April 11, 2008
To Our Stockholders:
I am pleased to provide my first report to our stockholders as president and chief executive officer of Harte-
Hanks, Inc. We faced challenges in 2007, and as indicated by our financial results we fell short in meeting and
overcoming these challenges. For all of 2007, our diluted earnings per share decreased to $1.26 on revenue of
$1.16 billion — decreases of 9.4% and 1.8%, respectively, from 2006. Direct Marketing, comprising 63% of total
2007 revenue, grew revenue by 3.2%, while operating income declined by 0.6%. Our Shoppers revenue declined
by 9.4%, while operating income declined 20.3%.
As we reflect on our 2007 performance and look to 2008, we remain firm in our conviction that the targeted
marketing business in which we operate has strong growth opportunities and will continue to be driven by
positive, secular trends toward the use of measurable media. The fundamental services we provide in each of our
businesses are essential to customers in any economic environment, and even more so in uncertain economic
times such as these. And even with our 2007 performance, these businesses continue to be strong generators of
cash, with $105.4 million of free cash flow in 2007.1
Direct Marketing: Measurable, Accountable and Vertical Market Expertise
In Direct Marketing in 2007, we achieved steady, but less than acceptable, growth. We believe improved
performance can be achieved in this business over the long-term, particularly as direct and data-driven marketing
are in demand by marketers who insist on the greater measurability and accountability that is inherent in direct-
response advertising. Gary Skidmore, who was named president of our Direct Marketing business in 2007, is
leading our drive to improved performance through placing focus on what he refers to as “PACE” — People,
Accountability, Customers, and Empowerment.
With our vertical market approach in Direct Marketing, Harte-Hanks remains a leader in retail, insurance
and financial services, technology, healthcare and pharmaceuticals, and a variety of other “select” markets,
among them automotive, consumer brands, non-profit and public sectors.
In addition to our penetration in key vertical markets, Harte-Hanks is highly regarded as a direct marketing
services provider in various functional areas. Independent research again has named Harte-Hanks and its Allink®
Solution Suite a “strong performer” for enterprise marketing database solutions, and, for the first time, as a
“market leader” for mid-market database solutions, our target market during the past three years. Further, our
Trillium Software System® data quality offering continues to be deemed a “market leader” for data quality
software, and is used by global companies not only for marketing applications, but also for all types of data
quality and business intelligence initiatives.
In the digital marketing arena, we continue to invest in the development and expansion of our digital
practice, including fully integrating the Harte-Hanks Postfuture® platform and adding new capabilities for
triggered messaging, measurement, and analysis. In the world of business-to-business information, our
Ci Technology Database™ continues to be the largest, most in-depth database of its kind, with more than
1.8 million business and technology contacts on three continents, and our Aberdeen Group issued more than 200
fact-based research reports in 2007 detailing adoption and impact of best-in-class business practices in two dozen
business areas.
1
Free cash flow is a non-GAAP financial measure, defined as net income, plus depreciation and amortization, plus stock-based
compensation (tax-effected), less capital expenditures. For 2007, our net income was $92.6 million. Our January 31, 2008 earnings
release tables provide a reconciliation of 2007 free cash flow to 2007 net income.
Shoppers: Targeted Media in a Challenging Marketplace
Our Shoppers business has been negatively affected by the California and Florida economies, the two
geographies where we distribute printed, targeted local advertising “shopper” publications using direct mail
zoned for specific neighborhoods. In particular, the real estate market has had an unfavorable impact on our
revenue and income performance, affecting not only the quantity of real estate listings, but advertising by
mortgage brokers, contractors, handymen, and retailers related to the home and spreading to other advertising
categories as well.
There is no doubt that our Shoppers business was under extreme pressure throughout 2007. But Shoppers
has a unique, highly effective product that has delivered outstanding results for its advertisers for decades. We
continue to believe that Shoppers remains a fundamentally sound long-term business with significant franchise
value whose performance will improve after the current cyclical issues in the California and Florida markets
stabilize and subside.
In these difficult times, Pete Gorman, who leads our Shoppers business, has instilled in his team the mantra
of “out-performing” — this means controlling and winning what we do control: competing vigorously for every
dollar at the top line, and reducing expenses at the middle line, which we have done through circulation and work
force reductions. In addition, we continue building a national local advertising network online in our two digital
sites, PennySaverUSA.com and TheFlyer.com, and reflecting the multichannel power of our Shoppers brands,
both print and digital versions now carry the “.com” name.
At year’s end, the print publication of PennySaverUSA.com had circulation of approximately 10 million in
California, and the print publication of TheFlyer.com had circulation of nearly 3 million in Southern and Central
Florida — representing roughly 1,000 unique, zoned editions. In mid-2007, we eliminated 600,000 of
unprofitable circulation.
Corporate Update
2007 also marked a change in our company’s leadership team. Richard Hochhauser announced his
retirement as president and chief executive officer after leading Harte-Hanks since 2002, and serving in the
company since 1975. In conjunction with this announcement during the third quarter, I was named president, and
in February 2008, I became chief executive officer, completing the transition. As mentioned above, in August
2007, Gary Skidmore was promoted to president, Harte-Hanks Direct Marketing, with responsibility for all of
our global Direct Marketing businesses. Pete Gorman, president, Harte-Hanks Shoppers, continues to lead our
Shoppers business through its current challenges. Gary and Pete are also corporate executive vice presidents. In
December 2007, Doug Shepard joined our company and was named executive vice president and chief financial
officer, filling my previously held positions. He formerly served as chief financial officer and treasurer of HVHC
Inc., the vision holding company of health-care provider Highmark Inc., and as executive vice president, chief
financial officer, treasurer and secretary of Eye Care Centers of America, Inc., which is owned by HVHC.
We continue to evaluate acquisitions for our business, to help us capitalize on strategic opportunities and to
meet customer needs. During the third quarter in 2007, we announced a relationship and option to acquire
Information Arts, a United Kingdom-based analytics and insight firm specializing in business-to-business
markets, where Harte-Hanks has several global clients in need of such services in overseas markets. In early
2008, we announced the acquisition of Mason Zimbler, a digital agency also based in the UK with expertise in
online branding and marketing, and a specialty in business-to-business markets.
We continued to use capital to repurchase shares, a program initiated in 1997. During 2007, we repurchased
8.4 million shares, bringing our total during the past 11 years to 59.0 million shares repurchased (split adjusted).
In January 2008, the board increased the share repurchase authorization by 12.5 million shares, bringing the total
remaining repurchase authorization to approximately 15.2 million as of January 15, 2008. Our total capital
projects spending in 2007 was $28.2 million. In January 2008, the company also announced a 7% increase in the
quarterly dividend, to 7.5 cents per share, effective with the dividend paid on March 14, 2008, marking the
thirteenth dividend increase since the company’s 1993 IPO.
One of the hallmarks of the Harte-Hanks brand is the quality and dedication of our people. In a dynamic
environment, we are prepared to excel for our customers, help them succeed, and differentiate our company from
competitors through our focus, values and performance. We believe that, too, will make a difference for our
stockholders.
Please refer to the Cautionary Note Regarding Forward-Looking Statements in Item 1A. of the enclosed annual report on Form 10-K.
DEAN BLYTHE
President & Chief Executive Officer
Notice of Annual Meeting
and
Proxy Statement
HARTE-HANKS, INC.
200 Concord Plaza Drive, Suite 800
San Antonio, Texas 78216
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 13, 2008
As a stockholder of Harte-Hanks, Inc., a Delaware corporation, you are hereby given notice of, and invited to attend in person or
by proxy, Harte-Hanks’ 2008 annual meeting of stockholders. The annual meeting will be held at the DoubleTree Hotel, 37 NE Loop
410, San Antonio, Texas 78216, on Tuesday, May 13, 2008, at 8:30 a.m. Central Time, for the following purposes:
1.
2.
To elect three Class III directors, each for a three-year term;
To ratify the appointment of KPMG LLP as Harte-Hanks’ independent registered public accounting firm for fiscal 2008;
and
3.
To transact such other business as may properly come before the meeting and any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on March 28, 2008 as the record date for the determination of stockholders
entitled to notice of and to vote at the annual meeting and any adjournment or postponement thereof.
Please note that we are requiring a form of personal identification and, for beneficial owners, appropriate proof of ownership of
our common stock to attend the annual meeting. For more information, please refer to the enclosed proxy statement.
Pursuant to new rules promulgated by the Securities and Exchange Commission (SEC), we have elected to provide access to our
proxy materials both by sending you this full set of proxy materials, including a proxy card, and by notifying you of the availability of
our proxy materials on the Internet. The enclosed proxy statement and our Form 10-K for the year ended December 31, 2007 (which
we are distributing in lieu of a separate annual report to stockholders) are available on our website at www.harte-hanks.com, under the
heading “About Us” in the section for “Investors.” Additionally, and in accordance with new SEC rules, you may access our proxy
statement and Form 10-K at http://www.edocumentview.com/HHS, which does not have “cookies” that identify visitors to the site.
Most stockholders have a choice of submitting a proxy (1) on the Internet, (2) by telephone or (3) by mail using a traditional
proxy card. Please refer to the proxy card or other voting instructions included with these proxy materials for information on the
voting methods available to you.
Your vote is important. We urge you to review the accompanying material carefully and to submit your proxy as soon as
possible so that your shares will be represented at the meeting.
Thank you for your continued interest and support.
By Order of the Board of Directors,
San Antonio, Texas
April 11, 2008
Bryan J. Pechersky
Senior Vice President, General Counsel and Secretary
PROXY STATEMENT TABLE OF CONTENTS
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 Annual Meeting Date and Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Delivery of Proxy Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual Meeting Admission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solicitation Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Copies of the Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 16(a) Beneficial Ownership Reporting Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Directors and Board Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Nomination Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independence of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Sessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit Committee Financial Experts and Financial Literacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications with Non-Management Directors and Other Board Communications . . . . . . . . . . . . . .
Director Attendance at Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policies on Business Conduct and Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indemnification of Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS . . . . . . . . . . . . . . .
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview of 2007 Executive Compensation Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation Philosophy and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elements of 2007 Executive Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Participants in the Executive Compensation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Factors That Influenced 2007 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tally Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Setting the Pay Mix – Cash Versus Equity; At-Risk Versus Fixed . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Benchmarking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Analysis of Executive Compensation Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discretionary Bonuses and Equity Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal Pay Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Ownership Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Deductibility of Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review of and Conclusion Regarding All Components of Executive Compensation . . . . . . . . . . . . . . . .
Compensation Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Compensation Plan Information at Year-End 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Important Note Regarding Compensation Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Other Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grants of Plan Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding Equity Awards at Year End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option Exercises and Stock Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined Benefit Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Restoration Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonqualified Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Potential Payments Upon Termination or Change of Control
Payments Pursuant to Severance Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments Made Upon Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments Made Upon Death or Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Potential Termination and Change in Control Benefits Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DIRECTOR COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elements of Current Director Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Establishing Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Stock Ownership Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 Director Compensation for Non-Employee Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Awards Outstanding at Year-End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AUDIT COMMITTEE AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM . . . . . . . . . .
Report of the Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Auditor Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-Approval for Non-Audit Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL I – ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Election of Class III Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Board Recommendation on Proposal
PROPOSAL II – RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS . . . . . . . . .
Description of Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Recommendation on Proposal
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSALS FOR 2009 ANNUAL MEETING OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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HARTE-HANKS, INC.
200 Concord Plaza Drive, Suite 800
San Antonio, Texas 78216
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 13, 2008
This proxy statement is being furnished to you in connection with the solicitation of proxies by the Board of
Directors (the Board) of Harte-Hanks, Inc. for use at our 2008 annual meeting. In this proxy statement, references
to “Harte-Hanks,” the “company,” “we,” “us,” “our” and similar expressions refer to Harte-Hanks, Inc., unless
the context of a particular reference provides otherwise. We refer to various websites in this proxy statement.
Neither the Harte-Hanks website nor any other website included in this proxy statement is intended to function as
a hyperlink, and the information contained on such websites is not a part of this proxy statement.
GENERAL INFORMATION
2008 Annual Meeting Date and Location
Our 2008 annual meeting of stockholders will be held on Tuesday, May 13, 2008 at 8:30 a.m. (Central
Time) at the DoubleTree Hotel, 37 NE Loop 410, San Antonio, Texas 78216, or at such other time and place to
which the meeting may be adjourned or postponed. References in this proxy statement to the annual meeting also
refer to any adjournments, postponements or changes in location of the meeting, to the extent applicable.
Delivery of Proxy Materials
Mailing Date
The approximate date on which this proxy statement and accompanying proxy are first being sent or given
to stockholders is April 11, 2008.
Important Notice Regarding Availability of Proxy Materials For Annual Meeting To Be Held On May 13,
2008
Pursuant to new rules promulgated by the Securities and Exchange Commission (SEC), we have elected to
provide access to our proxy materials both by sending you this full set of proxy materials, including a proxy card,
and by notifying you of the availability of our proxy materials on the Internet. This proxy statement and our
Form 10-K for the year ended December 31, 2007 (which we are distributing in lieu of a separate annual report to
stockholders) are available on our website at www.harte-hanks.com, under the heading “About Us” in the section
for “Investors.” Additionally, and in accordance with new SEC rules, you may access our proxy statement and
Form 10-K at http://www.edocumentview.com/HHS, which does not have “cookies” that identify visitors to the
site.
Stockholders Sharing an Address
Registered Stockholders — Each registered stockholder (you own shares in your own name on the books of
our transfer agent, Computershare Trust Company, N.A.) will receive one copy of each of our proxy statement
and annual report on Form 10-K per account even if at the same address.
Street-name Stockholders — Most banks and brokers are delivering only one copy of each of our proxy
statement and annual report on Form 10-K to consenting street-name stockholders (you own shares beneficially
1
in the name of a bank, broker or other holder of record on the books of our transfer agent) who share the same
address. This procedure reduces our printing and distribution costs. Those who wish to receive separate copies
may do so by contacting their bank, broker or other nominee, or, in most cases, by checking the appropriate box
on the voting instruction card sent to them. Similarly, most street-name stockholders who are receiving multiple
copies of our proxy statement and annual report on Form 10-K at a single address may request that only a single
set of materials be sent to them in the future by checking the appropriate box on the voting instruction card sent
to them or by contacting their bank, broker or other nominee. In the alternative, most street-name stockholders
may give instructions to receive separate copies or discontinue multiple mailings of materials by contacting the
third party that mails annual meeting materials for most banks and brokers: Broadridge, either by calling toll free
at (800) 542-1061 or by writing to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New
York 11717. Your instructions must include the name of your bank or broker and your account number.
Electronic Delivery Option
Instead of receiving future copies of these materials by mail, street-name stockholders may have the
opportunity to receive copies of the proxy materials electronically. Opting to receive your proxy materials online
will save us the cost of producing and mailing documents to your home or business. Please check the information
provided in the proxy materials mailed to you by your bank or broker or contact your bank or broker regarding
the availability of this service. In addition, the notice of annual meeting, proxy statement and other proxy
materials are available on our website at www.harte-hanks.com under the heading “About Us” in the section for
“Investors.”
Voting
Stockholders Entitled to Vote
The record date for determining the common stockholders entitled to notice of and to vote at the meeting
and any adjournment or postponement thereof was the close of business on March 28, 2008, at which time we
had issued and outstanding 63,890,655 shares of common stock, which were held by approximately 2,763
holders of record. Please refer to “Security Ownership of Management and Principal Stockholders” for
information about common stock beneficially owned by our directors, executive officers and principal
stockholders as of the date indicated in such section. Record date stockholders are entitled to one vote for each
share of common stock owned as of the record date. For a period of at least ten days prior to the annual meeting,
a complete list of stockholders entitled to vote at the annual meeting will be open to the examination of any
stockholder for any purpose germane to the meeting, during ordinary business hours at our corporate
headquarters located at 200 Concord Plaza Drive, Suite 800, San Antonio, Texas 78216, Attn: Secretary.
