,666 | | 67,260 | | — | | 2,669,092 | |
Estimated Total | | $ | 1,710,664 | | $ | 1,367,666 | | $ | 1,588,354 | | $ | — | | $ | 7,187,068 | |
Jon Biro | | | | | | | | | | | |
Retirement Benefits | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Disability Benefits | | 2,239,494 | | — | | — | | — | | — | |
Salary Continuation (2) | | — | | 700,000 | | — | | — | | — | |
Cash Severance | | — | | — | | 350,000 | | — | | 700,000 | |
Health Benefits (4) | | — | | — | | 19,422 | | — | | 52,127 | |
Equity Vesting Acceleration (5) | | 228,000 | | 228,000 | | — | | — | | 399,000 | |
Estimated Total | | $ | 2,467,494 | | $ | 928,000 | | $ | 369,422 | | $ | — | | $ | 1,151,127 | |
Robert Munden | | | | | | | | | | | |
Retirement Benefits (6) | | $ | 145,449 | | $ | 145,449 | | $ | 145,449 | | $ | 145,449 | | $ | 145,449 | |
Disability Benefits | | 2,379,827 | | — | | — | | — | | — | |
Salary Continuation (2) | | — | | 700,000 | | — | | — | | — | |
Cash Severance | | — | | — | | 565,500 | | — | | 1,555,125 | |
Health Benefits (4) | | — | | — | | 22,834 | | — | | 42,576 | |
Equity Vesting Acceleration (5) | | 198,721 | | 198,721 | | 198,721 | | — | | 366,890 | |
Estimated Total | | $ | 2,723,997 | | $ | 1,044,170 | | $ | 932,504 | | $ | 145,449 | | $ | 2,110,040 | |
Frank Grillo | | | | | | | | | | | |
Retirement Benefits | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Disability Benefits | | 2,171,458 | | — | | — | | — | | — | |
Salary Continuation (2) | | — | | 700,000 | | — | | — | | — | |
Cash Severance | | — | | — | | 377,000 | | — | | 1,244,100 | |
Health Benefits (4) | | — | | — | | 4,525 | | — | | 22,332 | |
Equity Vesting Acceleration (5) | | 144,343 | | 144,343 | | — | | — | | 256,120 | |
Estimated Total | | $ | 2,315,801 | | $ | 844,343 | | $ | 381,525 | | $ | — | | $ | 1,522,552 | |
Andrew Harrison | | | | | | | | | | | |
Retirement Benefits (6) | | $ | 347,493 | | $ | 347,493 | | $ | 347,493 | | $ | 347,493 | | $ | 347,493 | |
Disability Benefits | | 2,542,805 | | — | | — | | — | | — | |
Salary Continuation (2) | | — | | 700,000 | | — | | — | | — | |
Cash Severance | | — | | — | | 452,550 | | — | | 1,244,513 | |
Health Benefits (4) | | — | | — | | 21,965 | | — | | 42,468 | |
Equity Vesting Acceleration (5) | | 131,822 | | 131,822 | | 131,822 | | — | | 395,314 | |
Estimated Total | | $ | 3,022,120 | | $ | 1,179,315 | | $ | 953,830 | | $ | 347,493 | | $ | 2,029,788 | |
Shirish Lal | | | | | | | | | | | |
Retirement Benefits | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Disability Benefits | | 2,449,405 | | — | | — | | — | | — | |
Salary Continuation (2) | | — | | 700,000 | | — | | — | | — | |
Cash Severance | | — | | — | | 411,700 | | — | | 1,440,950 | |
Health Benefits (4) | | — | | — | | 14,647 | | — | | 42,576 | |
Equity Vesting Acceleration (5) | | 233,985 | | 233,985 | | — | | — | | 412,395 | |
Estimated Total | | $ | 2,683,390 | | $ | 933,985 | | $ | 426,347 | | $ | — | | $ | 1,895,921 | |
(1) Assumes equity awards are assumed or replaced with equivalents, as described under the terms of the CIC Agreements.
(2) Sum of 10 annual payments payable to the executive’s estate in the event of such executive’s death while employed.
(3) The non-change in control amounts are also payable if Ms. Puckett terminates for “good reason” as defined in her employment agreement.
(4) Reflects the estimated payments to (i) partially offset the cost of 12-24 months (no change in control) or (ii) entirely offset the cost of 24 months of future premiums (change in control) under our health and welfare benefit plans.
(5) Values are calculated based on the closing price of our common stock of $9.50 on December 31, 2017.
(6) Reflects the estimated single sum present value of Restoration Pension Plan accumulated benefit as of December 31, 2017, which the officer would be entitled to receive upon reaching age 65. Actual payments are made over time, not in a lump sum. None of our named executive officers with this benefit have reached normal retirement age. These amounts would also be payable in the event of termination with or without cause or voluntary resignation, provided that some or all of this amount is subject to clawback if, in the event of a “for cause” termination related to dishonest conduct, the Compensation Committee elects to deny vested retirement benefits under the Restoration Pension Plan.
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Risk Oversight
Our Board is responsible for overseeing the risk management process. The Board focuses on our general risk management strategy and the most significant risks we face, and ensures that appropriate risk mitigation strategies are implemented by management. The Board is also apprised of particular risk management matters in connection with its general oversight and approval of corporate matters.
In performing the risk management process, the Board reviews with management (1) our policies with respect to risk assessment and management of risks that may be material to us, (2) our system of disclosure controls and system of internal controls over financial reporting, and (3) our compliance with legal and regulatory requirements. The Board also reviews major legislative and regulatory developments that could materially impact our contingent liabilities and risks. Our other Board committees also consider and address risk as they perform their respective committee responsibilities. For example, our Compensation Committee evaluates the risks associated with our compensation plans and policies, and our Audit Committee monitors risks relating to our financial controls and reporting. All committees report to the full Board as appropriate, including when a matter rises to the level of a material or enterprise level risk. The leadership structure of our Board described above in the “Board Leadership Structure” section also ensures that management is properly overseen by independent directors.
Management is responsible for day-to-day risk management. Our finance, treasury, general counsel and internal audit functions serve as the primary monitoring and testing groups for company-wide policies and procedures, and manage the day-to-day oversight of the risk management strategy for our ongoing business. This oversight includes identifying, evaluating and addressing potential risks that may exist at the enterprise, strategic, financial and operational levels, as well as compliance and reporting.
We believe the division of risk management responsibilities described above is an effective approach for addressing the risks facing the company with respect to the company’s compensation policies and practices and that our Board leadership structure supports this approach.
Pay Ratio Disclosure
The SEC adopted a rule requiring annual disclosure of the ratio of our median employee’s (not including our principal executive officer (“PEO”)) annual total compensation to the total annual compensation of the PEO, in our case Karen Puckett. We employ people of all skills and education levels across multiple continents and economic regions. Our employee population comprises, among others, strategists and consultants with advanced degrees, marketing and technology experts, experienced managers, back-office operations staff, and mail production and distribution staff. Seventy percent of our employees worked in contact centers in the U.S. and the Philippines during 2017. The composition of the employee population requires a broad variance of market-driven compensation rates and, accordingly, yields a wide ratio of PEO pay to that of the median employee.
The Company is presenting the following information for 2017 as follows:
· Median employee (other than PEO) total annual compensation: $16,819.
· Ms. Puckett (PEO) total annual compensation: $2,445,396.
· Based on this information, for 2017, the ratio of the annual total compensation of our PEO to the median employee’s annual total compensation was reasonably estimated to be 145.4 to 1.0.
In determining the median employee, we prepared a listing of all employees as of December 31, 2017, and total compensation for each employee for the annual period then ended. Wages and salaries were annualized for those employees who were not employed for the full year of 2017. We selected the median employee from the annualized list by ranking the annual total compensation of all employees except for the PEO from lowest to highest and determining the median employee. Once we identified the median employee, we aggregated the following 2017 compensation elements to determine comparative wages for the pay ratio: salaries/wages, overtime, paid time off, bonus, and vesting equity awards. For simplicity, the value of our 401(k) plan and medical benefits provided was excluded, as the median employee and the PEO were offered the same benefits, and we utilized the Internal Revenue Service safe harbor provision for 401(k) discrimination testing in 2017. As of December 31, 2017, we employed 4,971 persons of which 3,483 were in our contact center operations.
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DIRECTOR COMPENSATION
Elements of Current Director Compensation Program
Directors’ compensation includes cash and stock-based incentives. Employee directors are not paid additional compensation for their services as directors. Currently, non-employee directors receive the following compensation for their services on the Board and its committees. Directors’ compensation is subject to change from time to time, and the Board has acted to change certain elements of director compensation as noted in “Establishing Director Compensation” below the table.
Element
|
| Description
|
| Amount
|
|
Annual Cash Retainer
| | Payable to “independent” Board members, as determined by the Board in accordance with applicable rules
| | $40,000
| |
Annual Equity Awards
| | · For each calendar year, each independent director receives restricted stock units which vest in three equal annual installments beginning the first anniversary of the grant date
| | Shares equal to $70,000
| |
| | · The number of shares of restricted stock delivered was based on the market value of one share of the company’s common stock on the NYSE on the grant date, in accordance with the 2013 Plan
| | | |
| | · These shares of restricted stock were granted pursuant to the 2013 Plan and the other terms and conditions set forth in the applicable form of award agreement under the 2013 Plan
| | | |
Annual Retainer for Independent Chairman
| | Payable to the Chairman if the Chairman is an independent director; consists of a grant of restricted stock units on July 1 of each year, vesting in one year but otherwise consistent with Annual Equity Awards (below); in addition to other amounts payable for service as a director
| | Shares equal to $50,000
| |
Annual Cash
| | · Audit Committee Chair
| | $12,500
| |
Retainer for Committee Chairs
| | · Compensation Committee Chair
| | $7,500
| |
| | · Nominating and Corporate Governance Committee Chair
| | $5,500
| |
Annual Equity Election In Lieu of Cash Fees
| | · Each independent director may elect, annually or in connection with such director’s appointment to the Board, to receive all or a portion of such director’s cash compensation otherwise payable for such director’s services in shares of the company’s common stock
| | Up to 100% of a director’s cash compensation
| |
| | · These shares of common stock are granted as soon as administratively practicable following the end of each of the company’s fiscal quarters; the number of shares delivered is based on the market value of one share of the company’s common stock on the NYSE as of the last day of the immediately preceding quarter, in accordance with the 2013 Plan
| | | |
Other
| | · Non-management directors may also receive compensation from time to time for any service on special Board committees
| | As applicable
| |
| | · All directors are reimbursed for their out-of-pocket expenses incurred in connection with their service on the Board or any of its committees
| | | |
Establishing Director Compensation
The Compensation Committee has the responsibility for recommending to the Board the form and amount of compensation for non-employee directors. The Compensation Committee may appoint subcommittees and
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delegate to a subcommittee such power and authority as it deems appropriate, subject to certain limitations set forth in its charter and discussed above in the CD&A. The Compensation Committee did not appoint any subcommittees during 2017.
The Compensation Committee has the sole authority to retain or terminate a consulting firm engaged to assist in the evaluation of director compensation. From time to time, the Compensation Committee reviews surveys and other information provided by outside consultants to provide insights on director compensation matters. Our director compensation is structured predominantly based upon the results of such reviews, company performance, and the amount of time devoted to Board and committee meetings. The Committee believes that engaging a consultant on a periodic basis is more appropriate than having annual engagements.
In connection with Meridian’s 2017 engagement to review the company’s executive compensation programs, the Committee also requested that Meridian conduct a review and analysis of our compensation of non-employee directors and related policies, practices and trends. The Committee made its 2017 annual non-employee director compensation determinations, taking into account the results of Meridian’s review, analysis and recommendations, among other factors, and no changes were initially made from the then-current compensation program. However, in August 2017, seven directors unilaterally waived all compensation for the remainder of the year. In February 2018, the Committee considered ways to reduce and simplify target non-employee director compensation, and the Board adopted the new compensation structure reflected in the table above, which:
· eliminated meeting fees (which had been a material driver of increased compensation in recent years);
· reduced the cash retainer by $5,000;
· increased the annual equity award by $10,000 to weight director compensation more heavily toward stock; and
· reduced committee chair retainers by $2,500 each.
The Board believes this overall compensation level is appropriate for the company’s circumstances and its need to attract and retain highly qualified board candidates.
Director Stock Ownership Guidelines & Hedging Policy
We recently revised our Corporate Governance Principles and Stock Ownership Guidelines to increase the stock holding requirement expected of non-employee directors. Non-employee directors are expected to hold five times the annual cash retainer amount (or $200,000) in company stock (an increase from three times the annual cash retainer amount, or $135,000, under prior compensation programs). Employee directors are likewise subject to the Stock Ownership Guidelines, but as applicable to their management level rather than directorship. Currently, each of our directors other than Mr. Keating is in compliance with this policy(Mr. Keating has through 2022 to come into compliance). As part of our Business Conduct Policy, we have adopted an insider trading policy that, among other things, forbids directors from engaging in hedging activities with respect to our securities.
2017 Director Compensation for Non-Employee Directors
The following table shows 2017 compensation recognized for financial statement reporting purposes of our non-employee directors. Consequently, the amounts reflected in the “Stock Awards” column below also include compensation expense amounts from awards granted in prior years. All fees were paid in cash, unless otherwise designated.
| | Fees Earned or Paid in Cash | | Stock Awards | | Total | |
Name | | ($) | | ($) (1) | | ($) | |
(a) | | (b) | | (c) | | (f) | |
Stephen E. Carley (2) | | $ | 37,000 | | $ | 59,995 | | $ | 96,995 | |
David L. Copeland | | $ | 51,917 | | $ | 59,995 | | $ | 111,912 | |
William F. Farley (3) | | $ | 62,252 | | $ | 59,995 | | $ | 122,247 | |
Christopher M. Harte (4) | | $ | 52,003 | | $ | 109,991 | | $ | 161,994 | |
Melvin L. Keating | | $ | 31,125 | | $ | 59,991 | | $ | 91,116 | |
Scott C. Key | | $ | 56,501 | | $ | 59,995 | | $ | 116,496 | |
Judy C. Odom | | $ | 55,083 | | $ | 59,995 | | $ | 115,078 | |
Alfred V. Tobia, Jr. (4) | | $ | 8,625 | | $ | 59,991 | | $ | 68,616 | |
(1) Each of the independent directors was granted shares of restricted stock in 2016 with a grant date fair value of $60,000 (rounded down to the nearest whole share), computed in accordance with FASB ASC Topic 718. For a discussion of valuation assumptions, see note
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H of our audited financial statements for the fiscal year ended December 31, 2017 included in the Original Filing. Restricted stock awards are granted without consideration and vest in three equal annual installments beginning the first anniversary of the date of grant.
(2) Mr. Carley retired from the Board July 18, 2018; Mr. Carley’s unvested restricted stock was forfeited in connection with his retirement.
(3) Elected to receive 75% of all fees in the form of stock.
(4) Elected to receive all fees in the form of stock.
Equity Awards Outstanding at Year End
The following table shows the number of outstanding equity awards held by our non-employee directors as of December 31, 2017; none of our non-employee directors held stock options.
Name | | Number of Outstanding
Shares of Restricted Stock (#) | | Total (#) | |
David L. Copeland | | 7,930 | | 7,930 | |
William F. Farley | | 7,930 | | 7,930 | |
Christopher M. Harte | | 12,784 | | 12,784 | |
Melvin L. Keating | | 6,382 | | 6,382 | |
Scott C. Key | | 7,930 | | 7,930 | |
Judy C. Odom | | 7,930 | | 7,930 | |
Alfred V. Tobia Jr. | | 6,382 | | 6,382 | |
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information at Year-End
20172018
The following table provides information as of the end of 2017required by this item regarding total shares subject to outstanding stock options and rights and total additional shares availablesecurities authorized for issuance under equity compensation plans will be set forth in our 2013 Plan and 2005 Omnibus Incentive Plan (“2005 Plan”), as well as the inducement awards granted to Ms. Puckett and Messrs. Biro, Grillo and Lal in connection with their hiring:Plan Category | | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights (1)
(a) | | Weighted-average exercise
price of outstanding options,
warrants and rights (2)
(b) | | Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a)) (3)
(c) | |
Equity compensation plans approved by security holders | | 407,066 | | $ | 86.54 | | 82,083 | |
Equity compensation plans not approved by security holders (4) | | 219,738 | | $ | 30.82 | | 0 | |
Total | | 626,804 | | $ | 60.80 | | 82,083 | |
(1) Consisting of outstanding options, restricted stock units and stock-denominated performance units.
(2) The weighted-average exercise price does not take into account any shares issuable upon vesting of outstanding restricted stock or performance restricted stock units, which have no exercise price.
(3) Represents shares available under our 2013 Plan; shares available for issuance under our 2013 Plan may be issued pursuant to stock options, restricted stock, performance restricted stock units, common stock and other awards that may be established pursuant to the 2013 Plan. No new options or securities may be granted
2019 Proxy Statement under the 2005 Plan.(4) Consists of inducement awards made to Ms. Puckett and Messrs. Biro, Grillo and Lal in connection with their employment; the terms of these grants are consistent with the 2013 Plan.
38caption “Executive Compensation - Equity Compensation Plan Information at Year-End 2018,” which information is incorporated herein by reference.
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERSThe following table sets forth the number of shares of our common stock beneficially ownedinformation required by (1) our “named executive officers” included in the Summary Compensation Table above, (2) each current Harte Hanks director, (3) each person known by Harte Hanks to beneficially own more than 5% of the outstanding shares of our common stock, and (4) all current Harte Hanks directors and executive officers as a group. Except as otherwise noted, (a) the persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them, and (b) ownership is as of April 20, 2018, when 6,254,276 shares of our common stock were outstanding.
Name and Address of Beneficial Owner (1) | | Number of Shares
of Common Stock | | Percent of
Class | |
Named Executive Officers | | | | | |
Karen A. Puckett (2) | | 87,870 | | 1.4 | % |
Jon C. Biro | | 0 | | * | |
Robert L. R. Munden (3) | | 32,251 | | * | |
Frank M. Grillo (4) | | 8,610 | | * | |
Andrew P. Harrison (5) | | 25,003 | | * | |
Shirish R. Lal | | 30,553 | | * | |
Directors | | | | | |
David L. Copeland (6) | | 465,189 | | 7.4 | % |
William F. Farley (7) | | 20,291 | | * | |
Christopher M. Harte (8) | | 121,507 | | 1.9 | % |
Melvin L. Keating | | 272 | | * | |
Scott C. Key | | 11,507 | | * | |
Judy C. Odom | | 14,200 | | * | |
Karen A. Puckett (2) | | 87,870 | | 1.4 | % |
Alfred V. Tobia, Jr. (9) | | 156,895 | | 2.5 | % |
Other Known 5% Holders | | | | | |
Wipro, LLC (10) | | 1,001,658 | | 13.8 | % |
Houston H. Harte (11) | | 736,956 | | 11.8 | % |
Fondren Management LP (12) | | 447,290 | | 7.2 | % |
Dimensional Fund Advisors, Inc. (13) | | 339,487 | | 5.4 | % |
| | | | | |
All Current Executive Officers and Directors as a Group (14 persons) (14) | | 974,148 | | 15.6 | % |
*Less than 1%.
(1) The address of (a) Houston H. Harte is P.O. Box 17424, San Antonio, TX 78217, (b) Dimensional Fund Advisors, Inc. is 6300 Bee Cave Road, Building One, Austin, TX 78746, (c) Fondren Management LP is 1177 West Loop South, Suite 1625, Houston, Texas 770275, (d) Wipro LLC is 2 Tower Center Blvd, Suite 2200, East Brunswick, NJ 08816, and (e) each other beneficial owner is c/o Harte Hanks, Inc., 9601 McAllister Freeway, Suite 610, San Antonio, TX 78216.
(2)Includes 43,368 shares that may be acquired upon the exercise of options exercisable within the next 60 days.
(3)Includes 22,201 shares that may be acquired upon the exercise of options exercisable within the next 60 days.
(4)Includes 5,065 shares that may be acquired upon the exercise of options exercisable within the next 60 days.
(5)Includes 16,154 shares that may be acquired upon the exercise of options exercisable within the next 60 days.
(6) Includes the following shares to which Mr. Copeland disclaims beneficial ownership: (a) 3,800 shares held as custodian for unrelated minors, (b) 118,228 shares that are owned by various trusts for which he serves as trustee or co-trustee, (c) 306,246 shares owned by the Shelton Family Foundation, of which he is one of nine directors and an employee, and (d) 21,050 shares in an testamentary estate for which Mr Copeland is serving as sole executor.
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(7) Includes (i) 12 shares owned indirectly by Mr. Farley via a trust in which his spouse is a beneficiary, as to which beneficial ownership is disclaimed, and (ii) 8,144 shares held in a trust for which Mr. Farley is a beneficiary.
(8) Includes 76,893 shares held by Spicewood Family Partners, Ltd., of which Mr. Harte is the sole member and manager of the limited liability company that is the sole general partner, with exclusive voting and dispositive power over all the partnership’s shares, and the following shares to which Mr. Harte disclaims beneficial ownership: (a) 30 shares held as custodian for Mr. Harte’s step-children and child, (b) 5,885 shares held by trusts for which Mr. Harte serves as trustee, and (c) 12,000 shares held by other trusts for which Mr. Harte serves as a co-trustee.
(9) 155,000 shares of Common Stock owned beneficially. (Mr. Tobia, as a Managing Partner of Sidus Investment Management, LLC, may be deemed to beneficially own (i) 25,555 shares of Common Stock owned directly by Sidus Investment Partners, L.P., (ii) 65,244 shares of Common Stock owned directly by Sidus Double Alpha Fund, L.P., (iii) 31,530 shares of Common Stock owned directly by Sidus Double Alpha, Ltd. and (iv) 32,669 shares of Common Stock held in a certain account managed by Sidus Investment Management, LLC.)
(10) Wipro, LLC owns 9,926 shares of Series A Convertible Preferred Stock, which shares are convertible into shares of the company’s common stock at Wipro, LLC’s election.
(11) 660,816 shares are held in the Harte Management Trust, as to which Houston H. Harte, Carolyn Harte and Sarah Harte share voting and dispositive power. 76,140 shares are beneficially owned by Larry D. Franklin, of which (i) 1,100 shares are held by the Franklin Family Foundation, of which Mr. Franklin is the President, and consequently has the sole power to vote and dispose (or direct the disposition) of such shares, and (ii) 75,040 shares are held by Mr. Franklin and his spouse as community property and as to which shares Mr. Franklin has the sole power to vote and dispose (or direct the disposition), subject to applicable community property laws. Information relating to this stockholder group is based on such group’s Schedule 13D/A filed with the SEC on March 5, 2018.
(12) Represents shares held by investment advisory clients of Dimensional Fund Advisors LP (“Dimensional”) for whom Dimensional serves as investment manager or sub-adviser to certain other commingled funds, group trusts and separate accounts (such investment companies, trusts and accounts, collectively referred to as the “Funds”). In its role as investment advisor, sub-adviser and/or manager, Dimensional or its subsidiaries possess sole voting power over 329,797 such shares and sole investment power over all such shares that are owned by the Funds, and may be deemed to be the beneficial owner of the shares of the Issuer held by the Funds. However, all securities reflected are owned by the Funds. Dimensional disclaims beneficialitem regarding security ownership of such securities.certain beneficial owners, management and directors will be set forth in our The Funds have2019 Proxy Statement under the right to receive or the power to direct the receiptcaption “Security Ownership of dividends from, or the proceeds from the sale of the securities held in their respective accounts. To the knowledge of Dimensional, the interest of no one such Fund exceeds 5% of the company’s common stock. Information relating to this stockholderManagement and Principal Stockholders,” which information is based on the stockholder’s Schedule 13G, filed with the SEC on February 9, 2018.
(13) Includes 429,290 shares heldincorporated herein by BLR Partners LP and 18,000 share held by the Radoff Family Foundation. Information relating to this stockholder is based on the stockholder’s Schedule 13D/A, filed with the SEC on February 15, 2018.reference.
(14)Includes 89,505 shares that may be acquired upon the exercise of options exercisable within the next 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Independence of Directors
The information required by this item regarding director independence will be set forth in our Questionnaires2019 Proxy Statement under the caption “Corporate Governance—Independence of Directors,” which information is incorporated herein by reference.
Certain Relationships and Related Transactions
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 used on an annual basis (or when a new directorrequired to be disclosed under the SEC’s rules and regulations, will be set forth in our 2019 Proxy Statement under the caption “Corporate Governance—Certain Relationships and Related Transactions,” which information is added)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 2019 Proxy Statement under the caption “Audit Committee and Independent Registered Public Accounting Firm,” which information is incorporated herein by reference.
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 38 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. |
Harte Hanks, Inc. and Subsidiaries
Index to gather input to assistConsolidated Financial Statements
All schedules for which provision is made in the Governance Committeeapplicable 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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Harte Hanks, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Harte Hanks, Inc. and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income (loss), changes in their determinationsequity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the independenceCompany as of December 31, 2018 and 2017, and the non-employee directors. Based on the foregoing and on such other due consideration and diligence as it deemed appropriate, the Governance Committee presented its 2017 findings to the Board on the independence of eachresults of its non-employee directors,operations and its cash flows for the years then ended, in each caseconformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with applicablethe standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based onthe criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2019 expressed an adverse opinion on the Company's internal control over financial reporting because of material weaknesses.
Change in Accounting Principle
As discussed in Note B to the financial statements, the Company changed its method of accounting for revenue from contracts with customers in 2018 due to adoption of the new revenue standard. The Company adopted the new revenue standard using a modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the NYSE. The Board determinedSecurities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that other thanwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in their capacitythe financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as directors, nonewell as evaluating the overall presentation of these non-employee directors hadthe financial statements. We believe that our audits provide a material relationship with reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
San Antonio, Texas
March 18, 2019
We have served as the Company’s auditor since 2016.
Harte Hanks, either directlyInc. and Subsidiaries Consolidated Balance Sheets |
| | | | | | | | |
| | | December 31, |
| In thousands, except per share and share amounts | | 2018 | | 2017 |
| ASSETS | | |
| | |
|
| Current assets | | |
| | |
|
| Cash and cash equivalents | | $ | 20,882 |
|
| $ | 8,397 |
|
| Accounts receivable (less allowance for doubtful accounts of $430 at December 31, 2018 and $697 at December 31, 2017) | | 54,240 |
| | 81,397 |
|
| Contract assets | | 2,362 |
| | — |
|
| Inventory | | 448 |
| | 587 |
|
| Prepaid expenses | | 4,088 |
| | 5,039 |
|
| Prepaid income tax and income tax receivable | | 20,436 |
| | 3,886 |
|
| Other current assets | | 2,536 |
| | 3,900 |
|
| Total current assets | | 104,992 |
| | 103,206 |
|
| Property, plant and equipment | | |
| | |
|
| Buildings and improvements | | 15,737 |
| | 16,821 |
|
| Software | | 50,531 |
| | 52,967 |
|
| Equipment and furniture | | 80,230 |
| | 84,747 |
|
| Software development and equipment installations in progress | | 653 |
| | 4,005 |
|
| Gross property, plant and equipment | | 147,151 |
| | 158,540 |
|
| Less accumulated depreciation and amortization | | (133,559 | ) | | (136,753 | ) |
| Net property, plant and equipment | | 13,592 |
| | 21,787 |
|
| Other intangible assets (less accumulated amortization of $2,184 at December 31, 2017) | | — |
| | 2,589 |
|
| Other assets | | 6,591 |
| | 3,230 |
|
| Total assets | | $ | 125,175 |
| | $ | 130,812 |
|
| | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | |
|
| Current liabilities | | |
| | |
|
| Accounts payable | | 31,052 |
| | 36,130 |
|
| Accrued payroll and related expenses | | 6,783 |
| | 10,601 |
|
| Deferred revenue and customer advances | | 6,034 |
| | 5,342 |
|
| Customer postage and program deposits | | 6,729 |
| | 11,443 |
|
| Other current liabilities | | 3,564 |
| | 3,732 |
|
| Total current liabilities | | 54,162 |
| | 67,248 |
|
| Long-term debt | | 14,200 |
| | — |
|
| Pensions | | 62,214 |
| | 59,338 |
|
| Contingent consideration | | — |
| | 33,887 |
|
| Deferred tax liability, net | | — |
| | 773 |
|
| Other long-term liabilities | | 4,060 |
| | 4,201 |
|
| Total liabilities | | 134,636 |
| | 165,447 |
|
| | | | | |
| Preferred stock, $1 par value, 1,000,000 shares authorized; 9,926 designated as Series A Convertible Preferred Stock; 9,926 shares of Series A Convertible Preferred Stock authorized, issued and outstanding at December 31, 2018 | | 9,723 |
| | — |
|
| | | | | |
| Stockholders’ deficit | | |
| | |
|
| Common stock, $1 par value, 25,000,000 shares authorized 12,115,055 shares issued at December 31, 2018 and 12,074,661 shares issued at December 31, 2017 | | 12,115 |
| | 12,075 |
|
| Additional paid-in capital | | 453,868 |
| | 457,186 |
|
| Retained earnings | | 812,704 |
| | 794,583 |
|
| Less treasury stock, 5,854,980 shares at cost at December 31, 2018 and 5,864,641 shares at cost at December 31, 2017 | | (1,251,388 | ) | | (1,254,176 | ) |
| Accumulated other comprehensive loss | | (46,483 | ) | | (44,303 | ) |
| Total stockholders’ deficit | | (19,184 | ) | | (34,635 | ) |
| Total liabilities, preferred stock and stockholders’ deficit | | $ | 125,175 |
| | $ | 130,812 |
|
See Accompanying Notes to Consolidated Financial Statements.
Harte Hanks, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss)
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands, except per share amounts | | 2018 | | 2017 |
| Operating revenues | | $ | 284,628 |
| | $ | 383,906 |
|
| Operating expenses | | |
| | |
|
| Labor | | 163,857 |
| | 230,280 |
|
| Production and distribution | | 100,253 |
| | 109,090 |
|
| Advertising, selling, general and administrative | | 34,212 |
| | 40,384 |
|
| Impairment of assets | | 4,888 |
| | 34,510 |
|
| Depreciation, software and intangible asset amortization | | 7,452 |
| | 10,507 |
|
| Total operating expenses | | 310,662 |
| | 424,771 |
|
| Operating loss | | (26,034 | ) | | (40,865 | ) |
| Other (income) and expenses | | |
| | |
|
| Interest expense, net | | 1,551 |
| | 4,826 |
|
| Gain on sale | | (30,954 | ) | | — |
|
| Other, net | | 3,931 |
| | 6,063 |
|
| Total other (income) and expenses | | (25,472 | ) | | 10,889 |
|
| Loss before income taxes | | (562 | ) | | (51,754 | ) |
| Income tax benefit | | (18,112 | ) | | (9,894 | ) |
| Net income (loss) | | $ | 17,550 |
| | $ | (41,860 | ) |
| Less: Earnings attributable to participating securities | | 2,202 |
| | — |
|
| Less: Preferred stock dividends | | 457 |
| | — |
|
| Net Income (loss) attributable to common stockholders | | $ | 14,891 |
| | $ | (41,860 | ) |
| | | | | |
| Earnings (loss) per common share | | |
| | |
|
| Basic | | $ | 2.39 |
| | $ | (6.76 | ) |
| Diluted | | $ | 2.38 |
| | $ | (6.76 | ) |
| | | | | |
| Weighted-average common shares outstanding: | | | | |
| Basic | | 6,237 |
| | 6,192 |
|
| Diluted | | 6,270 |
| | 6,192 |
|
| | | | | |
| Comprehensive Income (loss), net of tax | | | | |
| Net income (loss) | | $ | 17,550 |
| | $ | (41,860 | ) |
| | | | | |
| Adjustment to pension liability | | $ | (1,166 | ) | | $ | 1,559 |
|
| Foreign currency translation adjustments | | (1,014 | ) | | 316 |
|
| Total other comprehensive income (loss), net of tax | | (2,180 | ) | | 1,875 |
|
| | | | | |
| Comprehensive income (loss) | | $ | 15,370 |
| | $ | (39,985 | ) |
See Accompanying Notes to Consolidated Financial Statements.