Voting of Proxies By Management Proxy Holders
The Board has appointed Mr. Doug Shepard, our Executive Vice President and Chief Financial Officer, and
Mr. Bryan Pechersky, our Senior Vice President, General Counsel and Secretary, as the management proxy
holders for the annual meeting. Your shares will be voted in accordance with the instructions on the proxy card
you submit by mail, or the instructions provided for any proxy submitted by telephone or Internet, as applicable.
For stockholders who have their shares voted by duly submitting a proxy by mail, telephone or Internet, the
management proxy holders will vote all shares represented by such valid proxies as follows, unless a stockholder
appropriately specifies otherwise:
•
•
Proposal I (Election of Directors) — FOR the election of each of the persons named under “Proposal
I—Election of Directors” as nominees for election as Class III directors; and
Proposal II (Ratification of the Appointment of Independent Auditors) — FOR the proposal to ratify the
appointment of KPMG LLP as our independent registered public accounting firm (independent auditors)
for fiscal 2008.
2
As of the date of printing this proxy statement, the Board is not aware of any other business or nominee to
be presented or voted upon at the annual meeting. Should any other matter requiring a vote of stockholders
properly arise, the proxies in the enclosed form confer upon the person or persons entitled to vote the shares
represented by such proxies discretionary authority to vote the same in accordance with their best judgment in
the interest of the company. Where a stockholder has appropriately specified how a proxy is to be voted, it will
be voted by the management proxy holders in accordance with the specification.
Quorum; Required Votes
The presence at the meeting, in person or by proxy, of the stockholders entitled to cast at least a majority of
the votes that all common stockholders are entitled to cast is necessary to constitute a quorum for the transaction
of business at the annual meeting. Each vote represented at the meeting in person or by proxy will be counted
toward a quorum. Abstentions and broker “non-votes” (which are described below) are counted as present at the
annual meeting for purposes of determining whether a quorum is present. If a quorum is not present, the meeting
may be adjourned or postponed from time to time until a quorum is obtained.
Under the rules of the New York Stock Exchange (NYSE), brokers holding shares of record for a customer
have the discretionary authority to vote on some matters if the brokers do not receive timely instructions from the
customer regarding how the customer wants the shares voted. There are also non-discretionary matters for which
brokers do not have discretionary authority to vote, even if they do not receive timely instructions from the
customer. When a broker does not have discretion to vote on a particular matter and the customer has not given
timely instructions on how the broker should vote, a “broker non-vote” results. Although any broker non-vote
would be counted as present at the meeting for purposes of determining a quorum, it would be treated as not
entitled to vote with respect to non-discretionary matters. For proposals I and II to be voted on at our annual
meeting, brokers will have discretionary authority in the absence of timely instructions from their customers.
•
•
Proposal I (Election of Directors) — To be elected, each nominee for election as a Class III director
must receive the affirmative vote of a plurality of the votes of the shares of common stock, present in
person or represented by proxy at the meeting and entitled to vote on such proposal. This means that
director nominees with the most votes are elected. Votes may be cast in favor of or withheld from the
election of each nominee. Votes that are withheld from a director’s election will be counted toward a
quorum, but will not affect the outcome of the vote on the election of such director.
II
(Ratification of
the Appointment of
Proposal
the
appointment of KPMG LLP as our independent auditors for fiscal 2008 requires the affirmative vote of
the holders of a majority of the votes of our common stock present in person or represented by proxy at
the meeting and entitled to vote on such proposal. Abstentions may be specified on this proposal and
will have the same effect as a vote against this proposal. Although brokers have discretionary authority
to vote on this proposal, if a broker submits a “non-vote,” it will have the same effect as a vote against
this proposal.
Independent Auditors) — Ratification of
Voting Procedures
Registered Stockholders — Registered stockholders may vote their shares or submit a proxy to have their
shares voted by one of the following methods:
•
•
•
By Mail. You may submit a proxy by signing, dating and returning your proxy card in the enclosed
pre-addressed envelope.
By Telephone. You may submit a proxy by telephone using the toll-free number listed on the proxy card.
Please have your proxy card in hand when you call. Telephone voting facilities will close and no longer
be available on the date and time specified on the proxy card.
By Internet. You may submit a proxy electronically on the Internet, using the website listed on the proxy
card. Please have your proxy card in hand when you log onto the website. Internet voting facilities will
close and no longer be available on the date and time specified on the proxy card.
3
•
In Person. You may vote in person at the annual meeting by completing a ballot; however, attending the
meeting without completing a ballot will not count as a vote.
Street-name Stockholders — Street-name stockholders may generally vote their shares or submit a proxy to
have their shares voted by one of the following methods:
•
•
•
By Mail. You may submit a proxy by signing, dating and returning your proxy card in the enclosed
pre-addressed envelope.
By Methods Listed on Proxy Card. Please refer to your proxy card or other information forwarded by
your bank, broker or other holder of record to determine whether you may submit a proxy by telephone
or electronically on the Internet, following the instructions on the proxy card or other information
provided by the record holder.
In Person with a Proxy from the Record Holder. A street-name stockholder who wishes to vote in
person at the meeting will need to obtain a legal proxy from their bank, broker or other nominee. Please
consult the voting form or other information sent to you by your bank, broker or other nominee to
determine how to obtain a legal proxy in order to vote in person at the annual meeting.
Revoking Your Proxy
If you are a registered stockholder, you may revoke your proxy at any time before the shares are voted at the
annual meeting by:
•
•
•
•
timely delivery of a valid, later-dated executed proxy card;
timely submitting a proxy with new voting instructions using the telephone or Internet voting system;
voting in person at the meeting by completing a ballot; however, attending the meeting without
completing a ballot will not revoke any previously submitted proxy; or
filing an instrument of revocation received by the Secretary of Harte-Hanks, Inc. at 200 Concord Plaza
Drive, Suite 800, San Antonio, Texas 78216, by 5:00 p.m., Central Time, on Monday, May 12, 2008.
If you are a street-name stockholder and you vote by proxy, you may change your vote by submitting new
voting instructions to your bank, broker or nominee in accordance with that entity’s procedures.
Annual Meeting Admission
If you wish to attend the annual meeting in person, you must present a form of personal identification. If
you are a beneficial owner of Harte-Hanks common stock that is held of record by a bank, broker or other
nominee, you will also need proof of ownership to be admitted to the meeting. A recent brokerage statement or a
letter from your bank or broker are examples of proof of ownership. No cameras, recording equipment, electronic
devices, large bags, briefcases or packages will be permitted in the meeting.
Solicitation Expenses
We will bear all costs incurred in the solicitation of proxies by our Board. In addition to solicitation by mail,
our directors, officers and employees may solicit proxies personally or by telephone, e-mail, facsimile or other
means, without additional compensation. We may also make arrangements with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation materials to the beneficial owners of
shares of common stock held by such persons, and we may reimburse these brokerage houses and other
custodians, nominees and fiduciaries for reasonable expenses incurred in connection therewith.
4
Copies of the Annual Report
A copy of our annual report on Form 10-K for the year ended December 31, 2007, including the
financial statements and the financial statement schedules, if any, but not including exhibits, accompanies
this proxy statement and will also be furnished at no charge to each person to whom a proxy statement is
delivered upon the written request of such person addressed to Harte-Hanks, Inc., Attn: Secretary, at 200
Concord Plaza Drive, Suite 800, San Antonio, Texas 78216. Our Form 10-K and the exhibits filed with it
are available on our website, www.harte-hanks.com under the heading “About Us” in the section for
“Investors.” These materials do not constitute a part of the proxy solicitation material.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 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 are 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 to our directors and executive officers in making their Section 16(a) filings pursuant to powers of
attorney granted by our insiders. To our knowledge, based solely on our review of the copies of Section 16(a)
reports received by us with respect to fiscal 2007, 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.
5
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about our current directors and executive officers. As we
have previously announced, Mr. Hochhauser, our former Chief Executive Officer and a member of the Board,
retired in February 2008 and will not stand for re-election to the Board at the 2008 annual meeting, when his
current term expires. Mr. Dean Blythe, our President and Chief Executive Officer, has been nominated by the
Board for election to the Board, filling the seat previously held by Mr. Hochhauser.
Name
Age
Position
David L. Copeland . . . . . . . . . . . . . .
William F. Farley . . . . . . . . . . . . . . .
Larry D. Franklin . . . . . . . . . . . . . . .
William K. Gayden . . . . . . . . . . . . .
Christopher M. Harte . . . . . . . . . . . .
Houston H. Harte . . . . . . . . . . . . . . .
Richard M. Hochhauser . . . . . . . . . .
Judy C. Odom . . . . . . . . . . . . . . . . . .
Dean H. Blythe . . . . . . . . . . . . . . . . .
Peter E. Gorman . . . . . . . . . . . . . . . .
Douglas C. Shepard . . . . . . . . . . . . .
Gary J. Skidmore . . . . . . . . . . . . . . .
Bryan J. Pechersky . . . . . . . . . . . . . .
Jessica M. Huff . . . . . . . . . . . . . . . . .
52 Director (Class I)
64 Director (Class II)
65 Director (Class II); Chairman
66 Director (Class II)
60 Director (Class I)
81 Director Nominee (Class III); Vice Chairman
63 Director (Class III until 2008 annual meeting)
55 Director Nominee (Class III)
49
59 Executive Vice President and President, Shoppers
40 Executive Vice President and Chief Financial Officer
53 Executive Vice President and President, Direct Marketing
37
Senior Vice President, General Counsel and Secretary
47 Vice President – Finance, Controller and Chief Accounting Officer
President, Chief Executive Officer and Director Nominee (Class III)
Class III directors are to be elected at our 2008 annual meeting. Messrs. Houston Harte and Dean Blythe,
and Ms. Judy Odom are nominees for election as Class III directors. The term of Class I directors expires at the
2009 annual meeting of stockholders, and the term of Class II directors expires at the 2010 annual meeting of
stockholders.
David L. Copeland has served as a director of Harte-Hanks since 1996. He has been employed by SIPCO,
Inc., the management and investment company for the Andrew B. Shelton family, since 1980 and currently
serves as its president. He also serves as a director of First Financial Bankshares, Inc., a financial holding
company.
William F. Farley has served as a director of Harte-Hanks since 2003. He also serves as a director of
Wilsons The Leather Experts Inc., a leading retailer of leather apparel and accessories. He served as chairman
and chief executive officer of Science, Inc., a medical device company, from 2000 to 2002. He also served as
president 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.
Larry D. Franklin has served as a director of Harte-Hanks since 1974. Mr. Franklin was Chief Executive
Officer of Harte-Hanks from 1991 until April 2002 and executive Chairman until December 31, 2005.
William K. Gayden has served as a director of Harte-Hanks since 2001. He is chairman and chief executive
officer of Merit Energy Company, a private firm specializing in direct investments in oil and gas producing
properties, which he formed in 1989.
Christopher M. Harte has served as a director of Harte-Hanks since 1993. He is a private investor and
served as president of the Portland Press Herald and Maine Sunday Telegram for approximately two years
beginning June 1992. Prior to becoming president of the Portland newspapers, Mr. Harte spent nine years with
Knight-Ridder Newspapers, during which time he served as president and publisher of two newspapers and in
other positions. He serves as the chairman of Star Tribune Company and currently also serves as chief executive
6
officer and publisher of the Minneapolis Star Tribune. He also serves as a director of Geokinetics, Inc., a
provider of three-dimensional seismic acquisition services to U.S. oil and gas businesses. Mr. Harte is the
nephew of director Houston H. Harte.
Houston H. Harte has served as a director of Harte-Hanks since 1952 and served as Chairman of the Board
from 1972 until May 1999. Since May 1999, Mr. Harte has served as Vice Chairman of the Board of Harte-
Hanks. Mr. Harte is the uncle of director Christopher M. Harte.
Richard M. Hochhauser previously served as our Chief Executive Officer from April 2002 until February
2008 and has served as a director since 1996. From January 1998 until April 2002, he served as our Chief
Operating Officer. He also served as President of Harte-Hanks Direct Marketing from 1987 until August 2007,
and has held numerous other positions since joining Harte-Hanks in 1975. Mr. Hochhauser also serves as a
director of John Wiley & Sons, Inc., a publisher of print and electronic products.
Judy C. Odom has served as a director of Harte-Hanks since September 2003. Since November 2002, she
has also served on the board of directors of Leggett & Platt, Incorporated, a diversified manufacturing company.
She served on the board of Storage Technology Corporation, a provider of data storage hardware and software
products and services, from November 2003 to August 2005. 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.
Dean H. Blythe has served as our President since August 2007 and as our Chief Executive Officer since
February 2008. From January 2007 to August 2007, he served as our Executive Vice President and Chief
Financial Officer. From June 2003 until January 2007, he served as our Senior Vice President and Chief
Financial Officer. From November 2001 until February 2004, he served as our Vice President – Legal and
Secretary. Prior to joining Harte-Hanks, he served as managing director of TDF Ventures LLC, an investment
and transaction advisory firm he founded in 2000. During 2000, he was also senior vice president – corporate
development of Concero, Inc., an information technology consulting firm, and from 1994 to 2000 he was senior
vice president – corporate development, secretary & general counsel of Hearst-Argyle Television, Inc., an owner
and operator of television stations.
Peter E. Gorman has served as our Executive Vice President and President, Shoppers since October 2005,
with responsibility for our entire Shoppers division. From 1996 to October 2005, he served as Senior Vice
President – Shoppers. He has been with Harte-Hanks since 1979.
Douglas C. Shepard has served as our Executive Vice President and Chief Financial Officer since
December 2007. From September 2006 to December 2007, he served as chief financial officer and treasurer of
Highmark’s vision holding company, HVHC Inc. From November 2004 to December 2007, he served as the
executive vice president, chief financial officer, treasurer and secretary of Eye Care Centers of America, Inc.
(ECCA). From March 1997 to November 2004, he served as ECCA’s vice president of finance and controller.
Mr. Shepard joined ECCA in March 1995. Prior to his employment with ECCA, Mr. Shepard served as an SEC
reporting accountant at a publicly traded restaurant company and served as a senior auditor at Deloitte & Touche,
LLP.
Gary J. Skidmore has served as our Executive Vice President and President, Direct Marketing since August
2007, with responsibility for our entire Direct Marketing division. From January 2007 to August 2007, he served
as Executive Vice President – Direct Marketing, where he had responsibility for a portion of our Direct
Marketing business units. From 2000 to January 2007, he served as Senior Vice President – Direct Marketing. He
previously served as our Vice President – Direct Marketing. He has been with Harte-Hanks since 1994.
Bryan J. Pechersky has served as our Senior Vice President, General Counsel and Secretary since
March 2007. Prior to joining Harte-Hanks, he served as senior vice president, secretary and senior corporate
7
counsel of Blockbuster Inc., a movie and game entertainment retailer. Before joining Blockbuster, from March
2004 until October 2005, he served as deputy general counsel and secretary with Unocal, an international energy
company that was acquired by Chevron in 2005, and was in private practice with the law firm of Vinson &
Elkins L.L.P. from November 1996 until March 2004.
Jessica M. Huff has served as our Controller since 1996. In 1999, she was also named Chief Accounting
Officer. In 2003, she was also named Vice President, Finance. Prior to joining Harte-Hanks, she was corporate
manager of financial planning at SBC Communications. Ms. Huff also spent eight years with Ernst & Young and
three years as controller and vice president of a financial institution.