Harte Hanks, Inc. and Subsidiaries Consolidated Statements of Cash Flows
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands | | 2018 | | 2017 |
| Cash Flows from Operating Activities | | |
| | |
|
| Net Income (loss) | | $ | 17,550 |
| | $ | (41,860 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities | | |
| | |
|
| Impairment of assets | | 4,888 |
| | 34,510 |
|
| Depreciation and software amortization | | 7,339 |
| | 9,791 |
|
| Intangible asset amortization | | 113 |
| | 713 |
|
| Stock-based compensation | | (581 | ) | | 2,662 |
|
| Net pension cost | | 1,712 |
| | 1,100 |
|
| Interest accretion on contingent consideration | | 742 |
| | 4,162 |
|
| Deferred income taxes | | (1,645 | ) | | (10,959 | ) |
| Gain on sale | | (32,760 | ) | | — |
|
| Gain on disposal of assets | | (207 | ) | | (27 | ) |
| Decrease in assets and liabilities, net of acquisitions: | | | | |
| Decrease in accounts receivable, net and contract assets | | 7,468 |
| | 7,416 |
|
| Decrease in inventory | | 139 |
| | 251 |
|
| (Increase) Decrease in prepaid expenses, income tax receivable and other current assets | | (16,930 | ) | | 710 |
|
| Increase (Decrease) in accounts payable | | 9,248 |
| | (10,398 | ) |
| Decrease in other accrued expenses and liabilities | | (6,257 | ) | | (28,871 | ) |
| Net cash provided by (used in) operating activities | | (9,181 | ) | | (30,800 | ) |
| | | | | |
| Cash Flows from Investing Activities | | | | |
| Dispositions, net of cash transferred | | 3,929 |
| | — |
|
| Purchases of property, plant and equipment | | (4,206 | ) | | (5,684 | ) |
| Proceeds from the sale of property, plant and equipment | | 225 |
| | 18 |
|
| Net cash provided by (used in) investing activities | | (52 | ) | | (5,666 | ) |
| | | | | |
| Cash Flows from Financing Activities | | | | |
| Borrowings | | 23,200 |
| | 30,000 |
|
| Repayment of borrowings | | (9,000 | ) | | (30,211 | ) |
| Debt financing costs | | (591 | ) | | (635 | ) |
| Issuance of common stock | | (115 | ) | | (111 | ) |
| Issuance of preferred stock, net of transaction fees | | 9,723 |
| | — |
|
| Payment of capital leases | | (548 | ) | | (501 | ) |
| Issuance of treasury stock | | 63 |
| | — |
|
| Net cash provided by (used) in financing activities | | 22,732 |
| | (1,458 | ) |
| | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | (1,014 | ) | | 316 |
|
| Net increase (decrease) in cash and cash equivalents | | 12,485 |
| | (37,608 | ) |
| Cash and cash equivalents at beginning of year | | 8,397 |
| | 46,005 |
|
| Cash and cash equivalents at end of year | | $ | 20,882 |
| | $ | 8,397 |
|
|
| | | | | | | | |
| Supplemental disclosures | | | | |
| Cash paid for interest | | $ | (199 | ) | | $ | (292 | ) |
| Cash received (paid) for income taxes, net of refunds | | $ | 119 |
| | $ | (32,914 | ) |
| Non-cash investing and financing activities | | | | |
| Purchases of property, plant and equipment included in accounts payable | | $ | 1,108 |
| | $ | 1,434 |
|
| New capital lease obligations | | $ | 372 |
| | $ | 57 |
|
See Accompanying Notes to Consolidated Financial Statements
Harte Hanks, Inc. and Subsidiaries Consolidated Statements of Changes in Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income(loss) | | Total Stockholders’ Equity (Deficit) |
| Balance at December 31, 2016 | | $ | — |
| | $ | 12,044 |
| | $ | 458,638 |
| | $ | 837,316 |
| | $ | (1,259,164 | ) | | $ | (46,178 | ) | | $ | 2,656 |
|
| Cumulative effect of accounting change |
| — |
|
| — |
|
| 1,050 |
|
| (873 | ) |
| — |
|
| — |
|
| 177 |
|
| Exercise of stock options and release of unvested shares | | — |
| | 31 |
| | (30 | ) | | — |
| | (112 | ) | | — |
| | (111 | ) |
| Stock-based compensation | | — |
| | — |
| | 2,457 |
| | — |
| | — |
| | — |
| | 2,457 |
|
| Treasury stock issued | | — |
| | — |
| | (4,929 | ) | | — |
| | 5,100 |
| | — |
| | 171 |
|
| Net loss | | — |
| | — |
| | — |
| | (41,860 | ) | | — |
| | — |
| | (41,860 | ) |
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 1,875 |
| | 1,875 |
|
| Balance at December 31, 2017 | | $ | — |
| | $ | 12,075 |
| | $ | 457,186 |
| | $ | 794,583 |
| | $ | (1,254,176 | ) | | $ | (44,303 | ) | | $ | (34,635 | ) |
| Effect of change in accounting principle | | | |
|
| |
|
| | 571 |
| |
|
| |
|
| | 571 |
|
| Preferred Stock issued | | 9,723 |
| | | | | | | | | | | | |
| Exercise of stock options and release of unvested shares | | — |
| | 78 |
| | (159 | ) | | — |
| | (34 | ) | | — |
| | (115 | ) |
| Rounding from reverse stock split | | — |
| | (38 | ) | | 38 |
| | | | | | | | — |
|
| Stock-based compensation | | — |
| | — |
| | (438 | ) | | — |
| | — |
| | — |
| | (438 | ) |
| Treasury stock issued | | — |
| | — |
| | (2,759 | ) | | — |
| | 2,822 |
| | — |
| | 63 |
|
| Net Income | | — |
| | — |
| | — |
| | 17,550 |
| | — |
| | — |
| | 17,550 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,180 | ) | | (2,180 | ) |
| Balance at December 31, 2018 | | $ | 9,723 |
| | $ | 12,115 |
| | $ | 453,868 |
| | $ | 812,704 |
| | $ | (1,251,388 | ) | | $ | (46,483 | ) | | $ | (19,184 | ) |
See Accompanying Notes to Consolidated Financial Statements.
Harte Hanks, Inc. and Subsidiaries Notes to Consolidated Financial Statements
Note A — Overview and significant Accounting Policies
Background
Harte Hanks, Inc. ("Harte Hanks," "we," "our," or "us") is a purveyor of data-driven, omni-channel marketing and customer relationship solutions and logistics. The Company has robust capabilities that offer clients the strategic guidance they need across the customer data landscape as a partner, stockholder or officerwell as the executional know-how in database build and management, data analytics, digital media, direct mail, customer contact, client fulfillment and marketing and product logistics. Harte Hanks solves marketing, commerce and logistical challenges for some of the world's leading brands in North America, Asia-Pacific and Europe.
The Company operates as one reportable segment. Our Chief Executive Officer is considered to be our chief operating decision maker. He reviews our operating results on an organization that has a relationship with Harte Hanks. The Board further determined that (i) each such non-employee director is otherwise independent under applicable NYSE listing standardsaggregate basis for purposes of servingallocating resources and evaluating financial performance.
Reverse Stock Split
On January 31, 2018, we executed a 1-for-10 reverse stock split (the "Reverse Stock Split"). Pursuant to the Reverse Stock Split, every 10 pre-split shares were exchanged for one post-split share of the Company's Common Stock. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who would otherwise have held a fractional share of the Common Stock received a cash payment in lieu thereof. In addition, our authorized Common Stock was reduced from 250 million to 25 million shares. The number of authorized shares of preferred stock remains unchanged at one million shares.
Geographic Concentrations
Depending on the Board,needs of our clients, our services are provided through an integrated approach through 23 facilities worldwide, of which 4 are located outside of the Audit Committee,U.S.
Information about the Compensation Committeeoperations in different geographic areas:
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands | | 2018 | | 2017 |
Revenue (1) | | |
| | |
|
| United States | | $ | 243,298 |
| | $ | 330,944 |
|
| Other countries | | 41,330 |
| | 52,962 |
|
| Total revenue | | $ | 284,628 |
| | $ | 383,906 |
|
|
| | | | | | | | |
| | | December 31, |
| In thousands | | 2018 | | 2017 |
Property, plant and equipment (2) | | |
| | |
|
| United States | | $ | 11,647 |
| | $ | 18,789 |
|
| Other countries | | 1,945 |
| | 2,998 |
|
| Total property, plant and equipment | | $ | 13,592 |
| | $ | 21,787 |
|
| |
| (1) | Geographic revenues are based on the location of the service being performed. |
| |
| (2) | Property, plant and equipment are based on physical location. |
Consolidation
The consolidated financial statements and accompanying notes are prepared in conformity with accounting principles generally accepted in United States ("U.S. GAAP").
The accompanying consolidated financial statements present the financial position and the Governance Committee, (ii) each such non-employee director satisfiedresults of operations and cash flows of Harte Hanks, Inc., and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
As used in this report, the additional audit committee independence standards under Rule 10A-3terms “Harte Hanks,” “we,” “us,” or “our” may refer to Harte Hanks, Inc., one or more of our consolidated subsidiaries, or all of them taken as a whole.
Use of Estimates
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the SECreported amounts of assets, liabilities, revenue, and (iii)expenses. Actual results and outcomes could differ from those estimates and assumptions. Such estimates include, but are not limited to, estimates related to pension accounting; fair value for purposes of servingassessing goodwill, long-lived assets, and intangible assets for impairment; income taxes; and contingencies. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances could result in revised estimates and assumptions.
Operating Expense Presentation in Consolidated Statements of Comprehensive Income (Loss)
The “Labor” line in the Consolidated Statements of Comprehensive Income (Loss) includes all employee payroll and benefits, including stock-based compensation, along with temporary labor costs. The “Production and distribution” and “Advertising, selling, general and administrative” lines do not include labor, depreciation, or amortization.
Revenue Recognition
We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those products or services. We apply the following five-step revenue recognition model:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when (or as) we satisfy the performance obligation
Certain client programs provide for adjustments to billings based upon whether we achieve certain performance criteria. In these circumstances, revenue is recognized when the foregoing conditions are met. We record revenue net of any taxes collected from customers and subsequently remitted to governmental authorities. Any 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. Costs incurred for search engine marketing solutions and postage costs of mailings are billed to our clients and are not directly reflected in our revenue.
Revenue from agency and digital services, direct mail, and contact center is recognized as the work is performed. Fees for these services are determined by the terms set forth in the contact with the client. These are typically set at a fixed price or rate by transaction occurrence, service provided, time spent, or product delivered.
For arrangements requiring design and build of a database, revenue is not recognized until client acceptance occurs. Up-front fees billed during the setup phase for these arrangements are deferred and direct build costs are capitalized. Pricing for these types of arrangements are typically based on a fixed price determined in the contract. Revenue from other database marketing solutions is recognized ratably over the contractual service period. Pricing for these services are typically based on a fixed price per month or per contract.
Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements and Disclosures, ("ASC 820") defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into three levels:
|
| | |
| Level 1 | | Quoted prices in active markets for identical assets or liabilities. |
| | |
| Level 2 | | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| | |
| Level 3 | | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Because of their maturities and/or variable interest rates, certain financial instruments have fair values approximating their carrying values. These instruments include cash and cash equivalents, accounts receivable, and trade payables. The fair value of the assets in our funded pension plan is disclosed in Note F, Employee Benefit Plans. Tradename and non-compete agreement intangible assets are disclosed in Note E, Goodwill and Other Intangible Assets. The summary of our acquisition related contingent consideration accounted for at fair value on a recurring basis is disclosed in Note M, Disposition.
Cash Equivalents
All highly liquid investments with an original maturity of 90 days or less at the time of purchase are considered to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.
Allowance for Doubtful Accounts
We maintain our allowance for doubtful accounts adequate to reduce accounts receivable to the amount of cash expected to be collected. The methodology used to determine the minimum allowance 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). The changes in the allowance for doubtful accounts consisted of the following:
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands | | 2018 | | 2017 |
| Balance at beginning of year | | $ | 697 |
| | $ | 1,028 |
|
| Net charges to expense | | 131 |
| | 192 |
|
| Amounts recovered against the allowance | | (398 | ) | | (523 | ) |
| Balance at end of year | | $ | 430 |
| | $ | 697 |
|
Inventory
Inventory, consisting primarily of print materials and operating supplies, is stated at the lower of cost (first-in, first-out method) or net realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated on the Audit Committee, eachbasis of cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The general ranges of estimated useful lives are:
|
| | | |
| Buildings and improvements | 3 | to | 40 years |
| Software | 2 | to | 10 years |
| Equipment and furniture | 3 | to | 20 years |
Long-lived assets such non-employee directoras property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset group is financially literatenot recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and where applicable, certaineventual disposition of such directorsthe asset group. We recorded a $3.8 million impairment of long-lived assets in 2018 and did not record an impairment of long-lived assets in 2017.
Capital lease assets are “audit committee financial experts”included in property, plant and equipment. Capital lease assets consisted of:
|
| | | | | | | | |
| | | December 31, |
| In thousands | | 2018 | | 2017 |
| Equipment and furniture | | $ | 2,658 |
| | $ | 1,774 |
|
| Less accumulated depreciation | | (920 | ) | | (687 | ) |
| Net book value | | $ | 1,738 |
| | $ | 1,087 |
|
Goodwill and Other Intangible Assets
Goodwill is recorded to the extent that the purchase price of an acquisition exceeds the fair value of the identifiable net assets acquired and is tested for impairment on an annual basis. We have established November 30 as
such termthe date for our annual test for impairment of goodwill. Interim testing is
definedperformed more frequently if events or circumstances indicate that it is “more likely than not” that goodwill might be impaired. Such events could include changes in the
applicable SEC rules.40
Goodwill is tested for impairment by assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that is more likely than not that the fair value of the reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, or based on management's judgment, we determine it is more likely than not that the fair value is less than its carrying amount, an impairment test is performed using a one-step approach. The fair value of the reporting unit, using the discounted cash flow method, is compared to its carrying amount. If the carrying amount is greater than the fair value, an impairment loss is recognized in an amount equal to the excess.
Our acquired intangible assets are amortized on a straight-line basis over their estimated useful lives, which generally range from two to 10 years. Our acquired intangible assets do not have indefinite lives. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the intangible asset may not be recoverable. The carrying amount of an intangible asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the intangible asset exceeds its fair value.
Income Taxes
Income tax expense includes U.S. and international income taxes accounted for under the asset and liability method. Certain income and expenses are not reported in tax returns and financial statements in the same year. Such temporary differences are reported as deferred tax. Deferred tax assets are reported net of valuation allowances where we have assessed that it is more likely than not that a tax benefit will not be realized.
Earnings (Loss) Per Share
Basic earnings (loss) per common share are based upon the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share are based upon the weighted-average number of common shares and dilutive common stock equivalents outstanding during the period. Dilutive common stock equivalents are calculated based on the assumed exercise of stock options and vesting of unvested shares using the treasury stock method.
Stock-Based Compensation
All share-based awards are recognized as operating expense in the “Labor” line of the Consolidated Statements of Comprehensive Income (Loss). Calculated expense is based on the fair values of the awards on the date of grant and is recognized over the requisite service period or performance period of the awards.
Reserve for Healthcare, Workers’ Compensation, Automobile, and General Liability
We are self-insured for the majority of our healthcare insurance. We pay actual medical claims up to a stop loss limit of $0.3 million. In the fourth quarter of 2016, we moved to a guaranteed cost program for our workers' compensation and automobile programs. Prior to the change, our deductible for workers’ compensation was $0.5 million. Our deductible for general liability is $0.3 million.
The reserve is estimated using current claims activity, historical experience, and claims incurred but not reported. We use loss development factors that consider both industry norms and company specific information. Our liability is recorded at the estimate of the ultimate cost of claims at the balance sheet date. At December 31, 2018 and 2017, our reserve for healthcare, workers’ compensation, net, automobile, and general liability was $2.7 million and $3.5 million, respectively. 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).
Foreign Currencies
In most instances the functional currencies of our foreign operations are the local currencies. Assets and liabilities recorded in foreign currencies are translated in U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during a given month. Adjustments resulting from this translation are charged or credited to other comprehensive loss.
Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2018-14 on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to nonemployee share-based payment accounting, which supersedes ASC 505-50, Accounting for Distributions to Shareholders with Components of Stock and Cash and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. The ASU is effective for annual periods beginning after December 15, 2018, and the interim periods within those fiscal years with early adoption permitted after the entity has adopted ASU 2014-09 and its related amendments (collectively known as “ASC 606”). We are evaluating the effect that this will have on our consolidated financial statements and related disclosures.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows for reclassification of stranded tax effects on items resulting from the change in the corporate tax rate as a result of H.R. 1, originally known as the Tax Cuts and Jobs Act of 2017, (andfrom accumulated other comprehensive income to retained earnings. Tax effects unrelated to H.R. 1 are permitted to be released from accumulated other comprehensive income using either the specific identification approach or the portfolio approach, based on the nature of the underlying item. ASU 2018-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We are evaluating the effect that this will have on our consolidated financial statements and related disclosures.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendment ASU 2018-11, which requires all operating leases to be recorded on the balance sheet. The lessee will record a liability for its usuallease obligations (initially measured at the present value of the future lease payments not yet paid over the lease term, and an asset for its right to use the underlying asset equal to the lease liability, adjusted for lease payments made at or before lease commencement). This ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. This change was required to be applied using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. In July 2018, the FASB approved an optional transition method to initially account for the impact of the adoption with a cumulative-effect adjustment to the retained earnings to the January 1, 2019, rather than the January 1, 2017, independence determinations)financial statements. This will eliminate the need to restate amounts presented prior to January 1, 2019. We will adopt the standard effective January 1, 2019, and we expect to elect this optional transition method, as well as certain practical expedients permitted under the transition guidance within the standard. We have selected a lease accounting system and have started the system implementation during the fourth quarter of 2018. We will recognize right-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, which will increase our total assets and liabilities. We expect that the impact on our total assets and liabilities to be material.
Recently adopted accounting pronouncements
Income taxes
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("SAB 118"). This ASU amends certain Securities and Exchange Commission (SEC) material in Topic 740 for the income tax accounting implications of the recently issued Tax Reform. This guidance clarifies the application of
Topic 740 in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under Topic 740 for certain income tax effects of Tax Reform for the reporting period in which Tax Reform was enacted. See Note D, Income Taxes, for a discussion of the impacts of SAB 118 and this ASU.
Stock-based Compensation
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarified guidance on applying modification accounting to changes in the Board reconsidered Mr. Copeland’s independenceterms or conditions of a share-based payment award. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. This change is required to be applied prospectively to an award modified on or after the adoption date. This standard was adopted as of January 1, 2018 and did not have a material impact on our consolidated financial statements and related disclosures.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides clarified guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. This change is required to be applied using a retrospective transition method to each period presented. Early adoption is permitted. This standard was adopted as of January 1, 2018 and did not have a material impact on our consolidated financial statements and related disclosures.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). We adopted ASC 606 effective on January 1, 2018 using the modified retrospective method. Please see Note B, Revenue from Contracts with Customers, for the required disclosures related to the impact of adopting this standard and a discussion of our updated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.
Note B - Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, related to revenue recognition. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of the new standard, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The new standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard also includes criteria for the capitalization and amortization of certain contract acquisition and fulfillment costs.
Effective January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective method of adoption and have elected to apply the new standard only to contracts not completed at January 1, 2018. For contracts that were modified before the effective date, we applied the practical expedient method, which did not have a material effect on our adjustment to opening retained earnings. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, which is also referred to herein as “legacy GAAP.”
Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our contracts with customers state the terms of sale, including the description, quantity, and price of the product or service purchased. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. At December 31, 2018 and January 1, 2018, our contracts do not include any significant financing components.
Consistent with legacy GAAP, we present taxes assessed on revenue-producing transactions on a net basis.
Disaggregation of Revenue
We disaggregate revenue by vertical market and key revenue stream. The following table summarizes revenue from contracts with customers for the twelve months ended December 31, 2018 by our key vertical markets:
|
| | | | |
| In thousands | | For the Twelve Months Ended December 31, 2018 |
| B2B | | $64,026 |
| Consumer Brands | | 58,382 |
|
| Financial Services | | 53,919 |
|
| Healthcare | | 19,931 |
|
| Retail | | 66,545 |
|
| Transportation | | 21,825 |
|
| Total Revenues | | $ | 284,628 |
|
The nature of the services offered by each key revenue stream are different. The following tables summarize revenue from contracts with customers for the twelve months ended December 31, 2018 by our four major revenue streams and the pattern of revenue recognition:
|
| | | | | | | | | |
|
| For the Twelve Months Ended December 31, 2018 |
| In thousands |
| Revenue for performance obligations recognized
over time |
| Revenue for performance obligations recognized at a point in time |
| Total |
| Agency & Digital Services |
| $34,621 |
| $1,138 |
| $35,759 |
| Database Marketing Solutions |
| 31,684 |
|
| 3,526 |
|
| 35,210 |
|
| Direct Mail, Logistics, and Fulfillment |
| 128,372 |
|
| 6,989 |
|
| 135,361 |
|
| Contact Centers |
| 78,298 |
|
| — |
|
| 78,298 |
|
| Total Revenues |
| $272,975 |
| $11,653 |
| $284,628 |
Our contracts with customers may consist of multiple performance obligations. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (SSP) basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. For most performance obligations, we determine standalone selling price based on the price at which the performance obligation is sold separately. Although uncommon, if the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Further discussion of other performance obligations in each of our major revenue streams follows:
Agency & Digital Services
Our agency services are full-service, customer engagement agencies specializing in direct and digital communications for both consumer and business-to-business markets. Our digital solutions integrate online services within the marketing mix and include: search engine management, display, digital analytics, website development and design, digital strategy, social media, email, e-commerce, and interactive relationship management. Our contracts may include a promise to purchase media or acquire search engine marketing solutions on behalf of our clients; in such cases, we have determined we are an agent, rather than principal and therefore recognize the net consideration as revenue (consistent with legacy GAAP).
Agency and digital services performance obligations are satisfied over time and often offered on a project basis. We have concluded that the best approach of measuring the progress toward completion of the project-based performance obligations is the input method based on costs or labor hours incurred to date dependent upon whether costs or labor hours more accurately depict the transfer of value to the customer.
The variable consideration in these contracts primarily relates to time and material-based services and reimbursable out-of-pocket travel costs, both of which are estimated using the expected value method. For time and material-based contracts, we use the “as invoiced” practical expedient.
Database Marketing Solutions
Our solutions are built around centralized marketing databases with services rendered to build custom database, database hosting services, customer or target marketing lists and data processing services.
These performance obligations, including services rendered to build a custom database, database hosting services, professional services, customer or target marketing lists and data processing services, may be satisfied over time or at a point in time. We provide software as a service ("SaaS") solutions to host data for customers and have concluded that they are stand-ready obligations to be recognized over time on a monthly basis. Our promise to provide certain data related services meets the over-time recognition criteria because our services do not create an asset with an alternative use and we have an enforceable right to payment. For performance obligations recognized over time, we choose either the input (i.e. labor hour) or output method (i.e. number of customer records) to measure the progress toward completion depending on the nature of the services provided. Some of our other data-related services do not meet the over-time criteria and are therefore, recognized at a point-in-time, typically upon the delivery of a specific deliverable.
We charge our customers for certain data-related services at a fixed transaction-based rate, e.g., per thousand customer records processed. Because the quantity of transactions is unknown at the onset of a contract, our transaction price is variable, and we use the expected value method to estimate the transaction price. The uncertainty associated with the variable consideration generally resolves within a short period of time since the duration of these contracts is generally less than two months.
Direct Mail, Logistics, and Fulfillment
Our services include: digital printing, print on demand, advanced mail optimization, logistics and transportation optimization, tracking, commingling, shrink wrapping, and specialized mailings. We also maintain fulfillment centers where we provide custom kitting services, print on demand, product recalls, and freight optimization allowing our customers to distribute literature and other marketing materials.
The majority of performance obligations offered within this revenue stream are satisfied over time and utilize the input or output method, depending on the nature of the service, to measure progress toward satisfying the performance obligation. For performance obligations where we charge customers a transaction-based fee, we utilize the output method based on the quantities fulfilled. Services provided through our fulfillment centers are typically priced at a per transaction basis and our contracts provide us the right to invoice for services provided and reflects the value to the customer of the services transferred to date. In most cases, we use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their standalone selling prices. For our direct mail revenue stream, our contracts may include a promise to purchase postage on behalf of our clients; in such cases, we have determined we are an agent, rather than principal and therefore recognize net consideration as revenue (consistent with legacy GAAP).
The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations with their total transaction quantities to be provided unknown at the onset of a contract, which is estimated using the expected value method.
Contact Centers
We operate tele-service workstations in the U.S., Asia and Europe to provide advanced contact center solutions such as: speech, voice and video chat, integrated voice response, analytics, social cloud monitoring, and web self-service.
Performance obligations are stand-ready obligations and satisfied over time. With regard to account management and SaaS, we use a time-elapsed output method. For performance obligations where we charge customers a transaction-based fee, we use the output method based on transaction quantities. In most cases, our contracts provide us the right to invoice for services provided, therefore, we generally use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their standalone selling prices.
The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations with their total transaction quantities to be provided unknown at the onset of a contract, which is estimated using the expected value method.
Upfront Non-Refundable Fees
We may receive non-refundable upfront fees from customers for implementation of our SaaS database solutions products or for providing training in connection with our contact center solutions. These activities are not deemed to transfer a separate promised service and therefore, represent advanced payments. Where customers have an option to renew a contract, the customer is not required to pay similar upfront fees upon renewal. As a result, we have determined that these renewal options provide for the purchase of future services at a reduced rate and therefore, provide a material right. These upfront non-refundable fees are recognized over the estimated benefit period. The upfront non-refundable fees collected from customers were immaterial as of December 31, 2018.
Transaction Price Allocated to Future Performance Obligations
We have elected to apply certain optional exemptions that limit the disclosure requirements over remaining performance obligations at period end to exclude: performance obligations that have an original expected duration of one year or less, transactions using the “as invoiced” practical expedient, or when a performance obligation is a series and we have allocated the variable consideration directly to the services performed. After considering the above exemptions, the transaction prices allocated to unsatisfied or partially satisfied performance obligations as of December 31, 2018 totaled $0.7 million, which is expected to be recognized over the following 2 years as follows: $0.6 million in 2019 and $0.1 million in 2020.
Contract Balances
We record a receivable when revenue is recognized prior to invoicing when we have an unconditional right to consideration (only the passage of time is required before payment of that consideration is due) and a contract asset when the right to payment is conditional upon our future performance such as delivery of an additional good or service (e.g. customer contract requires customer's final acceptance of custom database solution or delivery of final marketing strategy delivery presentation before customer payment is required). If invoicing occurs prior to revenue recognition, the unearned revenue is presented on our Condensed Consolidated Balance Sheet as a contract liability, referred to as deferred revenue. The following table summarizes our contract balances as of January 1, 2018 and December 31, 2018:
|
| | | | | | | | |
| In thousands | | December 31, 2018 | | January 1, 2018 |
| Contract assets | | $ | 2,362 |
| | $ | 4,720 |
|
| Deferred revenue and customer advances | | 6,034 |
| | 5,906 |
|
| Deferred revenue included in other long-term liabilities | | 578 |
| | 341 |
|
Revenue recognized during the twelve months ended December 31, 2018 from amounts included in deferred revenue at the beginning of the period was approximately $4.0 million. We recognized no revenues during the twelve months ended December 31, 2018, from performance obligations satisfied or partially satisfied in previous periods. During the twelve months ended December 31, 2018, we reclassified $4.7 million of contract assets to receivables as a result of the right to the transaction consideration becoming unconditional.
Costs to Obtain and Fulfill a Contract
We recognize an asset for the direct costs incurred to obtain and fulfill our contracts with customers to the extent that we expect to recover these costs. These costs are amortized to expense over the expected period of benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. The remaining unamortized contract costs were $3.8 million as of December 31, 2018. For the periods presented, $0.1 million impairment was recognized in Q4 2018.
Financial Statement Impact of Adopting ASC 606
Upon the adoption of ASC 606 on January 1, 2018, we recorded a cumulative adjustment of $0.6 million, a net increase to opening retained earnings as of January 1, 2018. The following table shows the cumulative effect of the changes made to the accounts on the Consolidated Balance Sheet as of January 1, 2018 (in thousands):
|
| | | | | | | | | |
| | As Reported | | | | Adjusted |
| | December 31, 2017 | | Cumulative Adjustments | | January 1,
2018 |
| ASSETS | |
| |
| |
|
| Accounts receivable, net | | 81,397 |
|
| (4,310 | ) |
| 77,087 |
|
| Contract assets | | — |
|
| 4,720 |
|
| 4,720 |
|
| Other current assets | | 3,900 |
|
| 373 |
|
| 4,273 |
|
| Other assets | | 3,230 |
|
| 1,018 |
|
| 4,248 |
|
| |
|
|
|
|
|
| LIABILITIES | |
|
|
|
|
|
| Deferred revenue and related expenses | | 5,342 |
|
| 564 |
|
| 5,906 |
|
| Deferred income taxes | | 773 |
|
| 119 |
|
| 892 |
|
| Other current liabilities | | 3,732 |
|
| 245 |
|
| 3,977 |
|
| Other long-term liabilities | | 4,201 |
|
| 302 |
|
| 4,503 |
|
| |
|
|
|
|
|
| STOCKHOLDERS’ EQUITY | |
|
|
|
|
|
| Retained earnings | | 794,583 |
|
| 571 |
|
| 795,154 |
|
The cumulative effect adjustments to the opening retained earnings relate to a few key differences between legacy GAAP and ASC 606 which include capitalizing costs to obtain and fulfill a contract (increase to retained earnings), changes in the timing of revenue recognition for non-refundable upfront fees (decrease to retained earnings), and changes in the timing of revenue recognition for Database Marketing Solutions and Logistics services (increase to retained earnings).
Impact of New Revenue Guidance on Financial Statement Line Items
We identified the financial statement line items impacted by ASC 606 as compared to the pro-forma amounts had the legacy GAAP been in effect, as of and for the twelve months ended December 31, 2018, and these are summarized as follows:
Balance Sheet Financial Statement Line Items
The adoption of ASC 606 had the following impact on the Consolidated Balance Sheet as of December 31, 2018: an increase of $1.8 million and $1.3 million to reported total assets and reported retained earnings, respectively, and an increase in total reported liabilities of $0.5 million as compared to the pro-forma balance sheet which assumes legacy GAAP remained in effect as of December 31, 2018. The reported total assets increase was largely due to his service as sole managercapitalized costs to obtain and fulfill contracts and contract assets recognized for performance obligations in our Database Marketing Solutions and Logistics businesses, of which revenues are recognized over time. The reported total liabilities increase was largely due to deferred revenue recognized for upfront non-refundable fee and accrued expenses associated with performance obligations in our Database Marketing Solutions and Logistics businesses.
Income Statement Financial Statement Line Items (Year Ended December 31, 2018)
The adoption of ASC 606 did not have a significant impact on our Consolidated Statements of Comprehensive Income/(Loss) for the guarantortwelve months ended December 31, 2018.
The adoption of ASC 606 had no significant impact on our cash flows from operations for the company’syear ended December 31, 2018. The aforementioned impacts resulted in offsetting shifts in cash flows throughout net income and various changes in working capital balances.
Note C — Long-Term Debt
As of December 31, 2018, we had $14.2 million borrowing incurred under Texas Capital Facility. We had no debt outstanding at
December 31, 2017.
Credit Facilities
On April 17, 2017, we entered into a secured credit facility with Texas Capital Bank, N.A., that provides a $20 million revolving credit facility (the “TCB Facility”"Texas Capital Credit Facility"). After a review,The Texas Capital Credit Facility is being used for general corporate purposes and to provide collateral for up to $5.0 million of letters of credit issued by Texas Capital Bank. The Texas Capital Credit Facility is secured by substantially all of the Board determined such rolecompany's assets and is guaranteed by HHS Guaranty, LLC, an entity formed to provide credit support for Harte Hanks by certain members of the Shelton family (descendants of one of our founders).
On January 9, 2018, we entered into an amendment (the "First Amendment") to the Texas Capital Credit Facility. The First Amendment (i) increases the availability under the revolving credit facility from $20 million to $22 million and (ii) extends the Texas Capital Credit Facility one year to April 17, 2020. The Credit Facility remains collateralized by substantially all of our assets. Our fee for the collateral balance provided by HHS Guaranty, LLC also changed from an annual fee of $0.5 million to 2.0% of collateral actually pledged.
Pursuant to the First Amendment, the Texas Capital Credit Facility expires on April 17, 2020 at which point all outstanding principal amounts will be due. Harte Hanks can elect to accrue interest on outstanding principal balances at either LIBOR plus 1.95% or prime plus 0.75%. Unused credit balances will accrue interest at 0.50%.
The Texas Capital Credit Facility is subject to customary covenants requiring insurance, legal compliance, payment of taxes, prohibition of second liens, and secondary indebtedness, as constituting a material relationship disqualifying his independence. Mr. Copeland promptly resigned fromwell as the Audit Committeefiling of quarterly and Compensation Committeeannual financial statements. We were in connectioncompliance with all of the Board’s determination. For more information regardingcovenants of our credit facility at December 31, 2018.
Cash payments for interest were $0.2 million and $0.3 million for the TCB Facilityyears ended December 31, 2018 and 2017, respectively.
Note D — Income Taxes
The components of income tax expense (benefit) are as follows:
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands | | 2018 | | 2017 |
| Current | | |
| | |
|
| Federal | | $ | (18,194 | ) | | $ | 348 |
|
| State and local | | 314 |
| | 245 |
|
| Foreign | | 1,413 |
| | 472 |
|
| Total current | | $ | (16,467 | ) | | $ | 1,065 |
|
| | | | | |
| Deferred | | |
| | |
|
| Federal | | $ | (470 | ) | | $ | (9,886 | ) |
| State and local | | (181 | ) | | (747 | ) |
| Foreign | | (994 | ) | | (326 | ) |
| Total deferred | | $ | (1,645 | ) | | $ | (10,959 | ) |
| | | | | |
| Total income tax benefit | | $ | (18,112 | ) | | $ | (9,894 | ) |
The U.S. and foreign components of income (loss) before income taxes were as follows:
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands | | 2018 | | 2017 |
| United States | | $ | (4,873 | ) | | $ | (49,731 | ) |
| Foreign | | 4,311 |
| | (2,023 | ) |
| Total loss from operations before income taxes | | $ | (562 | ) | | $ | (51,754 | ) |
The differences between total income tax expense (benefit) and the guarantee, please referamount computed by applying the statutory federal income tax rate of 21% for 2018 and 35% for 2017 to income (loss) before income taxes were as follows:
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands | | 2018 | | 2017 |
| Computed expected income tax benefit | | $ | (118 | ) | | $ | (18,114 | ) |
| Goodwill impairment basis difference | | — |
| | 6,000 |
|
| Basis difference on sale of 3Q Digital | | (11,937 | ) | | — |
|
| Net effect of state income taxes | | (388 | ) | | (559 | ) |
| Foreign subsidiary dividend inclusions | | 2,781 |
| | 440 |
|
| Foreign tax rate differential | | 189 |
| | 187 |
|
| Change in valuation allowance due to tax reform |
| — |
|
| (13,821 | ) |
| Change in valuation allowance | | 3,383 |
| | 2,265 |
|
| Non-deductible interest | | — |
| | 1,280 |
|
| Loss from deemed liquidation of foreign subsidiary | | (4,242 | ) | | — |
|
| Rate Benefit from Carryback of Capital Loss | | (6,452 | ) | | — |
|
| Stock-based compensation shortfalls | | 437 |
|
| 1,373 |
|
| Change in U.S. tax rate due to tax reform |
| — |
|
| 10,391 |
|
| Return to Provision | | (1,835 | ) | | — |
|
| Other, net | | 70 |
| | 664 |
|
| Income tax benefit for the period | | $ | (18,112 | ) | | $ | (9,894 | ) |
Total income tax benefit was allocated as follows:
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands | | 2018 | | 2017 |
| Operations | | $ | (18,112 | ) | | $ | (9,894 | ) |
| Stockholders’ equity | | — |
| | 755 |
|
| Total | | $ | (18,112 | ) | | $ | (9,139 | ) |
The U.S. Tax Cuts and Jobs Act (the "Tax Reform Act”) was enacted on December 22, 2017. The legislation significantly changed U.S. tax law by, among other things, lowering the corporate income tax rate from 35% to 21%, implementing a territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries. The main impact of the Tax Reform Act on our financial statement is related to the relevant descriptionre-measurement of deferred tax balances. We recognized the tax effects of the Tax Reform Act in the year ended December 31, 2017 and recorded a deferred tax benefit of $3.4 million due to the re-measurement of deferred tax balances to the new 21% corporate tax rate. We applied the guidance in the SAB 118 when accounting for the enactment-date effects of the Tax Reform Act in 2017 and throughout 2018. At December 31, 2018, we have now completed our accounting for all the enactment-date income tax effects of the Tax Reform Act. We did not record any adjustments to our provisional amounts in the year ended December 31, 2018.