8
CORPORATE GOVERNANCE
We believe that strong corporate governance helps to ensure that our company is managed for the long-term
benefit of our stockholders. During the past year, we continued to review our corporate governance policies and
practices, the applicable federal securities laws regarding corporate governance, and the corporate governance
standards of the NYSE, the stock exchange on which our common stock is listed. This review is part of our
continuing effort to enhance corporate governance at Harte-Hanks and to communicate our governance policies
to stockholders and other interested parties.
You can access and print, free of charge, the charters of our Audit Committee, Compensation Committee
and Nominating and Corporate Governance Committee, as well as our Corporate Governance Principles,
Business Conduct Policy, Code of Ethics and certain other polices and procedures at our website at www.harte-
hanks.com under the heading “About Us” in the section for “Corporate Governance.” Additionally, stockholders
can request copies of any of these documents free of charge by writing to the following address:
Harte-Hanks, Inc.
200 Concord Plaza Drive, Suite 800
San Antonio, Texas 78216
Attention: Secretary
From time to time, these governance documents may be revised in response to changing regulatory
requirements, evolving best practices and the concerns of our stockholders and other interested parties. We
encourage you to check our website periodically for the most recent versions.
Board of Directors and Board Committees
Our business is managed under the direction of our Board. The Board elects the Chief Executive Officer
(CEO) and other corporate officers, acts as an advisor to and resource for management, and monitors
management’s performance. The Board, with the assistance of the Compensation Committee, also assists in
planning for the succession of the CEO and certain other key positions. In addition, the Board oversees the
conduct of our business and strategic plans to evaluate whether the business is being properly managed, reviews
and approves our financial objectives and major corporate plans and actions, and, through the Audit Committee,
reviews and approves significant changes in the appropriate auditing and accounting principles and practices and
provides oversight of internal and external audit processes and financial reporting.
The Board meets on a regularly scheduled basis to review significant developments affecting our company,
to act on matters requiring approval by the Board and to otherwise fulfill its responsibilities. It also holds special
meetings when an important matter requires action or review by the Board between regularly scheduled
meetings. The Board met six times and acted by unanimous written consent two times during 2007. Each director
participated in at least 75% of all Board meetings and all Board committee meetings of which he or she was a
member that were held during the period that he or she served as a director, committee member or both.
9
The Board has separately designated standing Audit, Compensation and Nominating and Corporate
Governance Committees. The following table provides Board and committee membership and meeting
information for each of the Board’s standing committees:
Director
Independent (1)
Audit Committee
David L. Copeland
William F. Farley
Larry D. Franklin
William K. Gayden
Christopher M. Harte
Houston H. Harte
Richard M. Hochhauser (3)
Judy C. Odom
Yes
Yes
—
Yes
Yes
—
—
Yes
Chair (2)
Member (2)
Member
Number of Meetings in 2007
Number of Written Consents in 2007
12
0
Compensation
Committee
Member
Member
Chair
5
1
Nominating and
Corporate
Governance
Committee
Member
Chair
Member
4
0
(1) The Board has determined that the director is independent as described below under “Independence of
Directors.”
(2) The Board has determined that the director is an audit committee financial expert as described below under
“Audit Committee Financial Experts and Financial Literacy.”
(3) As we have previously announced, Mr. Hochhauser, our former Chief Executive Officer and a member of
the Board, retired in February 2008 and will not stand for re-election to the Board at the 2008 annual
meeting, when his current term expires. Mr. Dean Blythe, our President and Chief Executive Officer, has
been nominated by the Board for election to the Board, filling the seat previously held by Mr. Hochhauser.
A brief description of the principal functions of each of the Board’s three standing committees follows.
Notwithstanding the following, the Board retains the right to exercise the powers of any committee to the extent
consistent with applicable rules and regulations, and may do so from time to time. For additional information,
please refer to the committee charters that are available on our website at www.harte-hanks.com under the
heading “About Us” in the section for “Corporate Governance.”
•
Audit Committee — 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.
• Compensation Committee — The primary functions of the Compensation Committee are to (1) review
and approve corporate goals and objectives relevant
to CEO compensation, evaluate the CEO’s
performance in light of those goals and objectives, and either as a Committee or together with the other
independent directors (as directed by the Board), determine and approve the CEO’s compensation level
based on this evaluation, (2) review and approve, or make recommendations to the Board (as directed by
the Board), with respect to non-CEO officer compensation, incentive-compensation plans and equity-
based plans, and (3) review and discuss with management the company’s “Compensation Discussion
and Analysis” and produce a committee report on executive compensation as required by the SEC to be
included in our annual proxy statement or annual report on Form 10-K filed with the SEC.
• Nominating and Corporate Governance Committee — The primary functions of the Nominating and
Corporate Governance Committee are to (1) develop, recommend to the Board, implement and maintain
our company’s corporate governance principles and policies, (2) identify, screen and recruit, consistent
with criteria approved by the Board, qualified individuals to become Board members, (3) recommend
10
that the Board select the director nominees for the next annual meeting of stockholders, (4) assist the
Board in determining the appropriate size, function, operation and composition of the Board and its
committees, and (5) oversee the evaluation of the Board and management.
Director Nomination Process
The Nominating and Corporate Governance Committee (Governance Committee) is responsible for
managing the process for the nomination of new directors. The Governance Committee may identify potential
candidates for first-time nomination as a director using a variety of sources—recommendations from our
management, current Board members, stockholders or contacts in communities served by Harte-Hanks, or by
conducting a formal search using an outside search firm selected and engaged by the Governance Committee.
During 2007, the Governance Committee retained Spencer Stuart to assist it in identifying and evaluating
potential director nominees.
Following the identification of a potential director nominee, the Governance Committee commences an
inquiry to obtain sufficient information on the background of a potential new director nominee. Included in this
inquiry is an initial review of the candidate with respect to whether the individual would be considered
independent under NYSE and SEC rules and whether the individual would meet any additional requirements
imposed by law or regulation on the members of the Audit and/or Compensation Committees of the Board. The
Governance Committee evaluates candidates for director nominees in the context of the current composition of
the Board, taking into account all factors it considers appropriate, including the characteristics of independence,
diversity, age, skills, background and experience, financial acumen, availability of service to Harte-Hanks, tenure
of incumbent directors on the Board and the Board’s anticipated needs.
The Governance Committee will consider potential nominees recommended by our stockholders for the
Governance Committee’s consideration taking into account the same considerations as are taken into account for
other potential nominees. Stockholders may recommend candidates by writing to the Governance Committee in
care of our Secretary at Harte-Hanks, Inc., 200 Concord Plaza Drive, Suite 800, San Antonio, Texas, 78216. Our
bylaws provide additional procedures and requirements for stockholders wishing to nominate a director for
election as part of the official business to be conducted at an annual stockholders meeting, as described further
under “Submission of Stockholder Proposals for 2009 Annual Meeting.”
Assuming a satisfactory conclusion to the Governance Committee’s review and evaluation process, the
Governance Committee presents the candidate’s name to the Board for nomination for election as a director and/
or inclusion in our proxy statement.
Independence of Directors
Annual questionnaires are used to gather input to assist the Governance Committee and the Board in their
determinations of the independence of 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 findings to the
Board on the independence of (1) David Copeland, (2) William Farley, (3) William Gayden, (4) Christopher
Harte and (5) Judy Odom, in each case in accordance with applicable federal securities laws and the rules of the
NYSE. The Board determined that, other than in their capacity as directors, none of these non-employee directors
had a material relationship with Harte-Hanks, either directly or as a partner, shareholder or officer of an
organization that has a relationship with Harte-Hanks. The Board further determined that (1) each such
non-employee director is otherwise independent under applicable NYSE listing standards for purposes of serving
on the Board, the Audit Committee, the Compensation Committee and the Governance Committee, (2) each such
non-employee director satisfies the additional audit committee independence standards under Rule 10A-3 of the
SEC and (3) each such non-employee director is financially literate for purposes of serving on our Audit
Committee.
11
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 terms to us 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 most recent independence determinations, the
Board considered the following matters with respect to Mr. Copeland and determined that they do not constitute
material relationships with Harte-Hanks or otherwise impair Mr. Copeland’s independence as a member of the
Board or any of its committees, including the Audit Committee:
• As previously disclosed in our 2007 proxy statement, Mr. Copeland’s son is a member of the
transactional services group of KPMG LLP, our independent registered public accounting firm. 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 their
transactional services group and whether there was any relation to KPMG’s audit, assurance or tax
compliance groups. As a result of this diligence and discussions with KPMG, it was determined that
KPMG’s transactional services group is a separate and distinct group from KPMG’s audit, assurance
and tax compliance practice groups. Accordingly, based on the nature of the services provided by the
transactional services group and the fact that Harte-Hanks has not purchased such transactional services
from KPMG, this matter was not deemed to constitute a material relationship with Harte-Hanks.
• As previously disclosed in our 2007 proxy statement, in accordance with SEC rules, Mr. Copeland has
reported, but disclaimed, “beneficial ownership” of more than 10% of our outstanding shares of our
common stock that are owned by (1) various trusts for which Mr. Copeland serves as trustee or
co-trustee, (2) a limited partnership of which he is an officer of the general partner, and (3) the Shelton
Family Foundation, of which he 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.
Executive Sessions
Our Corporate Governance Principles provide that the non-management members of the Board will hold
regular executive sessions in connection with regular Board meetings to consider issues that they may determine
from time to time without the presence of any member of management. If the Chairman of the Board is not a
member of management, the Chairman will chair each such session and report any material issues to the full
Board. If the Chairman is a member of management, the Chair of the Governance Committee, or if one has not
been appointed, the Chair of the Audit Committee, serves as the chairman of the executive sessions. If the
non-management directors include directors who are not “independent” under applicable NYSE and SEC rules,
then the independent directors will hold an executive session at least once a year. The Chairman of the Board, if
an independent director, will chair each such session and report any material issues to the full Board. If the
Chairman is not an independent director, the Chair of the Governance Committee, or if one has not been
appointed, the Chair of the Audit Committee, serves as the chairman of such sessions.
Audit Committee Financial Experts and Financial Literacy
The Board has determined that Messrs. Copeland, Farley and Christopher Harte, the current members of the
Audit Committee, are each financially literate as interpreted by the Board in its business judgment based on
applicable NYSE rules, and that Messrs. Copeland and Farley each further qualifies as an audit committee
financial expert, as such term is defined in applicable SEC rules.
12
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.
Communications with Non-Management Directors and Other Board Communications
The Board provides a process to enhance the ability of stockholders and other interested parties to
communicate directly with the non-management directors as a group, the entire Board, Board committees or
individual directors, including the Chairman and chair of any Board committee.
Stockholders and other interested parties may communicate by writing to: Board of Directors – Stockholder
Communication, Harte-Hanks, Inc., P.O. Box 1767, San Antonio, Texas 78291. Our independent directors have
instructed the Chairman of the Governance Committee to collect and distribute all such communications to the
intended recipient(s), assuming he reasonably determines in good faith that such communications do not relate to
an improper or irrelevant topic.
Concerns about accounting or auditing matters may be forwarded on a confidential or anonymous basis to
the Audit Committee by writing to: Audit Committee, Harte-Hanks, Inc., P.O. Box 1607, San Antonio, Texas
78291 in an envelope labeled “To be opened by the Audit Committee only. Submitted pursuant to Audit
Committee’s whistleblower policy.” These complaints will be reviewed and addressed under the direction of the
Audit Committee.
Items unrelated to the duties and responsibilities of the Board, such as mass mailings, business solicitations,
advertisements and other commercial communications, surveys and questionnaires, and resumes or other job
inquiries, will not be forwarded.
Director Attendance at Annual Meetings
Although we do not have a formal policy regarding director attendance at
the annual meeting of
stockholders, all directors are encouraged to attend. All directors attended the 2007 annual meeting of
stockholders.
Policies on Business Conduct and Ethics
We have established a corporate compliance program as part of our commitment to responsible business
practices in all of 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
in our business relationships with employees, customers, suppliers, competitors, government
conduct
representatives and all other business associates. In addition, we have adopted a Code of Ethics applicable to our
Chief Executive Officer and all of our senior financial officers. The Business Conduct Policy and Code of Ethics
form the foundation 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.
Both our Business Conduct Policy and our Code of Ethics are available on our website at www.harte-
hanks.com, under the heading “About Us” in the section for “Corporate Governance.” In accordance with NYSE
and SEC rules, we currently intend to disclose any future amendments to our Code of Ethics, or waivers from our
Code of Ethics for our Chief Executive Officer, Chief Financial Officer and Controller, by posting such
information on our website (www.harte-hanks.com) within the time period required by applicable SEC and
NYSE rules.
13
Certain Relationships and Related Transactions
The Board has adopted certain policies and procedures relating 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 transactions with related persons. As set forth in the Governance Committee’s charter,
except 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 account a variety of factors that
it deems appropriate, 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 be 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.
During 2007, in accordance with authority granted by the Board, we purchased common stock from
Mr. Houston H. Harte, a member of our Board, as described below:
Date of Purchase
Shares
Price Per Share
Closing Price on Date of
Purchase
February 5, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . .
March 8, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,000
100,000
$26.07
$27.73
$26.07
$27.73
Indemnification of Officers and Directors
Our certificate of incorporation and bylaws require us to indemnify our officers and directors to the fullest
extent permitted by the Delaware General Corporation Law. These documents also contain provisions that
provide for the indemnification of our directors for third party actions and actions by or in the right of Harte-
Hanks that mirror Section 145 of the Delaware General Corporation Law.
Our certificate of incorporation also states that Harte-Hanks has the power to purchase and maintain
insurance, at its expense, to protect itself and any such director, officer, employee or agent of Harte-Hanks or
another corporation, partnership, joint venture, trust or other enterprise against such expense, liability or loss,
whether or not we would have the power to indemnify such person against such expense, liability or loss under
the Delaware General Corporation Law. We also have and intend to maintain director and officer liability
insurance, if available on reasonable terms.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of
the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable.
Management Certifications
In accordance with the Sarbanes-Oxley Act of 2002 and SEC rules thereunder, our Chief Executive Officer
and Chief Financial Officer have signed certifications under Sarbanes-Oxley Section 302, which have been filed
as exhibits to our annual report on Form 10-K for the year ended December 31, 2007. In addition, our Chief
Executive Officer submitted his most recent annual certification to the NYSE under Section 303A.12(a) of the
NYSE listing standards on May 21, 2007.
14
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the number of shares of our common stock
beneficially owned by (1) our “named executive officers,” which, for purposes of this proxy statement, refers to
the five executive officers included in the Summary Compensation Table below in this proxy statement, (2) each
current Harte-Hanks director and each nominee for director, and (3) all current Harte-Hanks directors and
executive officers as a group. The following table also sets forth information with respect to the number of shares
of common stock beneficially owned by each person known by Harte-Hanks to beneficially own more than 5%
of the outstanding shares of our common stock. Except as otherwise noted, (1) the persons named in the table
have sole voting and investment power with respect to all shares beneficially owned by them and (2) ownership
is as of March 1, 2008. As of March 1, 2008, there were 66,966,063 shares of our common stock outstanding.
Name and Address of Beneficial Owner (1)
Houston H. Harte (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David L. Copeland (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Larry D. Franklin (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cooke & Bieler, LP(5 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shelton Family Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BlackRock, Inc. (Subsidiaries: BlackRock Advisors LLC, BlackRock Investment
Management, LLC, BlackRock (Channel Island) Ltd.) (6 ) . . . . . . . . . . . . . . . . . .
Goldentree Asset Management LP(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Christopher M. Harte (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richard M. Hochhauser (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gary J. Skidmore (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peter E. Gorman (11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dean H. Blythe (12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William K. Gayden (13)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William F. Farley (14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Judy C. Odom (15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Douglas C. Shepard (16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Executive Officers and Directors as a Group (14 persons) (17) . . . . . . . . . . . . . .
Number of Shares
of Common Stock
Percent of
Class
9,669,873
9,130,677
6,201,592
5,233,752
4,591,000
4,331,739
3,781,781
1,812,259
1,037,909
381,846
281,098
214,000
75,020
24,352
22,332
17,835
28,910,560
14.4%
13.6%
9.2%
7.8%
6.9%
6.5%
5.6%
2.7%
1.5%
*
*
*
*
*
*
*
41.9%
*
Less than 1%.
(1) The address of Cook & Bieler, LP is 1700 Market Street, Suite 3222, Philadelphia, PA 19103. The address
of the Shelton Family Foundation is 273 Walnut Street, Abilene, Texas 79601. The Address of BlackRock,
Inc. is 40 East 52nd Street, New York, NY 10022. The address of Goldentree Asset Management LP is 300
Park Avenue, 21st Floor, New York, N.Y. 10022. The address of each other beneficial owner is c/o Harte-
Hanks, Inc., 200 Concord Plaza Drive, Suite 800, San Antonio, Texas 78216.
(2)
(3)
Includes 3,061,555 shares held by three limited partnerships of which Mr. Harte is the sole shareholder of
the general partner, and to which he disclaims beneficial ownership.
Includes 8,150 shares that may be acquired upon the exercise of options exercisable within the next 60 days;
1,937 shares of stock subject to certain restrictions, which restrictions will be removed in January 2009;
1,918 shares of stock subject to certain restrictions, which restrictions will be removed in February 2010;
3,144 shares of stock subject to certain restrictions, which restrictions will be removed in February 2011;
and the following shares to which Mr. Copeland disclaims beneficial ownership: 5,650 shares owned by one
of his adult children, 31,900 shares held as custodian for unrelated minors, 4,221,471 shares that are owned
by 31 trusts for which he serves as trustee or co-trustee, 200,500 shares held by a limited partnership of
which he is sole manager of the general partner, and 4,591,000 shares owned by the Shelton Family
Foundation, of which he is one of nine directors and an employee.
15
(4)
Includes 303,000 shares that may be acquired upon the exercise of options exercisable within the next
60 days; 1,980,000 shares held in trust for Mr. Franklin’s children; and the following shares to which he
disclaims beneficial ownership: 3,258,558 shares owned by eight trusts for which he serves as co-trustee and
holds shared voting and dispositive power, and 48,405 shares owned by the Franklin Family Foundation of
which he is one of four directors.
(5) Represents shares held by investment advisory clients of Cooke & Bieler, LP (“C&B”), no one of which to
the knowledge of C&B owns more than 5.0% of the class. Includes shares to which C&B has shared voting
power of 2,839,557 shares and shared dispositive power of 5,180,452 shares. Information relating to this
stockholder is based on the stockholder’s Schedule 13G, filed with the SEC on February 13, 2008.
(6) Represents shares held by investment advisory clients of BlackRock, Inc.’s investment advisory subsidiaries
(Subsidiaries: BlackRock Advisors, LLC, BlackRock Investment Management, LLC, and BlackRock
(Channel Islands), Ltd.), no one of which to the knowledge of BlackRock owns more than 5.0% of the class.
Includes shares to which BlackRock has shared voting and dispositive power of 4,331,739. Information
relating to this stockholder is based on the stockholder’s Schedule 13G, filed with the SEC on February 8,
2008.
(7) Represents shares held by investment advisory clients of Golden Asset Management LP (“GAM”), no one
of which to the knowledge of GAM owns more than 5.0% of the class. Includes shares to which GAM has
shared voting and dispositive power of 3,781,781 shares. Information relating to this stockholder is based on
the stockholder’s Schedule 13G, filed with the SEC on February 14, 2008.
(8)
Includes 5,574 shares held as custodian for Mr. Harte’s step-children and child; 1,245,001 shares owned by
two trusts for which he serves as co-trustee and in which the trustees have shared voting and dispositive
power and to which he disclaims beneficial ownership; 450 shares owned indirectly by his wife; 505,458
shares held by Spicewood Family Partners, Ltd., of which he is the sole general partner with exclusive
voting and dispositive power over all the partnership’s shares; 8,150 shares that may be acquired upon the
exercise of options exercisable within the next 60 days; 1,937 shares of stock subject to certain restrictions,
which restrictions will be removed in January 2009; 1,918 shares of stock subject to certain restrictions,
to certain
which restrictions will be removed in February 2010; and 3,144 shares of stock subject
restrictions, which restrictions will be removed in February 2011.
(9)
Includes 853,000 shares that may be acquired upon the exercise of options exercisable within the next
60 days; 10,700 shares of stock subject to certain restrictions, which restrictions will be removed in
January 2009; and 8,500 shares of stock subject to certain restrictions, which restrictions will be removed in
February 2010.
(10) Includes 336,250 shares that may be acquired upon the exercise of options exercisable within the next 60
days; 4,115 shares of stock subject to certain restrictions, which restrictions will be removed in January
2009; 4,768 shares of stock subject to certain restrictions, which restrictions will be removed in February
2010; 4,668 shares of stock subject to certain restrictions, which restrictions will be removed in February
2011; and 4,318 shares held in two trusts for which Mr. Skidmore’s brother serves as trustee.
(11) Includes 247,500 shares that may be acquired upon the exercise of options exercisable within the next
60 days; 20,040 shares owned indirectly by the Gorman Family Trust; 5,928 shares of stock subject to
certain restrictions, which restrictions will be removed in January 2009; 2,755 shares of stock subject to
certain restrictions, which restrictions will be removed in February 2010; and 4,000 shares of stock subject
to certain restrictions, which restrictions will be removed in February 2011.
(12) Includes 189,375 shares that may be acquired upon the exercise of options exercisable within the next 60
days; 3,200 shares of stock subject
to certain restrictions, which restrictions will be removed in
January 2009; 4,300 shares of stock subject to certain restrictions, which restrictions will be removed in
February 2010; and 7,125 shares of stock subject to certain restrictions, which restrictions will be removed
in February 2011.
16
(13) Includes 8,150 shares that may be acquired upon the exercise of options exercisable within the next 60 days;
13,500 shares owned indirectly by Mr. Gayden’s wife; 1,937 shares of stock subject to certain restrictions,
which restrictions will be removed in January 2009; 1,918 shares of stock subject to certain restrictions,
to certain
which restrictions will be removed in February 2010; and 3,144 shares of stock subject
restrictions, which restrictions will be removed in February 2011.
(14) Includes 6,900 shares that may be acquired upon the exercise of options exercisable within the next 60 days;
1,937 shares of stock subject to certain restrictions, which restrictions will be removed in January 2009;
1,918 shares of stock subject to certain restrictions, which restrictions will be removed in February 2010;
3,144 shares of stock subject to certain restrictions, which restrictions will be removed in February 2011;
and 124 shares owned indirectly by Mr. Farley’s spouse, as to which beneficial ownership is disclaimed.
(15) Includes 6,900 shares that may be acquired upon the exercise of options exercisable within the next 60 days;
1,937 shares of stock subject to certain restrictions, which restrictions will be removed in January 2009;
1,918 shares of stock subject to certain restrictions, which restrictions will be removed in February 2010;
and 3,144 shares of stock subject to certain restrictions, which restrictions will be removed in February
2011.
(16) Includes 4,335 shares of stock subject
to certain restrictions, which restrictions will be removed in
December 2008; and 7,500 shares of stock subject to certain restrictions, which restrictions will be removed
in December 2010.
(17) Includes 1,989,875 shares that may be acquired upon the exercise of options exercisable within the next
60 days and 122,579 shares of stock subject to certain restrictions, which restrictions will be removed at
various times in December 2008, January 2009, March 2010, February 2010, December 2010 and February
2011.
17
Compensation Discussion and Analysis
EXECUTIVE COMPENSATION
This Compensation Discussion and Analysis (CD&A) provides a discussion of
the compensation
philosophy and objectives that underlie our executive compensation program and how we evaluated and set our
executives’ compensation for 2007. This CD&A provides qualitative information concerning how 2007
compensation was awarded to and earned by our executives, identifies the most significant factors relevant to our
2007 executive compensation decisions and gives context to the data presented in the tables included below in
this proxy statement. Certain information regarding our 2006 and 2008 compensation determinations is also
included to the extent we believe it provides helpful context for our discussion of 2007 executive compensation.
The term “executive officers” means our senior executives who are all listed above under the heading “Directors
and Executive Officers.” The term “named executive officers” means the five executive officers named in the
the
Summary Compensation Table and other compensation tables
Compensation Committee of the Board.
follow. “Committee” means
that
Overview of 2007 Executive Compensation Developments
In 2007, the principal compensation developments for our named executive officers were as follows:
•
•
•
•
January 2007 — The Committee made its annual executive compensation determinations for our 2007
executive compensation program. The determinations for Mr. Dean Blythe and Mr. Gary Skidmore took
to Executive Vice
into consideration their January 2007 promotions from Senior Vice President
President.
July/August 2007 — Mr. Dean Blythe was promoted from Executive Vice President and Chief Financial
Officer to President and Chief Financial Officer in connection with the then-announced retirement of
Mr. Richard Hochhauser, who retired as our Chief Executive Officer in February 2008. Mr. Blythe
received a base salary adjustment and an award of stock options in connection with his promotion.
July/August 2007 — Mr. Gary Skidmore was promoted to Executive Vice President and President,
Direct Marketing, with responsibility for our entire Direct Marketing business. Mr. Skidmore previously
had responsibility for managing a portion of our Direct Marketing business units. Mr. Skidmore
received a base salary adjustment and an award of stock options in connection with his promotion.
August 2007 — We entered into a transition and consulting agreement with Mr. Hochhauser, pursuant to
which he agreed to serve as a consultant to the company for three years commencing with his February
2008 retirement, and will receive consulting payments and other benefits.
• December 2007 — We hired Mr. Doug Shepard as Executive Vice President and Chief Financial Officer
and, in connection with his hiring, the Committee approved Mr. Shepard’s compensation package.
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 stockholder value by providing competitive
compensation compared to peer companies 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, business unit (for certain executive officers, as appropriate) 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 annual bonuses and performance
restricted stock units) or our stock price appreciates (for stock options).
18
•
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.
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 2007 compensation for each of our named executive
officers. Our 2007 compensation philosophy is consistent for all of our executive officer positions, and is
consistent with our 2006 and 2008 compensation programs.
Elements of 2007 Executive Compensation Program
The following table highlights the elements of our 2007 executive compensation program and the primary
purpose of each element. These compensation elements are consistent with our 2006 and 2008 executive
compensation programs, and, although individual amounts vary, the elements are also consistent for all of our
executive officer positions. Each element is discussed in further detail below in this CD&A.
Element
Base Salary
Annual Incentive
Compensation
(also referred to
in this proxy
statement as our
“bonus”)
Bonus Restricted
Stock Elections
Objectives and Basis
Form
Provide base compensation that is competitive for each role to
reward and motivate individual performance.
Annual incentive to drive company and, where applicable,
business unit performance.
Cash
Cash
Annual eligibility of executive officers to elect to receive up to
30% of their bonus awards in the form of restricted common
stock, which would vest 100% on the third anniversary of the
date of grant, allowing an executive officer to receive 125% of
the value of the forgone cash portion of his or her bonus in
such shares of restricted stock.
Restricted stock
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.
Stock options, restricted
stock and performance
restricted stock units
Perquisites
Enhance the competitiveness of our executive compensation
program through limited additional benefits.
Pension and
Retirement
Provide our executives with a competitive retirement income
program to supplement savings through our 401(k) plan.
Automobile allowances and
supplemental life insurance
benefits
Participation and vesting in
our non-qualified pension
restoration plan
19
Element
Objectives and Basis
Form
Severance
Agreements
Attract and retain key talent by providing certain
compensation in the event of a change of control and, for
one of our named executive officers, in designated non-
change of control scenarios.
Cash severance, equity vesting,
COBRA reimbursement and, if
applicable, tax gross-ups
Qualified Deferred
Compensation
Provide tax-deferred means to save for retirement.
Other
Offer other competitive benefits, such as medical, dental
and other health and welfare benefits.
Same benefit made generally
available to our employees to
participate in our 401(k) plan
with a company match
Same benefit made generally
available to our employees to
participate in health and
welfare plans
Compensation Committee
The Committee currently consists of Judy Odom (Chair), William Farley and William Gayden. The Board
has determined that each member of the Committee meets the independence requirements of the rules of the
NYSE. Each Committee member
is also considered to be an “outside director” in accordance with
Section 162(m) of the Internal Revenue Code (the Code), and a “non-employee director” as defined in Rule
16b-3 under the Exchange Act with regard to compensation and benefit plans subject to SEC Rule 16b-3. Each
member of the Committee either currently serves or has served as a senior executive of a large corporation, and
has had significant experience with compensation matters relating to senior executives of these organizations.
In accordance with its charter, the Committee’s responsibilities include the following:
•
•
•
•
•
•
participate with management and the Board of Directors in reviewing and approving the company’s
goals and objectives with respect to compensation for our CEO,
evaluate the CEO’s performance in light of these established goals and objectives and, based upon these
evaluations, set the CEO’s annual compensation, including salary, bonus and incentive and equity-based
compensation,
review publicly available data to assess the competitiveness of the CEO’s base salary, bonus and
taking into consideration our performance and relative
incentive and equity-based compensation,
stockholder return, the value of similar incentive awards to CEOs at comparable companies, and the
awards given to the CEO in prior years,
participate with management and the Board of Directors in reviewing the annual goals and objectives
with respect to compensation for other executive officers,
evaluate the performance of these executive officers in light of these established goals and objectives
and, based upon this evaluation and any compensation recommendations for the executive officers made
by the CEO, either approve or make recommendations to the Board (as directed by the Board) with
respect to the compensation for the executive officers, and
review publicly available data to assess our competitive position with respect
to our executive
compensation program, including consideration of base salaries, annual incentives, long-term incentives
and equity-based compensation, and make changes as deemed appropriate to align with our executive
compensation philosophy.
20
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 2007. The Committee has delegated to our President and CEO limited option grant authority for
non-officer new hires and promotions. This delegation does not apply to any of our executive officers.
The Committee meets in executive session as it deems appropriate to review and consider executive
compensation matters without the presence of our executive officers. These executive sessions frequently include
other non-employee directors. The Committee met in executive session with other non-employee directors at its
January 2007 regular meeting, which is the meeting when the Committee made its annual 2007 executive
compensation determinations. Members of the Committee also met in executive session with other non-employee
directors during a July 2007 meeting, when the Committee approved the base salary increases and option awards
for Messrs. Blythe and Skidmore in connection with their promotions. In the July 2007 executive session, the
independent directors also approved Mr. Hochhauser’s transition and consulting agreement, which was entered
into in connection with the announcement of his February 2008 retirement.
Other Participants in the Executive Compensation Process
In addition to the Committee and other non-Committee members of the Board who may also 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 and Chairman of the Board
Mr. Hochhauser, our former CEO and a director, and Mr. Blythe, our current President and CEO, each
participated in the Committee’s executive compensation processes during 2007. Messrs. Hochhauser and Blythe
played an important role in assisting the Committee and regularly attended Committee meetings, other than
executive sessions. Messrs. Hochhauser and Blythe provided their perspectives to the Committee regarding
executive compensation matters generally and the performance of the executive officers reporting to them. They
also presented recommendations to the Committee on the full range of annual executive compensation decisions,
including (1) annual incentive bonus plan 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, bonus opportunity targets and equity grants.