The Tax Reform Act subjects a U.S. shareholder to tax on Global Intangible Low Tax Income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A Topic 740, No. 5 "Accounting for Global Intangible Low-Taxed Income," states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI as a current period expense when incurred.
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands | | 2018 | | 2017 |
| Deferred tax assets | | | | |
| Deferred compensation and retirement plan | | $ | 16,179 |
| | $ | 15,017 |
|
| Accrued expenses not deductible until paid | | 1,584 |
| | 1,619 |
|
| Employee stock-based compensation | | 780 |
| | 1,757 |
|
| Accrued payroll not deductible until paid | | 428 |
| | 1,111 |
|
| Accounts receivable, net | | 100 |
| | 179 |
|
| Investment in Foreign Subsidiaries, Outside Basis Difference | | 1,322 |
| | — |
|
| Goodwill | | 710 |
| | 700 |
|
| Other, net | | 142 |
| | 290 |
|
| Foreign net operating loss carryforwards | | 3,042 |
| | 2,887 |
|
| State net operating loss carryforwards | | 3,776 |
| | 3,978 |
|
| Foreign tax credit carryforwards | | 3,653 |
| | 3,653 |
|
| Federal net operating loss carryforwards | | 2,507 |
| | — |
|
| Total gross deferred tax assets | | 34,223 |
| | 31,191 |
|
| Less valuation allowances | | (31,170 | ) | | (28,350 | ) |
| Net deferred tax assets | | $ | 3,053 |
| | $ | 2,841 |
|
| | | | | |
| Deferred tax liabilities | | |
| | |
|
| Property, plant and equipment | | $ | (1,689 | ) | | $ | (1,941 | ) |
| Goodwill and other intangibles | | — |
| | (701 | ) |
| Prepaid Expenses | | (331 | ) |
| — |
|
| Other, net | | (281 | ) | | (972 | ) |
| Total gross deferred tax liabilities | | (2,301 | ) | | (3,614 | ) |
| Net deferred tax assets (liabilities) | | $ | 752 |
| | $ | (773 | ) |
A reconciliation of the beginning and ending balance of deferred tax valuation allowance is as follows:
|
| | | | |
| In thousands | | |
| Balance at December 31, 2016 | | $ | 40,148 |
|
| Deferred Income Tax Expense | | (1,227 | ) |
| Return to Provision Impact |
| 3,250 |
|
| Impact of Tax Reform Act | | (13,821 | ) |
| Balance at December 31, 2017 | | $ | 28,350 |
|
| Deferred Income Tax Expense | | 3,383 |
|
| Return to Provision Impact | | (854 | ) |
| Other comprehensive income | | 291 |
|
| Balance at December 31, 2018 | | $ | 31,170 |
|
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance for deferred tax assets was $31.2 million and $28.4 million at December 31, 2018 and 2017, respectively. The amount of the deferred tax asset considered realizable could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present, and additional weight may be given to subjective evidence such as changes in our Current Report on Form 8-K filed withgrowth projections.
We or one of our subsidiaries file income tax returns in the
SEC on April 21, 2017.The Governance Committee likewise assessed the independence of Messrs. KeatingU.S. federal, U.S. state, and Tobia when they joined the Board in July 2017, using the same standardsforeign jurisdictions. For U.S. state returns, we are no longer subject to tax examinations for years prior to 2013. For U.S. federal and process it appliesforeign returns, we are no longer subject to incumbents as described above. The Board determined that, other than in their capacity as directors, neither of these new non-employee directors had a material relationship with Harte Hanks, either directly or as a partner, stockholder or officer of an organization that has a relationship with Harte Hanks. The Board further determined that (i) Messrs. Keating and Tobia are independent under applicable NYSE listing standardstax examinations for purposes of serving on the Board, the Audit Committee, the Compensation Committee and the Governance Committee, (ii) Messrs. Keating and Tobia satisfied the additional audit committee independence standards under Rule 10A-3years prior to 2015.
A reconciliation of the SECbeginning and (iii) for purposesending amount of serving on the Audit Committee, Messrs. Keating and Tobia are financially literate and Mr. Keating qualifiedunrecognized tax benefit is as an “audit committee financial expert”follows:
|
| | | | |
| In thousands | | |
| Balance at December 31, 2016 | | $ | 967 |
|
| Settlements | | (761 | ) |
| Balance at December 31, 2017 | | $ | 206 |
|
| Settlements | | (206 | ) |
| Balance at December 31, 2018 | | $ | — |
|
There is no balance of unrecognized tax benefits as
such term is defined in the applicable SEC rules.When assessing the materiality of a director’s relationship with us, if any, the Board considers all known relevant facts and circumstances, not merely from the director’s standpoint, but from that of the persons or organizations with which the director has an affiliation, the frequency or regularity of the services, whether the services are being carried out at arm’s length in the ordinary course of business and whether the services are being provided substantially on the same termsDecember 31, 2018. Any adjustments to usthis liability as those prevailing at the time from unrelated parties for comparable transactions. Material relationships can include commercial, banking, industrial, consulting, legal, accounting, charitable and familial relationships.
In making its initial independence determinations in early 2017, the Board considered the following matters with respect to Mr. Copeland, and determined that they did not constitute material relationships with Harte Hanks or otherwise impair his independence as a director or a member any of its committees, including the Audit Committee:
·As previously disclosed in our 2017 proxy statement, Mr. Copeland’s son is a member of the transaction services group of KPMG LLP, the independent registered public accounting firm we used in 2015 and prior fiscal years. This issue was previously reviewed and discussed by the Board in connection with assessing the continued independence of Mr. Copeland. This review process included discussing with KPMG the nature of its transaction services group and whether there was any relation to KPMG’s audit or tax compliance groups. As a result of the finalization of audits or potential settlements would not be material.
We have elected to classify any interest and penalties related to income taxes within income tax expense in our Consolidated Statements of Comprehensive Income (Loss). We did not recognize any tax benefits for the reduction of accrued interest and penalties associated with the reduction of the liability for unrecognized tax benefits during the years ended December 31, 2018 and 2017. We did not have any interest and penalties accrued at December 31, 2018 or 2017.
As of December 31, 2018, we had federal net operating loss carryforwards that are allowed to be carried forward indefinitely and available to reduce 80% of future taxable income in any given year.
Deferred income taxes have not been provided on the undistributed earnings of our foreign subsidiaries as these earnings have been, and under current plans will continue to be, permanently reinvested in these subsidiaries. It is not practicable to estimate the amount of additional taxes which may be payable upon the distribution of these earnings. However, because of the provisions in the Tax Reform Act, the tax cost of repatriation is immaterial and limited to foreign withholding taxes, currency translation and state taxes.
Note E — Goodwill and Other Intangible Assets
As discussed in Note A, Significant Accounting Policies, goodwill is not amortized, but is tested for impairment on an annual basis or when circumstances exist that indicate goodwill may be impaired.
During our annual impairment test in 2017, we performed a Step One analysis using a business enterprise value approach to determine the fair value of the business. The fair value of the reporting unit was estimated for the purpose of deriving an excess or deficit between the fair value and the carrying amount of the business enterprise. The fair value calculated using the discounted cash flow method was a component of the analysis. Estimated future cash flows were discounted at a rate of 14.0%. The results of the Step One analysis, in accordance with ASU 2017-04, indicated that the carrying value exceeded the fair value and the full carrying value of goodwill should be written-off, resulting in an impairment charge of $34.5 million. Our fair value estimates relied on management assumptions including market rates, revenue growth rates, operating margins, and discount rates.
Our accumulated goodwill impairment was $283.1 million and $283.1 million at December 31, 2018 and 2017, respectively.
The changes in the carrying amount of goodwill are as follows:
|
| | | | |
| In thousands | | |
| Balance at December 31, 2016 | | $ | 34,510 |
|
| Purchase consideration | | — |
|
| Impairment | | (34,510 | ) |
| Balance at December 31, 2017 | | $ | — |
|
| Impairment | | — |
|
| Balance at December 31, 2018 | | $ | — |
|
Other intangibles with definite useful lives relate to contact databases, client relationships, and non-compete agreements. They are amortized on a straight-line basis over their respective estimated useful lives, typically a period of 2 to 10 years, and reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The changes in the carrying amount of other intangibles with definite lives are as follows:
|
| | | | |
| In thousands | | |
| Balance at December 31, 2016 | | $ | 3,302 |
|
| Amortization | | (713 | ) |
| Balance at December 31, 2017 | | $ | 2,589 |
|
| Amortization |
| (113 | ) |
| Disposition |
| $ | (2,476 | ) |
| Balance at December 31, 2018 | | $ | — |
|
Amortization expense related to other intangibles with definite useful lives was $0.1 million and $0.7 million for the years ended December 31, 2018 and 2017, respectively. The intangible asset was fully amortized as of December 31, 2018.
Note F — Employee Benefit Plans
Prior to January 1, 1999, we provided a defined benefit pension plan in which most of our employees were eligible to participate (the "Qualified Pension Plan"). In conjunction with significant enhancements to our 401(k) plan, we elected to freeze benefits under the Qualified Pension Plan as of December 31, 1998.
In 1994, we adopted a non-qualified, unfunded, supplemental pension plan (the "Restoration Pension Plan") covering certain employees, which provides for incremental pension payments so that total pension payments equal those amounts that would have been payable from the principal pension plan were it not for limitations imposed by income tax regulation. The benefits under the Restoration Pension Plan were intended to provide benefits equivalent to our Qualified Pension Plan as if such plan had not been frozen. We elected to freeze benefits under the Restoration Pension Plan as of April 1, 2014.
The overfunded or underfunded status of our defined benefit post-retirement plans is recorded as an asset or liability on our balance sheet. The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation. Periodic changes in the funded status are recognized through other comprehensive income. We currently measure the funded status of our defined benefit plans as of December 31, the date of our year-end consolidated balance sheets.
The status of the defined benefit pension plans at year-end was as follows:
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands | | 2018 | | 2017 |
| Change in benefit obligation | | |
| | |
|
| Benefit obligation at beginning of year | | $ | 187,036 |
| | $ | 179,247 |
|
| Interest cost | | 6,740 |
| | 7,347 |
|
| Actuarial (gain) loss | | (12,021 | ) | | 10,121 |
|
| Benefits paid | | (9,994 | ) | | (9,679 | ) |
| Benefit obligation at end of year | | $ | 171,761 |
| | $ | 187,036 |
|
| | | | | |
| Change in plan assets | | |
| | |
|
| Fair value of plan assets at beginning of year | | 126,013 |
| | 116,725 |
|
| Actual return on plan assets | | (9,847 | ) | | 17,292 |
|
| Contributions | | 1,690 |
| | 1,675 |
|
| Benefits paid | | (9,994 | ) | | (9,679 | ) |
| Fair value of plan assets at end of year | | $ | 107,862 |
| | $ | 126,013 |
|
| | | | | |
| Funded status at end of year | | $ | (63,899 | ) | | $ | (61,023 | ) |
The following amounts have been recognized in the Consolidated Balance Sheets at December 31:
|
| | | | | | | | |
| In thousands | | 2018 | | 2017 |
| Other current liabilities | | $ | 1,685 |
| | $ | 1,685 |
|
| Pensions | | 62,214 |
| | 59,338 |
|
| Total | | $ | 63,899 |
| | $ | 61,023 |
|
The following amounts have been recognized in accumulated other comprehensive loss, net of tax, at December 31:
|
| | | | | | | | |
| In thousands | | 2018 | | 2017 |
| Net loss | | $ | 46,584 |
| | $ | 45,418 |
|
Based on current estimates, we will be required to make $2.2 million contributions to our Qualified Pension Plan in 2019.
We are not required to make and do not intend to make any contributions to our Restoration Pension Plan in 2019 other than to the extent needed to cover benefit payments. We expect benefit payments under this diligencesupplemental pension plan to total approximately $1.7 million in 2019.
The following information is presented for pension plans with an accumulated benefit obligation in excess of plan assets:
|
| | | | | | | | |
| In thousands | | 2018 | | 2017 |
| Projected benefit obligation | | $ | 171,761 |
| | $ | 187,036 |
|
| Accumulated benefit obligation | | $ | 171,761 |
| | $ | 187,036 |
|
| Fair value of plan assets | | $ | 107,862 |
| | $ | 126,013 |
|
The Restoration Pension Plan had an accumulated benefit obligation of $25.3 million and discussions with KPMG, it$27.6 million at December 31, 2018 and 2017, respectively.
The following table presents the components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss) for both plans:
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands | | 2018 | | 2017 |
| Net Periodic Benefit Cost (Pre-Tax) | | |
| | |
|
| Interest cost | | $ | 6,740 |
| | $ | 7,347 |
|
| Expected return on plan assets | | (6,094 | ) | | (7,328 | ) |
| Recognized actuarial loss | | 2,754 |
| | 2,754 |
|
| Net periodic benefit cost | | 3,400 |
| | 2,773 |
|
| | | | | |
| Amounts Recognized in Other Comprehensive Income (Loss) (Pre-Tax) | | |
| | |
|
| Net (gain) loss | | 1,166 |
| | (2,597 | ) |
| | | | | |
| Net cost recognized in net periodic benefit cost and other comprehensive (income) loss | | $ | 4,566 |
| | $ | 176 |
|
The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2019 is $2.9 million. The period over which the net loss from the Qualified Pension Plan is amortized into net periodic benefit cost was determined that KPMG’s transaction services groupthe average future lifetime of all participants (approximately 23 years). The Qualified Pension Plan is a separatefrozen and distinct group from KPMG’s audit and tax compliance practice groups. Accordingly,almost all of the plan's participants are not active employees.
The weighted-average assumptions used for measurement of the defined pension plans were as follows:
|
| | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 |
| Weighted-average assumptions used to determine net periodic benefit cost | | |
| | |
|
| Discount rate | | 3.67 | % | | 4.21 | % |
| Expected return on plan assets | | 5.00 | % | | 6.50 | % |
|
| | | | | | |
| | | December 31, |
| | | 2018 | | 2017 |
| Weighted-average assumptions used to determine benefit obligations | | |
| | |
|
| Discount rate | | 4.35 | % | | 3.67 | % |
The discount rate assumptions are based on current yields of investment-grade corporate long-term bonds. The expected long-term return on plan assets is based on the natureexpected future average annual return for each major asset class within the plan’s portfolio (which is principally comprised of equity investments) over a long-term horizon. In determining the expected long-term rate of return on plan assets, we evaluated input from our investment consultants, actuaries, and investment management firms, including their review of asset class return expectations, as well as long-term historical asset class returns. Projected returns by such consultants and economists are based on broad equity and bond indices. Additionally, we considered our historical 15-year compounded returns, which have been in excess of the services providedforward-looking return expectations.
The funded pension plan assets as of December 31, 2018 and 2017, by asset category, are as follows:
|
| | | | | | | | | | | | | | |
| In thousands | | 2018 | | % | | 2017 | | % |
| Equity securities | | $ | 71,384 |
| | 66 | % | | $ | 80,191 |
| | 64 | % |
| Debt securities | | 22,134 |
| | 21 | % | | 20,481 |
| | 16 | % |
| Other | | 14,344 |
| | 13 | % | | 25,341 |
| | 20 | % |
| Total plan assets | | $ | 107,862 |
| | 100 | % | | $ | 126,013 |
| | 100 | % |
The fair values presented have been prepared using values and information available as of December 31, 2018 and 2017.