Messrs. Hochhauser and Blythe did not make recommendations regarding their own compensation.
Mr. Larry Franklin, who serves as Chairman of the Board and was our CEO prior to Mr. Hochhauser
becoming our CEO in 2002, assisted the Committee and other independent directors in making 2007 executive
compensation determinations regarding Mr. Hochhauser and Mr. Blythe.
At the Committee’s January 2007 meeting, Mr. Hochhauser presented the Committee with specific 2007
compensation recommendations for the compensation amounts and elements of all executive officers other than
himself. Mr. Franklin, Chairman of the Board, presented the Committee with specific 2007 compensation
recommendations for Mr. Hochhauser. The Committee made final decisions about each officer’s 2007
compensation without the applicable executive officer being present, taking into account Mr. Hochhauser’s
recommendations for executive officers other
than himself and Mr. Franklin’s recommendations for
Mr. Hochhauser. At a July 2007 meeting, Mr. Franklin provided the Committee and other independent directors
with recommendations regarding the terms of Mr. Hochhauser’s transition and consulting agreement and
regarding the base salary increases and option awards for Messrs. Blythe and Skidmore in connection with their
21
promotions. In December 2007, Mr. Blythe provided the Committee with his recommendations regarding the
compensation elements and amounts for Mr. Shepard, who joined Harte-Hanks in December 2007 as our
Executive Vice President and Chief Financial Officer.
Compensation Consultants
The Committee believes that engaging a consultant on a periodic basis is more appropriate than having
annual engagements. The Committee did not engage a compensation consultant for its 2007 annual executive
compensation determinations, which were made at the Committee’s January 2007 meeting. Rather, our former
CEO’s and Chairman’s recommendations at that meeting included market data that was derived by “aging” data
provided by a compensation consultant engaged by the Committee in 2004.
In mid-2007, the Committee retained an outside compensation consultant to assist the Committee with its
evaluation and determinations
for our 2008 executive compensation program. The consulting firm,
Longnecker & Associates, was engaged by and reported directly to the Committee. Although Longnecker &
Associates did work in cooperation with management as required to gather information necessary to carry out its
obligations to the Committee, Longnecker did not have a separate engagement with our management.
The Committee asked Longnecker & Associates to conduct a comprehensive review of Harte-Hanks’
current management compensation program and individual management compensation arrangements. The
Committee also requested Longnecker & Associates to recommend specific changes and improvements to the
Committee to ensure that compensation remains aligned with the goal of enhancing stockholder value through
competitive programs that allow the company to attract, properly motivate and retain key executives who will
contribute to Harte-Hanks’ long-term success and the creation of stockholder value. Longnecker & Associates’
review included the following, at the Committee’s request:
•
•
•
•
review the peer group of companies used for benchmarking executive compensation, taking into account
input from the Committee,
based on compensation data from the peer group and broad market survey data, conduct an analysis of
total direct compensation, and the individual components of total direct compensation, for each of our
executive positions and assess how target and actual compensation positioning to the market aligned
with Harte-Hanks’ compensation philosophy and objectives,
advise the Committee on best practices and compensation trends for its 2008 compensation decisions for
the CEO and other executive officers, and
help the Committee evaluate the new hire compensation package for Doug Shepard, who was hired in
December 2007, by providing market data for similar positions.
In January 2008, the Committee made its 2008 annual executive compensation determinations, taking into
account the results of Longnecker’s review, analysis and recommendations, among other factors. The Committee
has not yet determined whether it will engage an outside consulting firm during 2008 for the Committee’s 2009
executive compensation determinations.
Principal Factors That Influenced 2007 Executive Compensation
When making its 2007 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 attract and retain high performing individuals who
will significantly contribute to our long-term success and the creation of stockholder value. The Committee did
not use pre-established formulas, 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
22
into consideration in the Committee’s business judgment and that
included a number of subjective
determinations. In establishing the individual elements and amounts of 2007 executive compensation, the
principal factors taken into consideration by the Committee included the following:
•
•
•
•
competitive market data to assess how our executive pay levels compared to other companies,
considering the individual elements of our compensation program,
those
compensation elements and total direct compensation amounts, with 2007 market data derived by
“aging” data previously provided by the Committee’s consultants in 2004,
the relative mix of
recommendations and input from non-Committee members of the Board, including our Chairman,
Mr. Franklin, and from Messrs. Hochhauser and Blythe, including with regard to proposed base salary
increases and long-term incentive awards and individual executive officer performance,
recent company performance compared to our financial (earnings per share, operating income and
revenues) and operational expectations for our company as a whole and for our Shoppers and Direct
Marketing businesses individually,
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,
• CEO succession planning considerations in light of Mr. Hochhauser’s February 2008 retirement,
•
•
•
•
•
providing competitive compensation to reflect new or expanded roles for some of our executives,
including the promotions of Messrs. Blythe and Skidmore and our hiring of Mr. Shepard,
retention concerns in light of the relatively low bonus payouts to executive officers based on company
performance, challenging business conditions, reduced historical equity compensation values because of
a reduced stock price during much of 2007 and recent earnings per share performance, and cost-cutting
initiatives and restructuring efforts that resulted, and were anticipated to result
in the future, in
significant additional work commitments by our existing executive officers,
individual officer compensation history, including stock options and other equity awards in prior years
and value realized from prior equity awards,
internal pay equity (i.e., considering pay for similar jobs and jobs at different levels within Harte-Hanks
and considering the relative importance of a particular position to Harte-Hanks), 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 Section 162(m) of the
Code, the impact of expensing equity grants under Statement of Financial Accounting Standards (SFAS)
No. 123(R), “Share-Based Payment” (SFAS 123R), and the impact of Section 409 of the Code relating
to non-qualified deferred compensation.
Tally Sheets
To assist the Committee in making its 2007 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 of 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: (1) values for cash compensation (base pay, bonus and automobile
allowance) for the current year under consideration and each of the past two years, (2) estimated values for long-
term incentive awards (options, restricted stock and performance restricted stock units) for the current year under
23
consideration and each of the past two years, (3) supplemental life insurance benefits, (4) estimated pension
benefits upon retirement, (5) actual realized and estimated future values for historical equity compensation
awards, (6) stock ownership guideline compliance, and (7) estimated amounts the executive could realize upon a
change of control or other termination of employment pursuant to the executive’s existing severance agreement.
The tally sheets also incorporate applicable competitive market compensation data for base salary, annual
incentive awards and long-term incentive awards.
Setting the Pay Mix—Cash Versus Equity; At-Risk Versus Fixed
We believe a mixture of both long-term (equity) and short-term (cash) 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. The following chart
shows the split of 2007 compensation for our named executive officers between equity and cash:
2007 Cash Versus Equity Compensation
Named Executive Officer
Compensation (1)(2)
Cash
Compensation
38%
Equity
Compensation
62%
(1) This chart was created using the sum of the amounts in columns (c) (salary) and (g) (non-equity incentive
plan compensation)
from the Summary Compensation table below as the amount of 2007 cash
compensation, and using 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 as the amount of 2007 equity compensation. It
does not include the amount in column (d) (bonus) from the Summary Compensation table, which was a
one-time payment of $150,000 in cash that Mr. Shepard received on his start date.
(2) For our individual named executive officers, their 2007 cash to equity compensation ratios (calculated as
described in footnote (1) above) were as follows: Hochhauser — 65.30% cash / 34.70% equity; Blythe —
27.42% cash / 72.58% equity; Gorman — 59.85% cash / 40.15% equity; Shepard — 0.28% cash / 99.72%
equity; and Skidmore — 30.12% cash / 69.88% equity. Individual circumstances and other factors may
cause significant fluctuations in these percentages from year to year, thereby affecting their year-to-year
comparability. For example, Messrs. Blythe and Skidmore were each promoted in August 2007 and received
additional option awards in connection with their promotions. In addition, Mr. Shepard was hired in
December 2007 and received an initial equity grant on his start date but did not earn a full year of 2007 base
salary.
24
The Committee also believes that a substantial portion of the potential cash compensation (the sum of base
salary and the potential annual incentive compensation) should be “at risk” or variable and therefore subject to
meeting financial performance criteria. In 2007, as shown below, over half of the potential cash compensation
(assuming a maximum bonus payout) for the named executive officers and all executive officers as a group was
“at risk.”
Percentage of 2007 Potential Cash Compensation: Fixed vs. Variable (or “At Risk”) (1)(2)
Named Executive Officers
All Executive Officers
Fixed
45%
Fixed
47%
Variable
55%
Variable
53%
(1) These charts reflect the overall ratio of 2007 base salary (fixed) to 2007 potential annual incentive
compensation (at risk or variable) assuming a maximum bonus payout for the executive officers.
(2) For our individual named executive officers, their percentages of 2007 at risk or variable cash compensation
(calculated as described in footnote (1) above) were as follows: Hochhauser — 55.56%; Blythe — 55.99%;
Gorman — 49.30%; Shepard — 41.60%; and Skidmore — 55.85%. Individual circumstances and other
factors may cause significant fluctuations in these percentages from year to year, thereby affecting their
year-to-year comparability.
Market Benchmarking
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 other 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. The market
data comprising aggregated survey data does not include the identity of the individual comparable companies and
is either provided by outside compensation consultants or derived by aging information that has been previously
provided by these consultants. For the Committee’s 2004 compensation consultant study, the broad survey data
was derived from the consulting firm’s executive compensation report, which included data from more than 550
companies across a wide array of industries. For the Committee’s 2007 Longnecker & Associates study, the
broad survey data was derived from published surveys, including printing and publishing industry segment data
from those surveys.
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. In connection with its engagement of outside compensation consultants in 2007,
the Committee recently modified and expanded the peer group used for 2008 executive compensation. The
25
following table shows a comparison of the peer group used for the Committee’s January 2007 and January 2008
annual compensation determinations. The 2007 compensation peer group was based on the Committee’s previous
engagement of a compensation consulting firm in 2004.
2007 Compensation Peer Group
2008 Compensation Peer Group
1. Acxiom Corporation
2. ADVO, Inc.
--
3. Catalina Marketing Corporation
4. ChoicePoint, Inc.
--
5. Convergys Corporation
6. DoubleClick Inc.
7. Equifax, Inc.
8. Fair Isaac Corporation
--
--
--
--
--
--
--
--
9. The Dun & Bradstreet Corporation
10. Valassis Communications, Inc.
--
--
11. West Corporation
1. Acxiom Corporation
--
2. Alliance Data Systems Corporation
3. Catalina Marketing Corporation
4. ChoicePoint, Inc.
5. Consolidated Graphics, Inc.
--
--
6. Equifax, Inc.
7. Fair Isaac Corporation
8. ICT Group, Inc.
9. infoUSA, Inc.
10. Interpublic Group of Companies, Inc.
11. PC Mall, Inc.
12. R.H. Donnelley Corporation
13. Source Interlink Companies, Inc.
14. Sykes Enterprises, Incorporated
15. TeleTech Holdings, Inc.
16. The Dun & Bradstreet Corporation
17. Valassis Communications, Inc.
18. ValueClick, Inc.
19. Viad Corp
--
The Committee compares each executive officer’s (1) salary, (2) potential bonus opportunity and
(3) 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, the Committee’s philosophy is to target total direct compensation in the 50th to 75th percentile of market
compensation (in other words, compensation levels that would be in the second quartile of market compensation
levels based on this benchmark data). As discussed above, however, the benchmark data is merely a starting
point and the Committee does not use pre-established formulas or rigidly 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 “Principal Factors That Influenced 2007 Executive Compensation.”
Accordingly, the Committee retains discretion to award compensation levels and elements that it believes are
appropriate, and the Committee is not required to award compensation levels at specific benchmark data
percentiles.
Although the Committee did not engage a compensation consultant for its 2007 annual executive
compensation determinations, our former CEO’s recommendations for other executive officers and our
Chairman’s recommendations for the former CEO in January 2007 included market data that was derived by
“aging” data provided by a compensation consultant engaged by the Committee in 2004. This market data
incorporated broad aggregated survey data and peer company data from the 2007 compensation peer group
companies listed above. Based on the total potential direct compensation approved in the Committee’s January
2007 meeting for our named executive officers (other than Mr. Shepard, who was hired in December 2007)
compared to the aged market data reviewed by the Committee at its January 2007 meeting, two of the named
executive officers were above the 75th percentile, one was between the 50th and 75th percentiles and one was
26
below the 50th percentile. Total potential direct compensation includes: (1) salary, (2) potential bonus
opportunity at a maximum payout assuming all performance criteria are achieved, and (3) an estimated long-term
incentive compensation value included in the Committee’s tally sheets. Restricted stock and performance
restricted stock units were given an assumed value of $27.50 per share. Stock options were given a value based
on a Black Scholes value of $8.05. All equity values assumed 100% vesting.
Additional Analysis of Executive Compensation Elements
The following discussion provides additional information and analysis regarding the specific elements of
our 2007 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 2007 Executive Compensation”) and
the compensation tables that follow.
Base Salary
We set executive base salaries at levels we believe are competitive based on each individual executive’s
roles and 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. Base salary changes also impact target bonus
amounts, which are based on a percentage of base salary.
When reviewing each executive’s base salary in 2007, the Committee considered the level of responsibility
and complexity of the executive’s job, the relative importance of the executive’s position to Harte-Hanks,
whether, in the Committee’s business judgment and taking into account input from our CEO, Chairman and other
Board members, prior individual performance was particularly strong or weak (for all executives other than
Mr. Shepard, who was a new employee in 2007), how the executive’s salary compares to the salaries of other
Harte-Hanks executives and to the 50th percentile and 75th percentile market salary information based on
benchmark data for the same or similar positions, and the combined potential total direct compensation value of
an executive’s salary, annual bonus opportunity and long-term incentive awards.
In 2007, the Committee increased the base salaries of Messrs. Blythe and Skidmore as a result of their two
promotions in January 2007 and in August 2007 and the resulting increase in their responsibilities. In setting the
amount of Mr. Blythe’s increased salary beginning with his August 2007 promotion to President, the Committee
took into consideration Mr. Hochhauser’s salary history and tenure as CEO and the Committee’s expectation that
it would again increase Mr. Blythe’s salary in January 2008 in connection with Mr. Blythe’s transition into the
additional role of CEO in February 2008. In January 2008, the Committee approved the increase in Mr. Blythe’s
annual base salary from $600,000 to $675,000. The amount of Mr. Skidmore’s base salary increase beginning
with his August 2007 promotion was driven by the relative roles and scope of responsibilities of Messrs. Blythe
and Skidmore and the expectation that Mr. Skidmore would not receive another salary increase in January 2008.
In January 2008, the Committee elected to maintain Mr. Skidmore’s current base salary of $540,000 per year.
increased in 2007 from 2006 levels.
The base salaries of Messrs. Hochhauser and Gorman were not
Mr. Shepard’s base salary was established by the Committee in connection with his hiring in December 2007,
taking into account the salary history of Mr. Blythe when he formerly served as our Chief Financial Officer,
benchmark salary data provided as part of the Committee’s engagement of Longnecker & Associates and
Mr. Shepard’s salary at his previous job.