The following tables present the fair value measurements of the assets in our funded pension plan:
|
| | | | | | | | | | | | | | | | |
| In thousands | | December 31,
2018 | | Quoted Prices in Active Markets for
Identical Assets
(Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Equity securities | | $ | 71,384 |
| | $ | 71,384 |
| | $ | — |
| | $ | — |
|
| Debt securities | | 22,134 |
| | 22,134 |
| | — |
| | — |
|
| Total investments, excluding investments valued at NAV | | 93,518 |
| | 93,518 |
| | — |
| | — |
|
Investments valued at NAV (1) | | 14,344 |
| | — |
| | — |
| | — |
|
| Total plan assets | | $ | 107,862 |
| | $ | 93,518 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| In thousands | | December 31,
2017 | | Quoted Prices
in Active Markets for
Identical Assets
(Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Equity securities | | $ | 80,191 |
| | $ | 80,191 |
| | $ | — |
| | $ | — |
|
| Debt securities | | 20,481 |
| | 20,481 |
| | — |
| | — |
|
| Total investments, excluding investments valued at NAV | | 100,672 |
| | 100,672 |
| | — |
| | — |
|
Investments valued at NAV (1) | | 25,341 |
| | — |
| | — |
| | — |
|
| Total plan assets | | $ | 126,013 |
| | $ | 100,672 |
| | $ | — |
| | $ | — |
|
(1) Investment valued at NAV are comprised of cash, cash equivalents, and short-term investments used to provide liquidity for the payment of benefits and other purposes. The commingled funds are valued at NAV based on the market value of the underlying investments, which are primarily government issued securities.
The investment policy for the Qualified Pension Plan focuses on the preservation and enhancement of the corpus of the plan’s assets through prudent asset allocation, quarterly monitoring and evaluation of investment results, and periodic meetings with investment managers.
The investment policy’s goals and objectives are to meet or exceed the representative indices over a full market cycle (3-5 years). The policy establishes the following investment mix, which is intended to subject the principal to an acceptable level of volatility while still meeting the desired return objectives:
|
| | | | | | | | | | |
| | | Target | | Acceptable Range | | Benchmark Index |
| Domestic Equities | | 50.0 | % | | 35 | % | - | 75% | | S&P 500 |
| Large Cap Growth | | 22.5 | % | | 15 | % | - | 30% | | Russell 1000 Growth |
| Large Cap Value | | 22.5 | % | | 15 | % | - | 30% | | Russell 1000 Value |
| Mid Cap Value | | 5.0 | % | | 5 | % | - | 15% | | Russell Mid Cap Value |
| Mid Cap Growth | | 0.0 | % | | 0 | % | - | 10% | | Russell Mid Cap Growth |
| | | | | | | | | |
| Domestic Fixed Income | | 35.0 | % | | 15 | % | - | 50% | | LB Aggregate |
| International Equities | | 15.0 | % | | 10 | % | - | 25% | | MSC1 EAFE |
The funded pension plan provides for investment in various investment types. Investments, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility risk. Due to the level of risk associated with investments, it is reasonably possible that changes in the value of investments will occur in the near term and may impact the funded status of the plan. To address the issue of risk, the investment policy places high priority on the preservation of the value of capital (in real terms) over a market cycle. Investments are made in companies with a minimum five-year operating history and sufficient trading volume to facilitate, under most market conditions, prompt sale without severe market effect. Investments are diversified across numerous market sectors and individual companies. Reasonable concentration in any one issue, issuer, industry, or geographic area is allowed if the potential reward is worth the risk.
Investment managers are evaluated by the
transaction services group and the fact that Harte Hanks has not purchased such transaction services from KPMG, this matter was not deemed to constitute a material relationship with Harte Hanks. We selected Deloitte & Touche LLP as our independent registered public accounting firm for 2016 and 2017.·As disclosed in our 2017 proxy statement and further in this Amendment No. 1, in accordance with SEC rules, Mr. Copeland has reported, but disclaimed, “beneficial ownership” of approximately 7.4%performance of the representative indices over a full market cycle for each class of assets. The Pension Plan Committee reviews, on a quarterly basis, the investment portfolio of each manager, which includes rates of return, performance comparisons with the most appropriate indices, and comparisons of each manager’s performance with a universe of other portfolio managers that employ the same investment style.
The expected future benefit payments for both pension plans over the next ten years as of December 31, 2018 are as follows:
|
| | | | |
| In thousands | | |
| 2019 | | $ | 10,133 |
|
| 2020 | | 10,365 |
|
| 2021 | | 10,606 |
|
| 2022 | | 10,962 |
|
| 2023 | | 11,251 |
|
| 2024-2028 | | 57,856 |
|
| Total | | $ | 111,173 |
|
We also sponsored a 401(k) - retirement plan in which we matched a portion of employees’ voluntary before-tax contributions prior to 2018. Under this plan, both employee and matching contributions vest immediately. We stopped this 401(k) match program in 2018. Total 401(k) expense for these matching payments recognized was $0.4 million and $3.0 million for years ending December 31, 2018 and 2017.
Note G — Stockholders’ Equity
Dividends
We did not pay any dividends in 2018 and 2017.
Share Repurchase
Under the stock repurchase program publicly announced in August of 2014, our Board provided authorization to spend up to $20.0 million to repurchase shares of our outstanding common stock. During 2018 and 2017, no shares of our common stock were
purchased. We had $11.4 million remaining under the current authorization as of December 31, 2018. From 1997 through December 2018, we have paid more than $1.2 billion to repurchase 6.8 million shares under this program and previously announced programs.
Awardees of stock-based compensation may elect to have shares of common stock withheld from vested awards to meet tax obligations. These shares are returned to our treasury stock at the time of vesting. During 2018, we received 3,541 shares of our common stock, with an estimated market value of $0.03 million, from such arrangements.
Series A Convertible Preferred Stock
Harte Hanks is authorized to issue one million shares of preferred stock with a par value of $1.00. In January 2018, our board of directors designated a total of 9,926 shares of our preferred stock as our Series A Convertible Preferred Stock (the "Series A Preferred Stock"). Each share of our Series A Preferred stock is convertible at any time at the option of the holder into the number of shares of common stock at the initial conversion price. Dividends on the Series A Preferred Stock are accrued at a rate of 5.0% per year or the rate that cash dividends were paid in respect to shares of common stock if such rate is greater than 5.0%. If Series A Preferred Stock is converted into the common stock, the accumulated dividends accrued is no longer payable. Holders of Series A Preferred Stock do not have voting rights, subject to certain exceptions.
On January 23, 2018, we issued 9,926 shares of our Series A Preferred Stock to Wipro, LLC for gross proceeds of $9.9 million. Shares are convertible into 16.0% of our outstanding common stock on a pre-closing basis, priced at $9.91 per share of common stock. For so long as Wipro owns at least a majority of the preferred shares originally purchased or is the beneficial owner of at least 5% of the company's common stock, Wipro has the right to appoint one individual as a non-voting observer to the Board and under certain circumstances Wipro may appoint a board member to the board of directors. As of December 31, 2018, Wipro, LLC has designated an observer to the Board of Directors.
Note H — Stock-Based Compensation
Compensation expense for stock-based awards is based on the fair values of the awards on the date of grant and is recognized on a straight-line basis over the vesting period of the entire award in the “Labor” line of the Consolidated Statements of Comprehensive Income (Loss). For the years ended December 31, 2018 and 2017, we recorded total stock-based compensation expense from operations of $(0.6) million and $2.7 million, respectively.
We granted equity awards to our Chief Executive Officer, Chief Financial Officer and Chief Operations Officer in 2019, 2018 and 2017, as a material inducement for acceptance of such positions. These option, restricted stock, and performance unit awards were not submitted for stockholder approval and were separately listed with the NYSE.
In May 2013, our stockholders approved the 2013 Omnibus Incentive Plan ("2013 Plan"), pursuant to which we may issue up to 500,000 shares of stock-based awards to directors, employees, and consultants, as adjusted for the reverse stock split. The 2013 Plan replaced the stockholder-approved 2005 Omnibus Incentive Plan ("2005 Plan"), pursuant to which we issued equity securities to directors, officers, and key employees. No additional stock-based awards will be granted under the 2005 Plan, but awards previously granted under the 2005 Plan will remain outstanding in accordance with their respective terms. As of December 31, 2018 and 2017, there were 0.2 million and 0.1 million shares available for grant under the 2013 Plan.
Stock Options
Options granted under the 2013 Plan or as inducement awards have an exercise price equal to the market value of the common stock on the grant date. These options become exercisable in 25% increments on the first four anniversaries of their date of grant and expire on the tenth anniversary of their date of grant. Options to purchase 34 thousand shares granted as inducement awards were outstanding at December 31, 2018, with exercise prices ranging from $7.40 to $60.40 per share. Options to purchase 42 thousand shares granted under 2013 Plan awards were outstanding at December 31, 2018, with exercise prices ranging from $7.40 to $119.00 per share.
Options under the 2005 Plan were granted at exercise prices equal to the market value of the common stock on the grant date. All such awards have met their respective vesting dates. Options to purchase 95 thousand shares were outstanding under the 2005 Plan as of December 31, 2018, with exercise prices ranging from $7.40 to $123.10 per share.
Options issued through March 2015 vest in full (to the extent not previously vested) upon a change in control, as defined in the applicable equity plan. Options granted to officers after April 2015 vest in full upon a change in control if such options are not assumed or replaced by a publicly-traded successor with an equivalent award (as defined in such officers’ change in control severance agreements). Additionally, 25% of the inducement options granted to the former Chief Executive Officer will vest (if not previously vested) in the event her employment is terminated without cause, or if she terminates her employment for good reason
(as such terms are defined in her employment agreement). However, following the August 2018 resignation of our former CEO, her unvested stock option was forfeited according to her separation agreement with the Company and resulted in $0.1 million credit to stock compensation expense.
The following summarizes all stock option activity during the years ended December 31, 2018 and 2017:
|
| | | | | | | | | | | | |
| In thousands | | Number of Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (Thousands) |
| Options outstanding at December 31, 2016 | | 370,547 |
| | $ | 77.23 |
| | | | |
|
| | | | | | | | | |
| Granted in 2017 | | 33,855 |
| | 10.00 |
| | | | |
|
| Exercised in 2017 | | — |
| | — |
| | | | — |
|
| Unvested options forfeited in 2017 | | (9,872 | ) | | 73.31 |
| | | | |
|
| Vested options expired in 2017 | | (85,563 | ) | | 110.44 |
| | | | |
|
| Options outstanding at December 31, 2017 | | 308,967 |
| | $ | 60.80 |
| | | | |
|
| | | | | | | | | |
| Granted in 2018 | | 14,821 |
| | 7.40 |
| | | | |
|
| Exercised in 2018 | | — |
| | — |
| | | | — |
|
| Unvested options forfeited in 2018 | | (61,286 | ) | | 37.13 |
| | | | |
|
| Vested options expired in 2018 | | (91,133 | ) | | 68.28 |
| | | | |
|
| Options outstanding at December 31, 2018 | | 171,369 |
| | $ | 60.66 |
| | 4.56 | | — |
|
| | | | | | | | | |
| Vested and expected to vest at December 31, 2018 | | 171,369 |
| | $ | 60.66 |
| | 4.56 | | — |
|
| | | | | | | | | |
| Exercisable at December 31, 2018 | | 128,105 |
| | $ | 76.48 |
| | 3.13 | | — |
|
The aggregate intrinsic value at year end in the table above represents the total pre-tax intrinsic value that would have been received by the option holders if all of the in-the-money options were exercised on December 31, 2018. The pre-tax intrinsic value is the difference between the closing price of our common stock on December 31, 2018 and the exercise price for each in-the-money option. This value fluctuates with the changes in the price of our common stock.
The following table summarizes information about stock options outstanding at December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | |
Range of Exercise Prices | | Number Outstanding | | Weighted-Average Exercise Price | | Weighted-Average Remaining Life (Years) | | Number Exercisable | | Weighted-Average Exercise Price |
| $ | 7.40 |
| - | 60.40 | | 84,502 |
| | $ | 30.91 |
| | 5.31 | | 44,289 |
| | $ | 50.77 |
|
| $ | 72.50 |
| - | 119.00 | | 84,467 |
| | 88.65 |
| | 3.88 | | 81,416 |
| | 89.10 |
|
| $ | 123.10 |
| - | 123.10 | | 2,400 |
| | 123.10 |
| | 2.10 | | 2,400 |
| | 123.10 |
|
| | | | | 171,369 |
| | $ | 60.66 |
| | 4.56 | | 128,105 |
| | $ | 76.48 |
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option-Pricing Model based on the following weighted-average assumptions used for grants during 2018 and 2017:
|
| | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 |
| Expected term (in years) | | 5.23 |
| | 6.25 |
|
| Expected stock price volatility | | 55.07 | % | | 53.70 | % |
| Risk-free interest rate | | 2.96 | % | | 2.16 | % |
Expected term is estimated using the simplified method, which takes into account vesting and contractual term. The simplified method is being used to calculate expected term instead of historical experience due to a lack of relevant historical data resulting from changes in option vesting schedules and changes in the pool of employees receiving option grants. Expected stock price volatility is based on the historical volatility from traded shares of our stock over the expected term. The risk-free interest rate is based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the expected term.
The weighted-average fair value of options granted during 2018 and 2017 was $3.55 and $5.32, respectively. As of December 31, 2018, there was $0.2 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted average period of approximately 2.85 years.
Cash Stock Appreciation Rights
In 2016 and 2017 the Board approved grants of cash settling stock appreciation rights under the 2013 Plan. Cash stock appreciation rights vest in 25% increments on the first four anniversaries of the date of grant and expire after 10 years. Cash stock appreciation rights settle solely in cash and are treated as a liability.
The following summarizes all cash stock appreciation rights during the year ended December 31, 2018:
|
| | | | | | | | | |
| | | Number of
Units | | Weighted-
Average Grant Price | | Weighted-Average
Remaining
Contractual Term
(Years) |
| Cash stock appreciation rights outstanding at December 31, 2016 | | — |
| | $ | — |
| | |
| | | | | | | |
| Granted in 2017 | | 86,618 |
| | 9.70 |
| | |
| Exercised in 2017 | | — |
| | — |
| | |
| Forfeited in 2017 | | — |
| | — |
| | |
| December 31, 2017 | | 86,618 |
| | $ | 9.70 |
| | 9.48 |
| | | | | | | |
| Granted in 2018 | | — |
| | — |
| | |
| Exercised in 2018 | | — |
| | — |
| | |
| Expired in 2018 |
| (11,090 | ) | | 9.70 |
| | |
| Forfeited in 2018 | | (62,852 | ) | | 9.70 |
| | |
| Cash stock appreciation rights outstanding at December 31, 2018 | | 12,676 |
| | $ | 9.70 |
| | 8.48 |
| | | | | | | |
| Vested balance at December 31, 2018 | | 3,169 |
| | $ | 9.70 |
| | 8.48 |
The fair value of each cash stock appreciation right is estimated on the date of grant using the Black-Scholes Option-Pricing Model and is revalued at the end of each period. Changes in fair value are recorded to the income statement as changes to expense. As of December 31, 2018, there was $0.0 million of total unrecognized compensation cost related to unvested cash stock appreciation right grants.
Restricted Stock Units
Restricted stock units granted as inducement awards or under the 2013 Plan vest in three equal increments on the first three anniversaries of their date of grant. Restricted stock units settle solely in common stock and are treated as equity. Outstanding restricted stock units granted to officers as inducement awards or under the 2013 Plan vest in full (to the extent not previously vested) upon a change in control if such unvested shares are not assumed or replaced by a publicly-traded successor with an equivalent award (as such terms are defined in such officers’ change-in-control severance agreements).
The following summarizes all restricted stock units' activity during 2018 and 2017:
|
| | | | | | | |
| | | Number of Shares | | Weighted- Average Grant Date Fair Value |
| Unvested shares outstanding at December 31, 2016 | | 94,543 |
| | $ | 37.59 |
|
| | | | | |
| Granted in 2017 | | 160,962 |
| | 9.81 |
|
| Vested in 2017 | | (40,979 | ) | | 41.39 |
|
| Forfeited in 2017 | | (13,304 | ) | | 27.84 |
|
| Unvested shares outstanding at December 31, 2017 | | 201,222 |
| | $ | 15.23 |
|
| | | | | |
| Granted in 2018 | | 72,549 |
| | 9.51 |
|
| Vested in 2018 | | (56,219 | ) | | 19.28 |
|
| Forfeited in 2018 | | (110,137 | ) | | 14.54 |
|
| Unvested shares outstanding at December 31, 2018 | | 107,415 |
| | $ | 9.98 |
|
The fair value of each restricted stock unit is estimated on the date of grant as the closing market price of our common stock on the date of grant. As of December 31, 2018, there was $0.9 million of total unrecognized compensation cost related to restricted stock units. This cost is expected to be recognized over a weighted average period of approximately 2.24 years.
Phantom Stock Units
In 2016 and 2017, the Board approved grants of phantom stock units under the 2013 Plan. Phantom stock units vest in 25% increments on the first four anniversaries of the date of grant. Phantom stock units settle solely in cash and are treated as a liability. Grants of phantom stock units made to officers under the 2013 Plan vest in full (to the extent not previously vested) upon a change in control if they are not assumed or replaced by a publicly-traded successor with an equivalent award (as such terms are defined in such officers’ change-in-control severance agreements).