27
Annual Incentive Compensation
We provide an annual incentive bonus opportunity for executive officers to drive company and, where
appropriate, business unit performance on a year-over-year basis. We believe this annual short-term cash
incentive opportunity provides an incentive for our executives to manage our businesses to achieve targeted
financial results. For our fiscal 2007 executive bonus plan, maximum bonus opportunity amounts were expressed
as a percentage of each executive’s base salary as follows:
Position
Hochhauser
Blythe
Gorman
Shepard
Skidmore
Maximum Bonus
Opportunity
(% of 2007 Base Salary)
125
100
100
100
100
As a result of the January 2007 promotions of Messrs. Blythe and Skidmore from Senior Vice President to
Executive Vice President, their 2007 maximum bonus opportunity percentages were increased from 85% to
100% of their 2007 base salaries. In January 2008, Mr. Blythe’s 2008 bonus opportunity was increased to 125%
of his 2008 base salary as a result of his promotion to CEO. There was no change in the bonus opportunity
percentages for Messrs. Hochhauser or Gorman from 2006 to 2007. Mr. Shepard joined Harte-Hanks in
December 2007 and therefore has not had any adjustments to his maximum bonus opportunity percentage.
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 January meeting. From time to time, individual non-financial goals may also
be established for one or more executive officers to better align an executive’s incentives with goals such as
organizational effectiveness, strategic focus, and personal development. There were no individual non-financial
performance goals for the 2007 executive bonus plan. 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 and long-term strategic plans, 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 Harte-Hanks 2005 Omnibus Incentive Plan (2005 Plan), a stockholder approved
plan, forms the basis of our annual incentive plan for executives.
For 2007, each named executive officer’s annual bonus potential was based on achievement against
established incremental target performance levels for the following financial performance criteria, each of which
was weighted for a particular executive to reflect the nature of that executive’s areas of responsibility and focus:
Named
Executive
Officer
Hochhauser
Blythe
Gorman
Shepard
Skidmore
Harte-
Hanks
Earnings
Per Share
✓
✓
✓
✓
✓
Harte-
Hanks
Operating
Income
✓
✓
✓
✓
✓
Shoppers
Revenue
Shoppers
Operating
Income
Direct
Marketing
Revenue
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Direct
Marketing
Operating
Income
✓
✓
✓
✓
Specific Business
Unit
Revenue/Operating
Income
Other
(1)
(2)
✓
(1) Shoppers digital revenue performance.
(2) Direct Marketing sales organization revenue growth.
28
The bonus amount ultimately paid to each executive for 2007, if any, was based on the target performance
levels reached. Although our 2005 Plan provides the Committee with the ability to reduce, but not to increase, the
amount payable to our named executive officers to take into account additional factors that the Committee may
deem relevant to the assessment of individual or corporate performance, no discretion was exercised by the
Committee in certifying 2007 bonus payouts for the named executive officers.
In establishing the performance criteria and the incremental target performance levels for each performance
criteria, it is anticipated that the executives will receive at least some portion of their year-end cash bonuses, with
increasing degrees of difficulty in achieving the higher levels of payout. Achieving the maximum bonus award is
anticipated, at the time of establishing the award, to be very difficult to achieve based on our company’s annual
budget performance assumptions. To illustrate the degree of difficulty in achieving bonus payouts, the following
table shows the 2007 and 2006 actual bonus payouts as a percentage of each named executive officer’s maximum
bonus opportunity.
Named Executive Officer
(as a % of 2006 maximum bonus opportunity)
(as a % of 2007 maximum bonus opportunity)
2006 Actual Bonus Payout
2007 Actual Bonus Payout
Hochhauser
Blythe
Gorman
Shepard (1)
Skidmore
14.00%
14.00%
4.50%
N/A
11.25%
0.00%
0.00%
0.00%
0.00%
5.25%
(1) Mr. Shepard joined Harte-Hanks in December 2007 and was not a participant in our 2006 executive annual
incentive plan.
Bonus Restricted Stock Elections
Our executive officers can elect to receive a portion of their bonus otherwise earned in the form of restricted
stock. In that case, the executive would receive 125% of the value of the forgone cash portion of the bonus in
shares of restricted stock. These shares vest 100% on the third anniversary of their date of grant. This election
option is considered by the Committee each year and was approved again with respect to the 2007 executive
bonuses, which were payable in early 2008. The Committee believes this election encourages the accumulation
of executive stock ownership, as required by our stock ownership guidelines. Most executive officers made
bonus restricted stock elections for their 2007 bonuses.
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. In May 2005,
we adopted the 2005 Plan, a stockholder approved plan, pursuant to which we may issue to directors, officers and
key employees various equity securities. The 2005 Plan forms the basis of our long-term incentive plan for
executives.
The Committee’s current philosophy is to grant options with an exercise price at the market price of our
common stock on the date of grant. Prior to 2007, we annually granted long-term incentive awards on the date of
the first Committee meeting held in late January of each year. Beginning in 2007, our Board determined that such
awards would be granted on February 5 each year, which both establishes a fixed date for such grants and is
anticipated to be during a “window” period (more than two days following the release of our annual earnings for
the prior year). If this date falls on a non-trading day such as a weekend, the exercise price for the grant would be
the closing price on the first preceding trading day (for example, a Friday if February 5 on a given year is a
29
Saturday). We also grant interim awards from time to time in connection with intra-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.
In January 2007, as in 2006, the Committee awarded our executives a combination of stock options,
restricted common stock and performance-based restricted stock units. Please refer to the Grants of Plan Based
Awards table below for a description of these types of equity awards under the 2005 Plan. The Committee
believes that awarding a combination of these forms of equity is more appropriate to achieve the goals of our
long-term incentive compensation program than awarding only one form of equity. Stock options align our
executives’ interests with the interests of stockholders by having value only if our stock price increases over
time. Restricted common stock better serves the retention goal by ensuring that the awards will have value if they
vest because the ultimate value of restricted stock, unlike stock options, does not depend solely on our stock price
increasing over time. Performance restricted stock units require performance over a multi-year measurement
period and thereby help align our executive compensation program with longer term company performance.
The 2007 performance restricted stock units each represent the right to potentially receive one share of our
common stock for each vested unit, as determined on the third anniversary of the grant date based upon the
satisfaction of specified 3-year average annual earnings per share growth rates during the 2007-2009
performance period. Actual vesting may range from 0% up to 125% of the number of performance units
awarded, depending on actual performance. In establishing the performance levels, it is generally anticipated that
at least some portion of the performance units will vest following the three-year period, with increasing degrees
of difficulty in achieving the higher levels of vesting. Achieving the maximum vesting level is anticipated, at the
time of establishing the award, to be very difficult to achieve based on company performance expectations and
historical earnings per share growth rates. The 2006 performance units were the first such units we granted to our
executives, and had a 2006-2008 performance period. As of December 31, 2007, none of the performance goals
associated with the 2006 or 2007 performance stock units are expected to be achieved, which would result in no
units vesting for any of our executives.
When reviewing each executive’s proposed equity awards in 2007, the Committee considered the level of
responsibility and complexity of the executive’s job, whether, in the Committee’s business judgment and taking
into account input from our CEO, Chairman and other Board members, prior individual performance was
particularly strong or weak (for all executives other than Mr. Shepard, who was a new employee in 2007), how
the executive’s proposed equity award value compares to the equity award values of other Harte-Hanks
executives and to the 50th percentile and 75th percentile market information based on benchmark data for the
same or similar positions, and the combined potential total direct compensation value of an executive’s salary,
annual bonus opportunity and long-term incentive awards.
Perquisites
Consistent with previous years, our 2007 executive compensation program includes 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. Our perquisites are:
•
Supplemental Life Insurance Benefits — We provide life insurance benefits to our executive officers at a
higher level than is offered more generally to our employees under our health and welfare benefits
program. Additional information about the supplemental life insurance benefits provided to our named
executive officers is found in the applicable executive’s table below under “Potential Termination and
Change in Control Benefits Tables.” In January 2007, the Committee approved an increase in the
supplemental life insurance benefits for Mr. Blythe from $50,000 per year for ten years to $70,000 per
30
year for ten years to bring Mr. Blythe’s benefits in line with those provided to Messrs. Gorman and
Skidmore. There was no change to Messrs. Hochhauser’s, Gorman’s or Skidmore’s life insurance
benefits from 2006 to 2007. Mr. Shepard’s life insurance benefits were established by the Committee at
a level consistent with the benefits provided to Messrs. Blythe, Gorman and Skidmore. In January 2008,
the Committee approved an increase in the supplemental life insurance benefits for Messrs. Blythe,
Gorman and Skidmore from $70,000 per year for ten years to $90,000 per year for ten years in the event
of the executive’s death. The decision to increase the potential payments to their beneficiaries reflected
Mr. Blythe’s promotion and the desire to also provide comparable, increased life insurance benefits to
our longer-term Executive Vice Presidents, Messrs. Gorman and Skidmore.
•
Automobile Allowance — We also provide automobile allowances to our executive officers, including
our named executive officers, in the following amounts: Chief Executive Officer — $1,325 per month;
Executive Vice Presidents and Senior Vice Presidents — $975 per month; and Vice Presidents — $600
per month. There were no changes to our named executive officers’ automobile allowances from 2006
to 2007. In January 2008, the Committee approved an increase in Mr. Blythe’s automobile allowance
from $975 per month to $1,325 per month in connection with his promotion to CEO in early February
2008.
In establishing the elements and amounts of each executive’s 2007 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 supplemental life insurance benefits
and automobile allowance.
Pension and Retirement
Consistent with our historical executive compensation program, each executive officer participates in our
non-qualified pension restoration plan and some executives will also receive benefits under our frozen qualified
defined benefit pension plan. These pension benefits are 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. We
sponsor a defined benefit pension plan (Defined Benefit Plan) qualified under Section 401 of the Code. We have
also established an unfunded, non-qualified pension restoration plan, which became effective on January 1, 1994
and was amended and restated on January 1, 2000 (Restoration Pension Plan). The Defined Benefit Plan was
frozen as of December 31, 1998 (at which time the benefits available under the company sponsored 401(k) plan
were enhanced), and no further benefits will accrue under that plan. In addition, the Code places certain
limitations on the amount of pension benefits that may be paid under qualified plans and on the amount of
compensation considered in determining the pension benefit amount. Any benefits payable to participants in
excess of amounts permitted under the Code and any benefit accrued after December 31, 1998 will be paid under
the Restoration Pension Plan.
The annual pension benefit under the Restoration Pension Plan and the Defined Benefit Plan, taken together,
are largely computed by multiplying the number of years of employment by a percentage of the participant’s
ten years of
final average earnings (earnings during the highest five consecutive years within the last
employment). Participation in the Restoration Pension Plan is limited to those employees of Harte-Hanks who
are designated by the Board as eligible and currently includes only corporate officers. 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. Further details about our pension plans are
shown in the “Pension Benefits” section below.
In establishing the elements and amounts of each executive’s 2007 compensation, tally sheets were 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 potential future pension payments to each executive. The Committee
considered these future payments in determining whether the overall executive compensation program remains
31
competitive to attract and retain key executives, although the Committee did not use pre-established formulas or
rigidly set other compensation amounts or elements based solely upon future pension payments. There were no
changes to the benefits provided to our named executive officers under our pension plans from 2006 to 2007.
Severance Agreements
in connection with his retirement
We have entered into standard form severance agreements with each of our named executive officers and
other corporate officers. These severance agreements are generally designed to attract and retain key talent by
providing certain compensation in the event of a change of control. The severance agreement for one of our
named executive officers also provides severance benefits in designated non-change of control scenarios because
of his position at the time of entering into the agreement and the then-current form of agreement for other
similarly situated executives. We have similar change of control severance agreements with Messrs. Blythe
(entered in 2004), Shepard (entered in 2007) and Skidmore (entered in 2000). We also have a severance
agreement with Mr. Gorman (entered in 2000) that provides similar severance benefits in certain non-change of
control and change of control scenarios. In August 2007, we entered into a transition and consulting agreement
with Mr. Hochhauser
replaced
Mr. Hochhauser’s December 2000 severance agreement, which previously provided severance benefits in certain
non-change of control and change of control scenarios. The terms of Mr. Hochhauser’s transition and consulting
agreement took into consideration recommendations of our Chairman and discussions with Mr. Hochhauser
regarding the timing and nature of consulting services that were anticipated to be provided by Mr. Hochhauser,
and the amount of Mr. Hochhauser’s salary as our CEO. The payout levels and triggering events in the severance
agreements for Messrs. Blythe, Shepard, Skidmore and Gorman were initially structured a number of years ago
based on the Committee’s review of publicly available market data regarding severance agreements. In 2007, the
Board approved an amendment to the equity acceleration provisions of the executive severance agreements to
clarify that acceleration would apply to all
types of equity-based awards rather than only options. This
clarification amendment was intended to reflect that, since 2006, the company has granted its executives
restricted stock and performance restricted stock units, in addition to stock options. Additional information
regarding these agreements is set forth below under, “Potential Payments Upon Termination or Change of
Control.”
in February 2008. That agreement
In establishing the elements and amounts of each executive’s 2007 compensation, tally sheets were 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 potential change of control and other termination payments to each
executive. The Committee considered these potential future payments in determining whether the overall
executive compensation program remains competitive to attract and retain key executives, although the
Committee did not use pre-established formulas or rigidly set the other compensation amounts or elements of our
executives based solely on potential future change of control or other termination payments.
Discretionary Bonuses and Equity Awards
We pay sign-on and other bonuses and grant new-hire equity awards when necessary or appropriate to
attract top executive talent from other companies. Executives we recruit often 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. In 2007, in connection with our hiring of Mr. Shepard,
he received the following initial equity awards in December 2007: (1) options to purchase 50,000 shares of
Harte-Hanks common stock, and (2) 7,500 shares of restricted common stock. Mr. Shepard also received on his
start date a one-time payment of $150,000 in cash and a grant of restricted stock equal to $75,000 based on the
closing market price of Harte-Hanks common stock on his start date.
We also grant discretionary equity awards from time to time when appropriate to retain key executives or
recognize expanded roles and responsibilities. Discretionary equity awards have typically taken the form of stock
options. As noted above, Messrs. Blythe and Skidmore each received option awards in July 2007 in connection
with their promotions and expanded responsibilities.
32
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 2007 compensation for our named executive officers, the Committee viewed each named executive
those of the other named executive officers. The
officer’s compensation amounts and elements against
Committee did not establish any rigid 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, as discussed above. We believe the total 2007
compensation we paid to each of our named executive officers was appropriate in relation to the other named
executive officers. Mr. Blythe’s 2007 salary was higher than the salaries for Messrs. Gorman, Skidmore and
Shepard because of Mr. Blythe’s August 2007 promotion to President and his anticipated transition to CEO in
early 2008. Mr. Skidmore’s 2007 salary was higher than the salaries for Messrs. Gorman and Shepard due to
Mr. Skidmore’s August 2007 promotion and broad responsibilities for our global Direct Marketing business,
including Direct Marketing business development efforts and ongoing efforts to streamline and restructure our
numerous Direct Marketing units from an operations and management standpoint. We believe the 2007 total
compensation we paid to Messrs. Blythe, Gorman, Skidmore and Shepard in relation to the compensation we
paid Mr. Hochhauser was also reasonable and appropriate given Mr. Hochhauser’s experience and tenure in his
position, each executive’s relative responsibilities, higher benchmark data for chief executive officers relative to
other members of senior management and the fact that Mr. Hochhauser was based in the high-cost jurisdiction of
New York, New York.
Stock Ownership Guidelines
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, in 2005, the Committee recommended, and the Board approved, the adoption of
stock ownership guidelines that require all officers to acquire and hold significant levels of our common stock.
An individual will be allowed up to the later of (a) seven years from commencement of employment or
promotion or (b) five years from adoption of the guidelines, to reach the minimum required level of common
stock ownership. In the event that an officer moves to a level with a different minimum equity ownership level,
the officer will have 24 months to achieve the higher level of ownership (but in no event less time than would be
provided for in the immediately preceding sentence). The requirements are as follows:
Management Level
Chief Executive Officer . . . . . . . . . . . . . . . . . . . . .