The following summarizes all phantom stock unit activity during 2018 and 2017:
|
| | | | | | | |
| | | Number of
Units | | Weighted-
Average Grant
Date Fair Value |
| Phantom stock units outstanding at December 31, 2016 | | 53,164 |
| | $ | 26.90 |
|
| | | | | |
| Granted in 2017 | | 56,000 |
| | 9.70 |
|
| Vested in 2017 | | (12,483 | ) | | 26.90 |
|
| Forfeited in 2017 | | (14,644 | ) | | 22.63 |
|
| Phantom stock units outstanding at December 31, 2017 | | 82,037 |
| | $ | 15.92 |
|
| | | | | |
| Granted in 2018 | | — |
| | — |
|
| Vested in 2018 | | (19,992 | ) | | 17.85 |
|
| Forfeited in 2018 | | (29,234 | ) | | 16.32 |
|
| Phantom stock units outstanding at December 31, 2018 | | 32,811 |
| | $ | 14.39 |
|
The fair value of each phantom stock unit is estimated on the date of grant as the closing market price of our common stock on the date of grant. Changes in our stock price will result in adjustments to compensation expense and the corresponding liability over the applicable service period. As of December 31, 2018, there was $0.1 million of total unrecognized compensation cost related to phantom stock units. This cost is expected to be recognized over a weighted average period of approximately 2.15 years.
Performance Stock Units
Under the 2013 Plan and grants of inducement awards, performance stock units are a form of share-based award similar to unvested shares, except that the number of shares ultimately issued is based on our performance against specific performance goals over a roughly three-year period. At the end of the performance period, the number of shares of stock issued will be determined in accordance with the specified performance target(s) in a range between 0% and 100%. Performance stock units vest solely in common stock and are treated as equity. Upon a change in control, performance stock units granted to officers vest on a pro-rated basis (based on time elapsed from the grant) to the extent not previously settled if they are not assumed or replaced by a publicly-traded successor with an equivalent award (as such terms are defined in such officers' change-in-control severance agreements).
The following summarizes all performance stock unit activity during 2018 and 2017:
|
| | | | | | | |
| | | Number of Units | | Weighted- Average Grant-Date Fair Value |
| Performance stock units outstanding at December 31, 2016 | | 84,430 |
| | $ | 25.56 |
|
| | | | | |
| Granted in 2017 | | 89,124 |
| | 9.95 |
|
| Settled in 2017 | | — |
| | — |
|
| Forfeited in 2017 | | (10,494 | ) | | 47.90 |
|
| Performance stock units outstanding at December 31, 2017 | | 163,060 |
| | $ | 15.59 |
|
| | | | | |
| Granted in 2018 | | 11,904 |
| | 8.40 |
|
| Settled in 2018 | | — |
| | — |
|
| Forfeited in 2018 | | (136,435 | ) | | 16.40 |
|
| Performance stock units outstanding at December 31, 2018 | | 38,529 |
| | $ | 10.50 |
|
The fair value of each performance stock unit is estimated on the date of grant as the closing market price of our common stock on the date of grant, minus the present value of anticipated dividend payments. Periodic compensation expense is based on the current estimate of future performance against specific performance goals over a three-year period and is adjusted up or down based on those estimates. As of December 31, 2018, there was $0.2 million of total unrecognized compensation cost related to performance stock units. This cost is expected to be recognized over a weighted average period of approximately 1 year.
Cash Performance Stock Units
In 2016 and 2017, the Board of Directors approved grants of cash performance stock units under the 2013 Plan. Cash performance stock units are a form of share-based award similar to phantom stock units, except that the number of units ultimately issued is based on our performance against specific performance goals measured after a three-year period. At the end of the performance period, the number of units vesting will be determined in accordance with specified performance target(s) in a range between 0% and 100%. Cash performance stock units settle solely in cash and are treated as a liability. Upon a change in control, cash performance stock units granted to officers vest on a pro-rated basis (based on time elapsed from the grant) to the extent not previously settled if they are not assumed or replaced by a publicly-traded successor with an equivalent award (as such terms are defined in such officers’ change-in-control severance agreements).
The following summarizes all performance stock unit activity during 2018 and 2017:
|
| | | | | | | |
| | | Number of
Shares | | Weighted-
Average Grant-Date Fair Value |
| Cash performance stock units outstanding at December 31, 2016 | | 44,397 |
| | $ | 26.90 |
|
| | | | | |
| Granted in 2017 | | 109,887 |
| | 10.10 |
|
| Settled in 2017 | | — |
| | — |
|
| Forfeited in 2017 | | (3,778 | ) | | 26.90 |
|
| Cash performance stock units outstanding at December 31, 2017 | | 150,506 |
| | $ | 14.63 |
|
| | | | | |
| Granted in 2018 | | — |
| | — |
|
| Settled in 2018 | | — |
| | — |
|
| Forfeited in 2018 | | (146,728 | ) | | 14.32 |
|
| Cash performance stock units outstanding at December 31, 2018 | | 3,778 |
| | $ | 26.90 |
|
The fair value of each cash performance stock unit is estimated on the date of grant as the closing market price of our common stock on the date of grant, minus the present value of anticipated dividend payments. Periodic compensation expense is based on the current estimate of future performance against specific performance goals over a three-year period and is adjusted up or down based on those estimates. As of December 31, 2018, there was $0.0 million of total unrecognized compensation cost related to performance stock units.
Note I — Commitments and Contingencies
At December 31, 2018, we had letters of credit in the amount of $2.8 million backed by cash collateral. No amounts were drawn against these letters of credit at December 31, 2018. These letters of credit exist to support insurance programs relating to workers’ compensation, automobile, and general liability.
In the normal course of our business, 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. The terms and duration of these commitments vary and, in some cases, may be indefinite, and certain of these commitments do not limit the maximum amount of future payments we could become obligated to make there under; accordingly, our actual aggregate maximum exposure related to these types of commitments cannot be reasonably estimated. Historically, we have not been obligated to make significant payments for obligations of this nature, and no liabilities have been recorded for these obligations in our financial statements.
We are also currently subject to various legal proceedings in the course of conducting our businesses and, from time to time, we may become involved in additional claims and lawsuits incidental to our businesses. In the opinion of management, after consultation with counsel, none of these matters is currently considered to be reasonably possible of resulting in a material adverse effect on our consolidated financial position or results of operations. Nevertheless, we cannot predict the impact of future developments affecting our pending or future claims and lawsuits and any resolution of a claim or lawsuit within a particular fiscal quarter may adversely impact our results of operations for that quarter. We expense legal costs as incurred, and all recorded legal liabilities are adjusted as required as better information becomes available to us. The factors we consider when recording an accrual for contingencies include, among others: (i) the opinions and views of our legal counsel, (ii) our previous experience, and (iii) the decision of our management as to how we intend to respond to the complaints.
Note J — Leases
We lease real estate and certain equipment under numerous lease agreements, most of which contain some renewal options. The total rent expense applicable to operating leases was $11.6 million and $13.1 million for the years ended December 31, 2018 and 2017.
Step rent provisions and escalation clauses, normal tenant improvements, rent holidays, and other lease concessions are taken into account in computing minimum lease payments. We recognize the minimum lease payments on a straight-line basis over the minimum lease term.
The future minimum rental commitments for all non-cancelable operating leases with terms in excess of one year as of December 31, 2018 are as follows:
|
| | | | |
| In thousands | | |
| 2019 | | $ | 9,645 |
|
| 2020 | | 8,815 |
|
| 2021 | | 7,425 |
|
| 2022 | | 5,456 |
|
| 2023 | | 2,349 |
|
| Thereafter | | 1,328 |
|
| Total | | $ | 35,018 |
|
We also lease certain equipment and software under capital leases. Our capital lease obligations at year-end were as follows:
|
| | | | | | | | |
| In thousands | | 2018 | | 2017 |
| Current portion of capital leases | | $ | 748 |
| | $ | 506 |
|
| Long-term portion of capital leases | | 676 |
| | 486 |
|
| Total capital lease obligation | | $ | 1,424 |
| | $ | 992 |
|
The future minimum lease payments for all capital leases operating as of December 31, 2018 are as follows:
|
| | | | |
| In thousands | | |
| 2019 | | $ | 748 |
|
| 2020 | | 307 |
|
| 2021 | | 131 |
|
| 2022 | | 133 |
|
| 2023 | | 104 |
|
| Thereafter | | — |
|
| Total | | $ | 1,423 |
|
Note K — Earnings (Loss) Per Share
In periods in which the company has net income, the company is required to calculate earnings (loss) per share ("EPS") using the two-class method. The two-class method is required because the company's preferred stock is considered a participating security with objectively determinable and non-discretionary dividend participation rights. Preferred stockholders have the right to participate in dividends above their five percent dividend rate should the company declare dividends on its Common Stock at a dividend rate higher than the five percent (on an as-converted basis). Under the two-class method, undistributed and distributed earnings are allocated on a pro-rata basis to the common and the preferred stockholders. The weighted-average number of common and preferred stock outstanding during the period is then used to calculate EPS for each class of shares.
In periods in which the company has a net loss, basic loss per share is calculated using the treasury stock method. The treasury stock method is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period. The two-class method is not used, because the two-class calculation is anti-dilutive.
Reconciliations of basic and diluted EPS are as follows:
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands, except per share amounts | | 2018 | | 2017 |
| Numerator: | | | | |
| Net income (loss) | | $ | 17,550 |
|
| $ | (41,860 | ) |
| Less: Preferred stock dividend | | 457 |
|
| — |
|
| Less: Earnings attributable to participating securities | | 2,202 |
|
| — |
|
| Numerator for basic EPS: income/(loss) attributable to common stockholders | | 14,891 |
|
| $ | (41,860 | ) |
| | | | | |
| Effect of dilutive securities: | | | | |
| Add back: Allocation of earnings to participating securities | | 2,202 |
| | — |
|
| Less: Re-allocation of earnings to participating securities considering potentially dilutive securities | | (2,191 | ) |
| — |
|
| Numerator for diluted EPS | | $ | 14,902 |
| | $ | (41,860 | ) |
| | | | | |
| Denominator: | | | | |
| Basic EPS denominator: weighted-average common shares outstanding | | 6,237 |
|
| 6,192 |
|
| | | | | |
| Effect of dilutive securities: | | | | |
| Unvested shares | | 33 |
| | — |
|
| Diluted EPS denominator | | 6,270 |
| | 6,192 |
|
| | | | | |
| Basic earnings (loss) per common share | | $ | 2.39 |
| | $ | (6.76 | ) |
| Diluted earnings (loss) per common share | | $ | 2.38 |
| | $ | (6.76 | ) |
For the purpose of calculating the shares used in the diluted EPS calculations, 0.2 million and 0.3 million anti-dilutive options have been excluded from the EPS calculations for the years ended December 31, 2018 and 2017. 0.1 million and 0.1 million anti-dilutive unvested shares were excluded from the calculation of shares used in the diluted EPS calculation for the years ended December 31, 2018 and 2017, respectively.
Note L — Comprehensive Income (Loss)
Comprehensive income (loss) for a period encompasses net income (loss) and all other changes in equity other than from transactions with our stockholders. Our comprehensive income (loss) was as follows:
|
| | | | | | | | |
| | | Year Ended December 31, |
| In thousands | | 2018 | | 2017 |
| Net income (loss) | | $ | 17,550 |
| | $ | (41,860 | ) |
| | | | | |
| Other comprehensive income (loss): | | |
| | |
|
| Adjustment to pension liability | | (1,166 | ) | | 2,597 |
|
| Tax (expense) benefit | | — |
| | (1,038 | ) |
| Adjustment to pension liability, net of tax | | (1,166 | ) | | 1,559 |
|
| Foreign currency translation adjustment | | (1,014 | ) | | 316 |
|
| Total other comprehensive income (loss) | | $ | (2,180 | ) | | $ | 1,875 |
|
| | | | | |
| Total comprehensive income (loss) | | $ | 15,370 |
| | $ | (39,985 | ) |
Changes in accumulated other comprehensive income (loss) by component are as follows:
|
| | | | | | | | | | | | |
| In thousands | | Defined Benefit Pension Items | | Foreign Currency Items | | Total |
| Balance at December 31, 2016 | | $ | (46,977 | ) | | $ | 799 |
| | $ | (46,178 | ) |
| Other comprehensive loss, net of tax, before reclassifications | | — |
| | 316 |
| | 316 |
|
| Amounts reclassified from accumulated other comprehensive income (loss), net of tax | | 1,559 |
| | — |
| | 1,559 |
|
| Net current period other comprehensive income (loss), net of tax | | 1,559 |
| | 316 |
| | 1,875 |
|
| Balance at December 31, 2017 | | $ | (45,418 | ) | | $ | 1,115 |
| | $ | (44,303 | ) |
| Other comprehensive loss, net of tax, before reclassifications | | — |
| | (1,014 | ) | | (1,014 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss), net of tax | | (1,166 | ) | | — |
| | (1,166 | ) |
| Net current period other comprehensive income (loss), net of tax | | (1,166 | ) | | (1,014 | ) | | (2,180 | ) |
| Balance at December 31, 2018 | | $ | (46,584 | ) | | $ | 101 |
| | $ | (46,483 | ) |
Reclassification amounts related to the defined pension plans are included in the computation of net period pension benefit cost (see Note F, Employee Benefit Plans).
Note M — Disposition
On February 28, 2018, we completed the sale of 3Q Digital to an entity owned by (1) various trusts for which Mr. Copeland serves as trustee or co-trustee, (2) a limited partnership of which he is an officercertain former owners of the general partner,3Q Digital business. Consideration for the sale included $5.0 million in cash proceeds, subject to certain working capital adjustments, and (3)up to $5.0 million in additional consideration if the Shelton Family Foundation,3Q Digital business is sold again (provided certain value thresholds are met). The $35 million contingent consideration obligation that was related to our acquisition of which he3Q Digital in 2015 was assigned to the buyer, therefore relieving us of the obligation. In addition, the identified intangible assets with definite lives for client relationships and non-compete agreements were written-off as a component of the gain on sale.
The 3Q Digital business represented less than 10% of our total 2017 revenues. As a result of the sale, the company recognized a pre-tax gain of $31.0 million in the first quarter of 2018. The assets of 3Q Digital included net intangible assets and the liabilities (including contingent consideration) were removed from our balance sheet as a result of the disposition.
The purchase agreement and subsequent amendment to the purchase agreement for the 2015 acquisition of 3Q Digital included a contingent consideration arrangement that would have required us to pay the former owners of 3Q Digital an additional cash payment depending on achievement of certain revenue growth goals. The potential undiscounted amount of all future payments that would have been required to be paid under the contingent consideration arrangement was $35.0 million in cash payable in 2019.
A reconciliation of accrued balances of the contingent consideration using significant unobservable inputs (Level 3) is
one of nine directors and an employee. Based on the nature of Mr. Copeland’s role with these entities, his absence of any pecuniary interest in these shares and his disclaimer of any beneficial ownership in these shares, this matter is not deemed to constitute a material relationship with Harte Hanks.as follows:
|
| | | | |
| (in thousands) | | Fair Value |
| Accrued contingent consideration liability as of December 31, 2017 |
| $ | 33,887 |
|
| Accretion of interest |
| 742 |
|
| Disposition |
| $ | (34,629 | ) |
| Accrued earnout liability as of December 31, 2018 |
| $ | — |
|
Note N — Certain Relationships and Related
Party Transactions
The Board has adopted certain policies and procedures relating
Since 2016, we have conducted (and we continue to
its review, approval or ratification of any transaction in which Harte Hanks is a participant and that is required to be reported by the SEC’s rules and regulations regarding transactionsconduct) business with
related persons. As set forth in the Governance Committee’s charter, except41
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for matters delegated by the Board to the Audit Committee, all proposed related transactions and conflicts of interest should be presented to the Governance Committee for its consideration. If required by law, NYSE rules or SEC regulations, such transactions must obtain Governance Committee approval. In reviewing any such transactions and potential transactions, the Governance Committee may take into accountWipro, LLC (“Wipro”), whereby Wipro provides us with a variety of factors thattechnology-related services, including database and software development, database support and analytics, IT infrastructure support, leased facilities and digital campaign management. Additionally, we also provide Wipro with agency services and consulting services.
Effective January 30, 2018, Wipro became a related party when it deems appropriate,purchased 9,926 shares of our Series A Preferred Stock (which are convertible at Wipro's option into 1,001,614 shares, or 16% of our Common Stock), for aggregate consideration of $9.9 million. For information pertaining to the Company’s preferred stock, See Note E, Convertible Preferred Stock.
During 2018, we recorded an immaterial amount of revenue for services we provided to Wipro.
During the twelve months ended December 31, 2018 and 2017, we recorded $12.3 million and $5.6 million of expense, respectively, in technology-related services and lease expense for a facility Wipro provided to us.
During the twelve months ended December 31, 2018, we capitalized $2.3 million of costs ($2.1 million of which
may include, for example, whether the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party, the value and materiality of such transaction, any affiliate transaction restrictions that may bewas included in
our debt agreements, any impact on the
Board’s evaluation of a non-employee director’s independence or on such director’s eligibility to serve on one of the Board’s committees and any required public disclosures by Harte Hanks.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Report of the Audit Committee
The Audit Committee has the authority and responsibility to select, determine the compensation of, evaluate and, when appropriate, replace the company’s independent registered public accounting firm (independent auditors). The Audit Committee is comprised of four directors, currently Messrs. Farley (Chair), Harte, Keating and Key. The Board has determined that (i) each of its members is independent under the standards of director independence established under our Corporate Governance Principles and the NYSE listing requirements, and is also independent under applicable federal securities laws, including Section 10A(m)(3) of the Exchange Act, and (ii) that Messrs. Farley and Keating qualify as an audit committee financial expert under applicable federal securities laws.