President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chief Operating Officer . . . . . . . . . . . . . . . . . . . . .
Executive Vice President . . . . . . . . . . . . . . . . . . . .
Senior Vice President . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vice President
Multiple of Base Annual Salary
Four Times
Three and One-Half Times
Three and One-Third Times
Two and Two-Thirds Times
Two Times
One Times
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, the following are deemed to be owned by an executive officer: (1) restricted stock that is
still subject to a restricted period, and (2) common stock owned by the officer or any member of the officer’s
immediate family. Neither options nor performance restricted stock units are included in the compliance
calculation. If an officer has not previously met the minimum equity ownership level and exercises stock options
or restricted stock awarded to such officer vests, then the officer must retain fifty percent (50%) of the “net
33
shares” related to the exercise or vesting. “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.
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. Because the initial compliance period has not yet run, no officer has
failed to comply with these guidelines.
Tax Deductibility of Executive Compensation
Section 162(m) of the Code prevents us from taking a tax deduction for non-performance-based
compensation in excess of $1 million in any fiscal year paid to certain senior executive officers. In designing our
executive compensation program, we consider the effect of Section 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 objectives. The Committee does have discretion to design and
use compensation elements that are not deductible under Section 162(m) if the Committee believes that paying
non-deductible compensation is appropriate to achieve our executive compensation objectives.
In 2007 and 2006, $0.6 million and $3.5 million respectively of compensation was paid that was not
Section 162(m) qualified. These amounts relate to compensation from the exercise of stock options that were
granted in the 1996 – 1998 time period. Certain of these option grants were not Section 162(m) qualified because
the plan under which these grants occurred did not have the requisite stockholder approval for Section 162(m)
purposes. Had such compensation been Section 162(m) qualified, we would have been able to deduct these
amounts from our 2007 and 2006 income for purposes of calculating the amount of federal taxes due.
Review of and Conclusion Regarding All Components of Executive Compensation
The Compensation Committee has reviewed all components of the named executive officers’ 2007
compensation, including salary, bonus, equity and long-term incentive compensation, accumulated realized and
unrealized stock option gains, the dollar value to the executive and the cost to the company of all perquisites and
other personal benefits and any lump-sum payments that may be payable under their respective severance
agreements due to termination of their employment or a change-in-control of the company. 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 key executive
talent. The Committee also finds the named executive officers’ total compensation to be fair, reasonable 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.
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 proxy
statement. Based on such review and discussions, the Compensation Committee recommended to the Board that
the Compensation Discussion and Analysis be included in this proxy statement.
Compensation Committee
Judy C. Odom, Chair
William F. Farley
William K. Gayden
34
Equity Compensation Plan Information at Year-End 2007
The following table provides information as of the end of 2007 regarding total shares subject to outstanding
stock options and rights and total additional shares available for issuance under our 2005 Plan and our 1994
Employee Stock Purchase Plan:
Plan Category
Equity compensation plans
approved by security
holders . . . . . . . . . . . . . . . . .
Equity compensation plans not
approved by security
holders . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . .
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average exercise
price of outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
6,872,094 (outstanding
options and performance
stock units)
$20.71 (outstanding
options) (1)
4,919,810 (2)
—
—
6,872,094 (outstanding
options and performance
stock units)
$20.71 (outstanding
options) (1)
—
4,919,810 (2)
(1) The weighted-average exercise price does not take into account any shares issuable upon vesting of
outstanding restricted common stock or performance restricted stock units, which have no exercise price.
(2) Shares available for issuance under the 2005 Plan may be issued pursuant to stock options, restricted
common stock, performance restricted stock units, common stock, stock appreciation rights or other awards
that may be established pursuant to the 2005 Plan. Shares available for issuance under our Employee Stock
Purchase Plan are shares of common stock.
Important Note Regarding Compensation Tables
The following compensation tables in this proxy statement have been prepared pursuant to SEC rules.
Although some amounts (e.g., 2007 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 2007 and 2006 by our named
executive officers: (1) Richard Hochhauser—our CEO during 2007, who retired as CEO in February 2008,
(2) Dean Blythe—our President as of the end of 2007 and current President and CEO, and one of the next three
most highly compensated executive officers for 2007 other than our CEO and Chief Financial Officer, (3) Pete
Gorman—our Executive Vice President and President, Shoppers as of the end of 2007, and one of the next three
most highly compensated executive officers for 2007 other than our CEO and Chief Financial Officer, (4) Doug
Shepard—our Executive Vice President and Chief Financial Officer as of the end of 2007, and (5) Gary
Skidmore—our Executive Vice President and President, Direct Marketing as of the end of 2007 and one of the
next three most highly compensated executive officers for 2007 other than our CEO and Chief Financial Officer.
35
Name and Principal
Position (a)
Year
(b)
Salary
($)
(c )
Bonus
($)
(d)
Stock
Awards
($) (1) (e)
Option
Awards
($) (1) (f)
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
($) (3)
(h)
Non-Equity
Incentive Plan
Compensation
($) (2)
(g)
All Other
Compensation ($)
(4) (i)
Total
($)
(j)
Richard Hochhauser . . . . 2007 $820,000
2006 $820,000
Former Chief
Executive Officer
Dean Blythe . . . . . . . . . . 2007 $471,667
2006 $355,000
President and Chief
Executive Officer
Pete Gorman . . . . . . . . . . 2007 $384,908
2006 $394,000
Executive Vice
President and
President, Shoppers
$ — $ 21,236
$ — $147,951
$644,626
$979,363
$ —
$143,500
$590,847
$649,756
$55,618
$51,435
$2,132,327
$2,792,005
$ — $ 42,510
$ — $ 44,247
$358,370
$322,788
$ —
$ 42,245
$ 54,706
$ 28,221
$24,770
$23,238
$ 952,023
$ 815,739
$ — $ 35,478
$288,350
$ — $ 52,896 (5) $376,104
$ —
$ 17,730
$175,189
$135,432
$30,430
$23,419
$ 914,355
$ 999,581
Doug Shepard . . . . . . . . . 2007 $
1,346 (6)$150,000 (7)$ —
2006 $ — $ — $ —
$ — $ —
$ — $ —
$ —
$ —
$ —
$ —
$ 151,346
—
$
Executive Vice
President and Chief
Financial Officer
Gary Skidmore . . . . . . . . 2007 $426,962
2006 $340,000
Executive Vice
President and
President, Direct
Marketing
$ — $ 46,256
$262,475
$ — $ 32,928 (5) $287,383
$ 28,350
$ 32,513
$ 93,701
$ 38,639
$23,832
$22,571
$ 881,576
$ 754,034
(1) The amounts in columns (e) and (f) reflect the dollar amount recognized for financial statement reporting purposes for the fiscal years
ended December 31, 2007 and December 31, 2006, in accordance with SFAS 123R. As of December 31, 2007, none of the performance
goals associated with outstanding performance restricted stock units were expected to be achieved. As a result, no compensation expense
related to performance restricted stock unit awards has been recorded since June 30, 2007 and we reversed previously recorded stock-
based compensation expense related to performance restricted stock units in the third quarter of 2007. Assumptions used in the
calculation of these amounts are included in note I of our audited financial statements for the fiscal year ended December 31, 2007
included in our Annual Report on Form 10-K filed with the SEC (the “Form 10-K”).
(2) The amounts shown in column (g) are attributable to annual cash bonuses earned in fiscal year 2006 and 2007, but paid in 2007 and
2008. These are discussed in further detail under the heading “Annual Incentive Compensation” included above in the CD&A section of
this proxy statement.
(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 Defined Benefit Plan and Restoration Pension Plan, determined using interest rate and mortality rate assumptions consistent
with those used in our audited financial statements and described in note F of the Form 10-K. There can be no assurance that the amounts
shown will ever be realized by the named executive officers.
(4) The amounts in column (i) are detailed by type and more fully described in the All Other Compensation table included below.
(5)
Included in these amounts are expenses related to restricted stock awards earned in fiscal year 2005, but granted in 2006. Mr. Gorman
and Mr. Skidmore each elected to receive a portion of their bonus (earned in 2005) in the form of restricted stock. As a result of such
election, each such executive received 125% of the value of the foregone cash portion of the bonus in the form of restricted stock. These
shares will vest 100% on the third anniversary of their date of grant. The fair value of each restricted share was estimated as the closing
market price of our common stock on the date of grant. The portion of the restricted stock award related to the foregone bonus is not
included in the “Stock Awards” amounts presented above, as the related expense was recognized in 2005 and therefore not subject to
SFAS 123R under the modified prospective transition method we adopted on January 1, 2006. For the shares that represented the
additional 25% of restricted shares granted, the expense is being recognized in accordance with SFAS 123R and is therefore included in
the “Stock Awards” amounts presented above.
(6) Mr. Shepard joined Harte-Hanks in December 2007.
(7) Represents a one-time payment of $150,000 in cash to Mr. Shepard on his start date in December 2007.
36
All Other Compensation
Name
Richard Hochhauser . . . . . . . . .
Dean Blythe . . . . . . . . . . . . . . .
Pete Gorman . . . . . . . . . . . . . . .
Doug Shepard . . . . . . . . . . . . . .
Gary Skidmore . . . . . . . . . . . . .
Year
2007
2006
2007
2006
2007
2006
2007
2006
2007
2006
Insurance
Premiums (1)
Auto
Allowance
Company Contrib.
to 401(k) Plans (2)
Dividends on
Restricted Stock (3)
$25,342
$24,167
$ 1,970
$ 1,970
$ 7,299
$ 1,496
$ —
$ —
$
645
$ 1,083
$15,900
$15,900
$11,700
$11,700
$11,700
$11,700
$ —
$ —
$11,700
$11,700
$9,000
$8,800
$9,000
$8,800
$9,000
$8,800
$ —
$ —
$9,000
$8,800
$5,376
$2,568
$2,100
$ 768
$2,431
$1,423
$ —
$ —
$2,487
$ 988
Total
$55,618
$51,435
$24,770
$23,238
$30,430
$23,419
$ —
$ —
$23,832
$22,571
(1) This column reports premiums paid by us in 2006 and 2007 for life insurance policies insuring the lives of
the named executive officers.
(2) This column reports company matching contributions we made on behalf of each of the named executive
officers to each of the named executive officer’s 401(k) savings accounts.
(3) This column reports the amount of dividends we paid during 2006 and 2007 on shares of restricted stock
held by each of the named executive officers.
Grants of Plan Based Awards
The following table sets forth information regarding grants of equity-based awards during 2007 to our
named executive officers. All of the equity awards described below were granted pursuant to our 2005 Plan.
Vesting of equity awards is accelerated upon the occurrence of certain events. See “Potential Payments Upon
Termination or Change of Control” below.
Stock Options — All options in 2007 were granted at exercise prices equal to the closing market price per
share of our common stock on the grant date. Options vest in equal 25% increments on each of the second, third,
fourth, and fifth anniversaries of their grant date and expire on the tenth anniversary of their grant date.
Restricted Common Stock — Restricted stock awards in 2007 were granted with no exercise price and vest
100% on the third anniversary of their date of grant, with the exception of the 4,335 restricted shares granted to
Mr. Shepard on his start date in December 2007, which vest 100% on the first anniversary of their grant date.
Restricted stock awards receive dividends during the vesting period, which have been reflected in the All Other
Compensation table above.
Performance Restricted Stock Units — Performance restricted stock units in 2007 were also granted with no
exercise price; however the number of shares ultimately awarded under these stock units is dependent on certain
performance conditions. Each unit represents the right potentially to receive one share of our common stock for
each vested restricted stock unit. The amount of restricted stock units that vest, if any, will be determined on the
third anniversary of the date of grant based upon our average earnings per share growth rates for the years 2007-
2009. The stock units do not receive dividends during the vesting period.
37
Name
(a)
Estimated Future Payouts
Under Equity Incentive
Plan Awards (1) (2)
Threshold (#)
(f)
Target (#)
(g)
Maximum (#)
(h)
Grant
Date
(b)
Richard Hochhauser
Restricted Stock . . . . . . . . .
Performance Stock Units . .
2/5/2007
2/5/2007
Dean Blythe
Stock Options . . . . . . . . . . .
Stock Options . . . . . . . . . . .
Restricted Stock . . . . . . . . .
Performance Stock Units . .
2/5/2007
7/31/2007
2/5/2007
2/5/2007
Pete Gorman
Stock Options . . . . . . . . . . .
Restricted Stock . . . . . . . . .
Restricted Stock . . . . . . . . .
Performance Stock Units . .
2/5/2007
2/5/2007
2/5/2007
2/5/2007
Doug Shepard
Stock Options . . . . . . . . . . . 12/31/2007
Restricted Stock . . . . . . . . . 12/31/2007
Restricted Stock . . . . . . . . . 12/31/2007
Gary Skidmore
Stock Options . . . . . . . . . . .
Stock Options . . . . . . . . . . .
Restricted Stock . . . . . . . . .
Restricted Stock . . . . . . . . .
Performance Stock Units . .
2/5/2007
7/31/2007
2/5/2007
2/5/2007
2/5/2007
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,375
—
—
—
3,225
—
—
—
1,875
—
—
—
—
—
—
—
3,225
—
10,625
—
—
—
5,375
—
—
—
3,125
—
—
—
—
—
—
—
5,375
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (#)
(i)
All Other
Option Awards:
Number of
Securities
Underlying
Options (#)
(j)
Exercise
or Base
Price of
Option
Awards
($/Sh) (3)
(k)
Grant
Date
Fair
Value of
Stock
and
Option
Awards
($)(4)
(l)
8,500
8,500
—
—
4,300
4,300
—
2,500
255(5)
2,500
—
4,335(6)
7,500
—
—
4,300
468(5)
4,300
—
—
30,000
100,000
—
—
17,500
—
—
—
50,000
—
—
30,000
75,000
—
—
—
— $221,595
— $214,200
$26.07
$23.55
$211,536
$816,380
— $112,101
— $108,360
$26.07
$123,396
— $ 65,175
6,648
— $
— $ 63,000
$17.30
$266,660
— $ 74,996
— $129,750
$26.07
$23.55
$211,536
$612,285
— $112,101
— $ 12,201
— $108,360
(1) Other than the amounts reported in the Summary Compensation table above, there were no non-equity incentive plan awards granted or
outstanding in 2007.
(2) The amounts shown in column (f) reflect that 0% is the minimum payout level of the performance restricted stock units which are
payable in shares of common stock. The target amount shown in column (g) is 75% of the number of units granted, which is a
hypothetical payout amount. Based on a three-year historical average earnings per share growth rate as of December 31, 2007, the payout
level would be zero shares of common stock. The amount shown in column (h) is 125% of the number of units granted, which is the
maximum payout level. As of December 31, 2007, none of the performance goals associated with outstanding performance restricted
stock units were expected to be achieved.
(3) 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.
(4) The amounts shown in column (l) represent the full grant date fair value of the options and awards calculated in accordance with SFAS
123R. For a discussion of valuation assumptions, see note I of our audited financial statements for the fiscal year ended December 31,
2007 included in our Form 10-K.
(5) Mr. Gorman and Mr. Skidmore each elected to receive a portion of their bonus (earned in 2006) in the form of restricted stock. As a
result of such election, each such executive received 125% of the value of the foregone cash portion of the bonus in the form of restricted
stock. The amount shown in column (i) reflects the number of shares related to the foregone cash bonus amount determined using the fair
market value of our common stock as of the grant date.
(6) Represents a one-time grant to Mr. Shepard on his start date of restricted stock equal to $75,000, based on the closing price of our stock
on the date of grant.