The Audit Committee meets with management periodically to consider the scope and adequacy of the company’s internal controls and the objectivity of its financial reporting and discusses these matters with the company’s independent registered public accounting firm (or “independent auditors”), the company’s internal auditors and appropriate company financial personnel. The Audit Committee also meets privately with the company’s independent auditors, and the company’s internal auditors. The company’s independent auditors and its internal auditors have unrestricted access to the Audit Committee and can meet with the Audit Committee upon request. In addition, the Audit Committee reviews the company’s financial statements and reports its recommendations to the full Board as required for approval and to authorize action.
Management is responsibleasset impairment charge for the financial reporting process, including the system of internal controls, for the preparation of consolidated financial statements in accordance with GAAP and for the report on the company’s internal control over financial reporting. The company’s independent auditors are responsible for auditing those financial statements and expressing an opinion as to their conformity with GAAP. The Audit Committee’s responsibility is to oversee and review the financial reporting process and to review and discuss management’s report on the company’s internal control over financial reporting.
The Audit Committee reviewed and discussed (i) the company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002, including the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 5 regarding the audit of internal control over financial reporting, (ii) the company’s guidelines, policies and procedures for financial risk assessment and management and the major financial risk exposures of the company and its business units, as appropriate, (iii) the audited consolidated financial statements for the fiscal year ended December 31, 2017 (and the audit related thereto) with management, the company’s internal auditors and Deloitte & Touche LLP (“Deloitte”)2018), and (iv) with management, the company’s internal auditors and Deloitte, management’s annual reportfor internally developed software services received from Wipro. These remaining capitalized costs are included in Other Assets on the company’s internal control over financial reportingConsolidated Balance Sheet as of December 31, 2018.
As of December 31, 2018 and
Deloitte’s audit report.The Audit Committee has also discussed with Deloitte (and2017, we had a trade payable due to Wipro of $5.0 million and $2.2 million, respectively. As of December 31, 2018, we had an immaterial amount in trade receivables due from Wipro for services provided in 2017 but invoiced in 2018 and no trade receivables due from Wipro as appropriate KPMG LLP (“KPMG”)of December 31, 2017.
As described in “Note C- Long-Term Debt", the
company’s independent auditorCompany’s Texas Capital Credit Facility is secured by HHS Guaranty, LLC, an entity formed to provide credit support for
2015 and prior periods), all matters that the
independent registered public accounting firm was required to communicate and discuss withCompany by certain members of the
audit committee, including the matters required to be discussed by Auditing Standard No. 1301 (Communications with Audit Committees) as adopted by the PCAOB.Deloitte providedShelton family (descendants of one of our founders). Pursuant to the Audit Committee the written disclosuresAmended and Restated Fee, Reimbursement and Indemnity Agreement, dated January 9, 2018, between HHS Guarantee. LLC and the letter provided by applicable requirements ofCompany, HHS Guarantee, LLC has the PCAOB concerning independence. The Audit Committee discussed with Deloitte its independence from the company. When considering Deloitte’s independence, the Audit Committee reviewed the services Deloitte providedright to the company that were not in connection with its audit of the company’s consolidated financial statements. These services included reviews of the company’s interim condensed consolidated financial statements included in its Quarterly Reports on Form 10-Q. The Audit Committee also reviewed the audit, audit-
42
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related and tax services performed by, and the amount of fees paid for such services to, Deloitte. In addition, when considering Deloitte’s independence, the Audit Committee considered any fees received by the company from Deloitte.
Based on these activities, the Audit Committee recommendedappoint one representative director to the Board thatof Directors. Currently, David L. Copeland serves as the company’s audited consolidated financial statementsHHS Guarantee, LLC representative on the Board of Directors.
Note O — Selected Quarterly Data (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| In thousands, except per share amounts | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Revenues | | $ | 81,198 |
| | $ | 94,894 |
| | $ | 69,633 |
| | $ | 94,722 |
| | $ | 63,588 |
| | $ | 94,424 |
| | $ | 70,209 |
| | $ | 99,866 |
|
| | | | | | | | | | | | | | | | | |
| Operating income (loss) | | (5,035 | ) | | (6,342 | ) | | (6,308 | ) | | (1,791 | ) | | (10,353 | ) | | 950 |
| | (4,338 | ) | | (33,682 | ) |
| | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | 23,849 |
| | (8,862 | ) | | (7,318 | ) | | (4,852 | ) | | (11,421 | ) | | (2,098 | ) | | (5,673 | ) | | (35,942 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 32,629 |
| | $ | (7,386 | ) | | $ | (6,734 | ) | | $ | (2,653 | ) | | $ | (9,984 | ) | | $ | (2,480 | ) | | $ | 1,639 |
| | $ | (29,341 | ) |
| | | | | | | | | | | | | | | | | |
| Basic earnings (loss) per common share | | $ | 5.24 |
|
| $ | (1.20 | ) |
| $ | (1.10 | ) |
| $ | (0.43 | ) |
| $ | (1.62 | ) |
| $ | (0.40 | ) |
| $ | 0.21 |
|
| $ | (4.73 | ) |
| Diluted earnings (loss) per common share | | $ | 4.67 |
|
| $ | (1.20 | ) |
| $ | (1.10 | ) |
| $ | (0.43 | ) |
| $ | (1.62 | ) |
| $ | (0.40 | ) |
| $ | 0.21 |
|
| $ | (4.73 | ) |
Earnings per common share amounts are computed independently for
each of the
fiscal year ended December 31, 2017 be included in its Annual Report on Form 10-K. | Audit Committee
|
| William F. Farley, Chair
|
| Christopher M. Harte
|
| Melvin L. Keating
|
| Scott C. Key
|
Independent Auditor Fees and Services
The following table sets forthquarters presented. Therefore, the aggregate fees billed by our independent auditorssum of the quarterly earnings per share amounts may not equal the quarterly earnings per share amounts or fees payable for professional services in or related to 2016 and 2017.
| | 2016 | | 2017 | |
Audit Fees (1) | | $ | 2,000,000 | | $ | 1,600,000 | |
Audit-Related Fees (2) | | 17,500 | | 0 | |
Tax Fees (relating to state, federal and international tax matters) | | 171,226 | | 66,686 | |
All Other Fees | | 2,132 | | 1,875 | |
Total | | $ | 2,190,858 | | $ | 1,668,561 | |
(1) Fees for the annual financial statement audit, quarterly financial statement reviews and audit of internal control over financial reporting.
(2) Includes fees for assurance and related services other than those included in Audit Fees. Includes charges for statutory audits of certain of the company’s foreign subsidiaries required by countries in which they are domiciled in 2016 and 2017.
Pre-Approval for Non-Audit Services
Pursuantearnings per share amounts due to its charter, the Audit Committee pre-approves all permitted non-audit services to be performed for Harte Hanks by its independent auditors. The Audit Committee may form and delegate authority to subcommittees consisting of one or more members when appropriate, including the authority to grant preapprovals of non-audit services, provided that such subcommittee’s preapproval decisions are presented to the full Audit Committee at its next scheduled meeting.
PART IVrounding.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
15(a)(1)
Financial Statements
The information required by this item is set forth in Part IV, Item 15(a)(1) of the Original Filing.
43
Table of Contents
15(a)(2)
Financial Statement Schedules
The information required by this item is set forth in Part IV, Item 15(a)(2) of the Original Filing.
15(a)(3)
Exhibits
The Exhibit Index lists the exhibits that are filed or furnished, as applicable, as part of this Form 10-K/A.
44
We are incorporating certain exhibits listed below by reference to other Harte Hanks filings with the Securities and Exchange Commission, which we have identified in parentheses after each applicable exhibit.
Exhibit No.
|
| |
|
| Exhibit | | |
| No. | | Description of Exhibit |
Acquisition and Dispositions
|
| | |
Acquisition and Dispositions
| | |
|
2.1 | | Asset Purchase Agreement, dated September 18, 2013, by and among Harte Hanks Shoppers, Inc., Southern Comprint Co. and Harte Hanks, Inc., on the one hand, and Pennysaver USA Publishing, LLC, Pennysaver USA Printing, LLC, Orbiter Properties, LLC and OpenGate Capital Management, LLC, on the other hand (filed as Exhibit 2.1 to the company’s Form 8-K dated September 19, 2013).
|
| | |
2.2
| | Agreement and Plan of Merger, dated March 16, 2015, among Harte Hanks, Inc., Harte Hanks Smart, Inc., 3Q Digital, Inc. and Maury Domengeaux, as representative to the stockholders of 3Q Digital, Inc. (filed as Exhibit 2.1 to the company’s Form 10-Q dated May 7, 2015).
|
| | |
2.3
| | |
| | |
2.4
2.2 | | Stock Purchase Agreement, dated November 29, 2016, by and among Syncsort Incorporated, Syncsort Limited, Syncsort GmbH, Harte Hanks, Inc., Harte-Hanks UK Limited, Harte-Hanks GmbH, Trillium Software, Inc., Harte-Hanks Trillium UK Limited, Harte-Hanks Trillium Software Germany GmbH and Harte Hanks, Inc. as sellers’ representative (filed as Exhibit 2.1 to the company’scompany's Form 8-K dated December 30, 2016).
|
| | |
2.5
2.3 | | |
| | |
2.6
2.4 | | |
| | | |
10.1(a)
| | Term Loan Agreement by and between Harte Hanks, Inc. and Wells Fargo Bank, as administrative agent, dated March 10, 2016 (filed as Exhibit 10.1 to the company’s Form 8-K dated March 11, 2016).
| |
| 10.1(a) | | | |
10.1(b)
| | Waiver and First Amendment to Credit Agreement as of May 16, 2016, with Wells Fargo Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 in the company’s Form 8-K dated May 20, 2016).
| |
| | | |
10.1(c)
| | Waiver and Second Amendment to Credit Agreement as of August 5, 2016, with Wells Fargo Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 in the company’s Form 8-K dated August 9, 2016).
| |
| | | |
10.1(d)
| | | |
| | | |
10.1(e)
10.1(b) | | |
| | |
| 10.1(c) | | | |
| | | |
10.1(f)
10.1(d) | | | |
| | | |
10.1(g)
10.1(e) | | | |
| | |
10.1(h)
10.1(f) | | |
| | |
10.1(i)
10.1(g) | | |
Management and Director Compensatory Plans and Forms of Award Agreements
|
| | |
10.2(c)
| | |
| 10.2(c) | | |
| | |
10.2(d) | | |
| | |
10.2(e) | | |
| | |
10.2(f) | | |
| | |
10.2(g) | | |
46
Table of Contents
10.2(h)
| | |
| 10.2(h) | | |
| | |
10.2(i) | | |
| | |
10.2(j) | | |
| | |
10.2(k) | | |
| | |
10.2(l) | | |
| | |
10.2(m) | | |
| | |
10.2(n)
| | |
| 10.2(n) | | |
| | |
10.2(o)
| | Form of2013 Omnibus Incentive Plan Performance Restricted Stock Award Agreement between the company and Karen A. Puckett (filed as Exhibit 10.3 to the company’s Form 8-K dated September 14, 2015)
|
| | |
10.2(p)
| | Form of Performance Unit Award Agreement between the company and Karen A. Puckett (filed as Exhibit 10.4 to the company’s Form 8-K dated September 14, 2015)
|
| | |
10.2(q)
10.2(o) | | Form of Non-Qualified Stock Option Agreement between Harte Hanks, Inc. and Shirish R. Lal (filed as Exhibit 10.2 to the company’s Form 8-K dated February 17, 2016)
|
| | |
10.2(r)
| | Form of Restricted Stock Award Agreement between Harte Hanks, Inc. and Shirish R. Lal (filed as Exhibit 10.3 to the company’s Form 8-K dated February 17, 2016)
|
| | |
10.2(s)
| | |
| | |
10.2(t)
10.2(p) | | Form of Non-Qualified Stock Option Agreement between Harte Hanks, Inc. and Frank M. Grillo (filed as Exhibit 10.1 to the company’s Form 10-K dated June 6, 2017)
|
| | |
10.2(u)
| | Form of Restricted Stock Agreement between Harte Hanks, Inc. and Frank M. Grillo (filed as Exhibit 10.2 to the company’s Form 10-K dated June 6, 2017)
|
| | |
10.2(v)
| | |
| | |
10.2(w)
10.2(q) | | |
| | |
10.2(x)
10.2(r) | | |
| | |
10.2(y)
10.2(s) | | |
| | |
10.2(z)
10.2(t) | | |
47
| | |
10.3(a)
| | |
| 10.3(a) | | |
| | |
10.3(b) | | |
| | |
10.3 (c)
| | Transition Agreement dated July 30, 2012 between the company and Gary J. Skidmore (filed as Exhibit 10.2 to the company’s 8-K dated August 2, 2012)
|
| 10.3 (c) | | |
10.3 (d)
| | |
| | |
10.3 (e)
| | Retirement & Consulting Agreement between the company and Larry D. Franklin dated June 7, 2013 (filed as Exhibit 10.5 to the company’s 8-K dated June 11, 2013)
|
| | |
10.3 (f) (d) | | Employment Agreement between the company and Robert A. Philpott dated June 8, 2013 (filed as Exhibit 10.1 to the company’s 8-K dated June 11, 2013)
|
| | |
10.3 (g)
| | |
| | |
10.3 (h) (e) | | |
| | |
10.3(i)
10.3(f) | | |
| | |
10.3(j)
10.3(g) | | |
| 10.3(h) | | |
| | |
10.3(k)
10.3(i) | | |
| 10.3(j) | | |
| | |
10.3(l)
10.3(k) | | Retention Bonus Agreement between the company and Robert L. R. Munden dated December 31, 2016 (filed as Exhibit 10.1 to the company’s Form 8-K, dated December 15, 2016)
|
| | |
10.3(m)
| | Transition and Consulting Agreement, dated as of December 31, 2016, between the company and Douglas C. Shepard (filed as Exhibit 10.2 to the company’s Form 8-K, dated December 15, 2016)
|
| | |
10.3(n)
| | Letter Agreement, effective September 13, 2017, by and between Harte Hanks, Inc. and Karen A. Puckett, amending Employment Agreement with Karen A. Puckett (filed as Exhibit 10.1 to the company’s form 8-K dated September 14, 2017)
|
| | |
10.3(o)
| | Employment Agreement between the company and Jon C. Biro dated October 30, 2017 (filed as Exhibit 10.1 to the company’s Form 8-K, dated November 17, 2017)
|
| | |
10.3(p)
| | Letter Agreement dated February 1, 2018 by and between the company and Karen A. Puckett, amending Employment Agreement with Karen A. Puckett (filed as Exhibit 99.1 to the company’s From 8-K, dated February 2, 2018)
|
| | |
10.3(q)
| | |
48
| | |
10.4(a)
| | |
| 10.4(a) | | Cooperation Agreement, dated July 18, 2017, by and among Harte Hanks, Inc., Sidus Investment Management, LLC, Sidus Investment Partners, L.P., Sidus Double Alpha Fund, L.P., Sidus Double Alpha Fund, Ltd., Sidus Advisors, LLC, Michael J. Barone and Alfred V. Tobia, Jr. (filed as Exhibit 10.1 to the company’scompany's Form 8-K dated July 19, 2017) |
Other Exhibits
Other Exhibits
*Filed or furnished herewith, as applicable
† Filed or furnished with the Original Filing, as applicable
49
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.
|
| | | |
| HARTE HANKS, INC. | |
| |
By: | /s/ Karen A. Puckett Timothy E. Breen | |
| Karen A. Puckett
Timothy E. Breen | |
| Chief Executive Officer | |
| | | |
| Date: | March 18, 2019 | |
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.
|
| | |
/s/ Timothy E. Breen
| | /s/ Mark A. Del Priore |
Timothy E. Breen
| | Mark A. Del Priore
|
| Director, President and Chief Executive Officer | |
| | |
Date:
| April 30, 2018
| |
By:
| /s/ Jon C. Biro
| |
| Jon C. Biro
| |
| Executive Vice President and Chief Financial Officer | |
| Date: March 18, 2019 | | Date: March 18, 2019 |
Date:
| April 30, 2018
| |
| /s/ Laurilee Kearnes | | /s/ Alfred V. Tobia, Jr. |
| Laurilee Kearnes | | Alfred V. Tobia, Jr., Chairman |
| Vice President, Finance and Corporate Controller | | Date: March 18, 2019 |
| Date: March 18, 2019 | | |
| | |
| /s/ David L. Copeland | | /s/ Evan Behrens |
| David L. Copeland, Director | | Evan Behrens, Director |
| Date: March 18, 2019 | | Date: March 18, 2019 |
| | |
| /s/ Maureen O'Connell | | /s/ John H. Griffin, Jr. |
| Maureen O'Connell, Director | | John H. Griffin Jr., Director |
| Date: March 18, 2019 | | Date: March 18, 2019 |
| | |
| /s/ Melvin L. Keating | | |
| Melvin L. Keating, Director | | |
| Date: March 18, 2019 | | |
50