38
Outstanding Equity Awards at Year End
The following table sets forth information regarding outstanding equity awards held at the end of 2007 by
our named executive officers. Some of these equity awards were issued pursuant to the 2005 Plan and older
option awards were issued pursuant to the 1991 Stock Option Plan (1991 Plan).
2005 Plan — In May 2005, we adopted the 2005 Plan, a stockholder approved plan, pursuant to which we
may issue to directors, officers and key employees various equity securities. Under the 2005 Plan, we have
awarded stock options, restricted stock and performance-based restricted stock units. Please refer to the Grants of
Plan Based Awards table above for a description of these types of equity awards under the 2005 Plan.
1991 Plan — The 2005 Plan replaced the 1991 Plan, a stockholder approved plan, pursuant to which we
issued stock options to officers and key employees. No additional options will be granted under the 1991 Plan.
Under the 1991 Plan, options were granted at exercise prices equal to the market price of the common stock on
the grant date (1991 Plan market price options) and at exercise prices below the market price of the common
stock (1991 Plan performance options). 1991 Plan market price options granted prior to January 1998 became
exercisable after the fifth anniversary of their date of grant and expire on the tenth anniversary of their date of
grant. Beginning January 1998, 1991 Plan market price options became exercisable in 25% increments on the
second, third, fourth and fifth anniversaries of their date of grant and expire on the tenth anniversary of their date
of grant. No 1991 Plan performance options have been granted since January 1999. The 1991 Plan performance
options became exercisable in whole or in part after three years, and the extent to which they became exercisable
at that time depended upon the extent to which we achieved certain goals established at the time the options were
granted. In December 2005, the remaining unvested 1991 Plan performance options were amended to comply
with Section 409A of the Code. Under this option amendment, these unvested 1991 Plan performance options
will only be exercisable on the business day following the vesting date of each option.
Option Awards
Stock Awards
Name (a)
Richard
Hochhauser
. . .
Dean Blythe . . . . .
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
(d)
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(b)
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
(c)
3,000
75,000
112,500
150,000
225,000
100,000
62,500
37,500
—
75,000
20,000
37,500
17,500
12,500
—
—
—
—
4,500(6)
—
—
—
—
—
—
—
—
—
—
62,500(9)
—
112,500(10) —
75,000(11) —
—
—
12,500(12) —
17,500(9)
—
37,500(10) —
22,500(11) —
30,000(14) —
100,000(15) —
—
—
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
(g)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($) (1)
(h)
10,700(3)
8,500(4)
—
—
—
—
—
—
—
3,200(3)
4,300(4)
—
—
—
—
—
—
$185,110
$147,050
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ 55,360
$ 74,390
$ —
$ —
$ —
$ —
$ —
$ —
Option
Exercise
Price ($)
(e)
Option
Expiration
Date
(f)
$ 1.33 1/12/2009
$16.33 1/12/2009
1/6/2010
$13.38
1/9/2011
$14.67
1/8/2012
$18.22
9/3/2012
$19.85
$22.03
2/2/2014
$25.63 1/27/2015
$25.80 1/25/2016
$15.50 11/1/2011
$19.85
9/3/2012
$19.19 8/28/2013
$22.03
2/2/2014
$25.63 1/27/2015
$25.80 1/25/2016
$26.07
2/5/2017
$23.55 7/31/2017
39
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
($) (1)(2)
(j)
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares,
Units or Other
Rights
That Have Not
Vested (#)(2)
(i)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
Name (a)
Pete Gorman . . . . .
Doug Shepard . . . .
Gary Skidmore . . .
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
(d)
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(b)
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
(c)
—
22,500
45,000
75,000
30,000
25,000
12,500
6,250
—
—
—
—
—
12,000
4,500
58,500
22,500
75,000
75,000
40,000
10,000
10,000
7,500
—
—
—
1,800(6)
—
—
—
—
25,000(9)
37,500(10)
18,750(8)
25,000(11)
17,500(14)
50,000(7)
—
1,800(6)
—
—
—
—
—
—
—
10,000(9)
10,000(13)
22,500(10)
15,000(11)
30,000(14)
75,000(15)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Option
Exercise
Price ($)
(e)
Option
Expiration
Date
(f)
1/12/2009
$ 1.33
1/12/2009
$16.33
1/9/2011
$14.67
1/8/2012
$18.22
9/3/2012
$19.85
2/2/2014
$22.03
1/27/2015
$25.63
9/21/2015
$26.31
1/25/2016
$25.80
$26.07
2/5/2017
$17.30 12/31/2017
$ —
$ 1.33
$16.33
$15.25
$14.50
$15.75
$16.75
$18.22
$19.85
$22.03
$24.42
$25.63
$25.80
$26.07
$23.55
1/12/2009
1/12/2009
5/21/2009
8/30/2009
5/22/2010
8/31/2010
1/8/2012
9/3/2012
2/2/2014
4/23/2014
1/27/2015
1/25/2016
2/5/2017
7/31/2017
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
($) (1)(2)
(j)
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares,
Units or Other
Rights
That Have Not
Vested (#)(2)
(i)
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
(g)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($) (1)
(h)
5,928(3)
2,755(4)
—
—
—
—
—
—
—
—
4,335(5)
7,500(5)
4,115(3)
4,768(4)
—
—
—
—
—
—
—
—
—
—
—
—
$102,554
$ 47,662
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ 74,996
$129,750
$ 71,190
$ 82,486
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
(1) Based upon the closing market price of our common stock as of December 31, 2007 ($17.30), as reported on the NYSE.
(2)
In 2007, as in 2006, our Compensation Committee awarded our executives performance-based restricted stock units. As of December 31,
2007, none of the performance goals associated with the 2006 or 2007 performance stock units are expected to be achieved, which would
result in no units vesting for any of our executives. As a result, no compensation expense related to performance stock awards has been
recorded since June 30, 2007 and we reversed $0.5 million of previously recorded stock-based compensation related to performance
stock units in the third quarter of 2007, see note I of our audited financial statements for the fiscal year ended December 31, 2007
included in our Form 10-K. For a description of these types of equity awards, please refer to the Grants of Plan Based Awards table
above (with respect to the 2007 grants) and the Grants of Plan Based Awards table in last year’s proxy statement (with respect to the
2006 grants).
(3) Restricted stock vests on January 25, 2009.
(4) Restricted stock vests on February 5, 2010.
(5) 4,335 shares of restricted stock vest on December 31, 2008. 7,500 shares of restricted stock vest on December 31, 2010.
(6) Options vested on January 12, 2008.
(7) These options vest annually in equal installments of 12,500 between December 31, 2009 and December 31, 2012.
(8) These options vest annually in equal installments of 6,250 between September 21, 2008 and September 21, 2010.
(9) These options vest annually in equal installments (31,250 for Hochhauser, 8,750 for Blythe, 12,500 for Gorman and 5,000 for Skidmore)
between February 2, 2008 and February 2, 2009.
40
(10) These options vest annually in equal installments (37,500 for Hochhauser, 12,500 for Blythe, 12,500 for Gorman and 7,500 for
Skidmore) between January 27, 2008 and January 27, 2010.
(11) These options vest annually in equal installments (18,750 for Hochhauser, 5,625 for Blythe, 6,250 for Gorman and 3,750 for Skidmore)
between January 25, 2008 and January 25, 2011.
(12) These options vest on August 28, 2008.
(13) These options vest annually in equal installments of 5,000 between April 23, 2008 and April 23, 2009.
(14) These options vest annually in equal installments (7,500 for Blythe, 4,375 for Gorman and 7,500 for Skidmore) between February 5,
2009 and February 5, 2012.
(15) These options vest annually in equal installments (25,000 for Blythe and 18,750 for Skidmore) between July 31, 2009 and July 31, 2012.
Option Exercises and Stock Vested
The following table sets forth information for our named executive officers regarding option exercises and
equity vestings during 2007.
Name (a)
Option Awards
Stock Awards (1)
Number of Shares
Acquired on
Exercise (#)
(b)
Value Realized on
Exercise ($)
(c )
Number of Shares
Acquired on
Vesting (#)
(d)
Value Realized on
Vesting ($)
(e)
Richard Hochhauser . . . . . . . . . . . . . . . . .
Dean Blythe . . . . . . . . . . . . . . . . . . . . . . .
Pete Gorman . . . . . . . . . . . . . . . . . . . . . . .
Doug Shepard . . . . . . . . . . . . . . . . . . . . . .
Gary Skidmore . . . . . . . . . . . . . . . . . . . . .
135,000
—
33,000
—
24,000
$776,820
—
$514,466
—
$381,200
—
—
—
—
—
—
—
—
—
—
(1) No stock awards vested during 2007.
Pension Benefits
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
the following plans:
Defined Benefit Plan
The purpose of this plan is to provide participants with benefits when they separate from employment
through termination, retirement, death or disability. The plan was frozen to participation and benefit accruals as
of December 31, 1998. All participants are 100% vested as of December 31, 1998. Death benefits are provided to
beneficiaries on behalf of participants. The 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 Defined Benefit Plan, the following definitions apply:
“Average Monthly Compensation” means the monthly average of the five consecutive years’ compensation
out of the last ten complete years on December 31, 1998 that gives the highest average; such compensation
includes W-2 compensation plus any compensation deferred under a Section 125 or Section 401(k) plan.
Compensation is limited by the pay limit in Section 401(a)(17) of the Code.
“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 the year of termination and prior to the end of the
35-year period, the MTW from the years of termination is used.
41
The monthly amount (Monthly Accrued Benefit) shall be equal to the sum of A and B multiplied by C
where A, B and C are defined below:
A = 1.0 percent of the Average Monthly Compensation at December 31, 1998 multiplied by the projected
number of years of credited service at the Normal Retirement Date.
B = 0.65 percent of the Average Monthly Compensation at December 31, 1998 in excess of 1/12 of Covered
Compensation at December 31, 1998 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 December 31, 1998 to projected credited service at the Normal Retirement
Date.
Participants are eligible for early retirement upon attainment of age 55 and five years of vesting service. The
monthly amount payable upon early retirement is equal to the monthly accrued benefit at December 31, 1998
multiplied by certain plan and Internal Revenue Service-prescribed early retirement factors.
Restoration Pension Plan
The purpose of this unfunded, non-qualified pension plan is to provide employees with the benefits they
would receive if the Defined Benefit Plan were not subject to the benefit and compensation limits imposed by
Section 415 and Section 401(a)(17) of the Code. Selected employees designated as participants by the Board of
Directors are eligible to participate under the plan. Participants currently include only corporate officers. An
officer of Harte-Hanks with the title of a Senior Vice President or a higher position is 100% vested on January 1,
1996. An officer with a title below Senior Vice President will be vested at the earlier of age 55 or 20 years of
credited service. The 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:
“Average Monthly Compensation” means the monthly average of the five consecutive years’ compensation
out of the last ten complete years that gives the highest average. For purposes of determining the gross benefit
under the Restoration Pension Plan, compensation includes W-2 compensation 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” has the same meaning as previously defined under the Defined Benefit Plan.
The monthly amount is the lesser of the sum of A and B multiplied by C and D as defined below over the
Monthly Accrued Benefit under the Defined Benefit Plan (as described above):
A = 1.0 percent of the Average Monthly Compensation at the date of termination multiplied by the projected
number of years of credited service at the Normal Retirement Date.
B = 0.65 percent of the Average Monthly Compensation at the date of termination in excess of 1/12 of
Covered Compensation at the date of termination 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 the date of termination to projected credited service at the Normal
Retirement Date.
D = 50 percent of Average Monthly Compensation at the date of termination.
42
Participants are eligible for early retirement upon attainment of age 55 and becoming 100% vested. 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 multiplied by certain plan and Internal Revenue Service-prescribed
early retirement factors.
We do not have a policy for granting extra years of credited service.
The amounts reported in the table below equal the present value of the accumulated benefit at December 31,
2007 for our named executive officers under each plan based upon the assumptions described in note 1.
Name
(a)
Plan Name
(b)
Number of Years of
Credited Service (#)
(c )
Present Value of
Accumulated
Benefit ($) (1)
(d)
Payments During Last
Fiscal Year ($)
(e)
Richard Hochhauser (2)
. . . Defined Benefit Plan
Restoration Benefit Plan
Dean Blythe . . . . . . . . . . . . . Defined Benefit Plan
Restoration Benefit Plan
Pete Gorman (3)
. . . . . . . . . Defined Benefit Plan
Restoration Benefit Plan
Doug Shepard . . . . . . . . . . . Defined Benefit Plan
Restoration Benefit Plan
Gary Skidmore . . . . . . . . . . Defined Benefit Plan
Restoration Benefit Plan
32.250
32.250
6.167
6.167
26.500
26.500
—
—
13.250
13.250
—
$ 552,961
$4,206,280
$
$ 154,361
$ 285,661
$1,182,879
$
$
$
$ 413,195
—
—
—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
(1) The accumulated benefit is based on service and earnings, as described above, considered by the plans for
the period through December 31, 2007. The present value has been calculated using a discount rate of
6.25% 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 1994 Group Annuity Mortality Tables for males
and females.
(2) Participant is eligible for early retirement. The single sum values of the early retirement benefits from the
Defined Benefit Plan and the Restoration Pension Plan are $573,943 and $4,451,059, respectively.
(3) Participant is eligible for early retirement. The single sum values of the early retirement benefits from the
Defined Benefit Plan and the Restoration Pension Plan are $319,930 and $1,321,266, respectively.
Nonqualified Deferred Compensation
None of our named executive officers receive nonqualified deferred compensation as defined under SEC
rules.
Potential Payments Upon Termination or Change of Control
Payments Pursuant to Severance Agreements
The following descriptions of our executive severance agreements do not include all terms contained in the
actual agreements. Please refer to the full text of the agreements for the complete terms and provisions, copies of
which are filed as exhibits to our public filings with the SEC and which are incorporated herein by reference.
Hochhauser
On July 31, 2007, we announced the retirement in early 2008 of our former CEO, Richard Hochhauser, after
which Mr. Hochhauser has agreed to serve as a consultant for a three-year period. On August 29, 2007, Harte-
Hanks and Mr. Hochhauser entered into a transition and consulting agreement, which superseded
Mr. Hochhauser’s amended and restated severance agreement dated December 15, 2000.
43
Pursuant to the transition and consulting agreement, Mr. Hochhauser remained employed as the CEO
through February 4, 2008 and will not stand for re-election to our Board of Directors at the 2008 annual meeting.
During the employment term under the transition and consulting agreement, subject to the terms and
conditions of the agreement, Mr. Hochhauser was entitled to the following compensation and benefits:
(1) payment of his then-current base salary and monthly automobile allowance, (2) participation in Harte-Hanks’
2007 annual incentive compensation plan under its existing terms, and (3) eligibility to participate in Harte-
Hanks’ health, life, and disability insurance plans and Harte-Hanks’ retirement plans, in accordance with the
terms of the plans.
Since February 5, 2008, Mr. Hochhauser has served as a consultant to Harte-Hanks. During the consulting
period, subject to the terms and conditions of the agreement, Mr. Hochhauser is entitled to the following
compensation and benefits: (1) a consulting fee for the period from February 5, 2008 through February 4, 2009 of
$162,500 per quarter; for the period from February 5, 2009 through February 4, 2010 of $112,500 per quarter;
and for the period from February 5, 2010 through February 4, 2011 of $50,000 per quarter, and (2) a lump sum
cash payment in the amount necessary (taking into account applicable taxes) for Mr. Hochhauser to make
COBRA continuation coverage payments under Harte-Hanks’ group medical and dental plans in which he (and
his spouse or other eligible dependents) are then enrolled for a period of 18 months following the end of the
month in which the employment term ends. The consulting period will end on February 4, 2011, unless
terminated sooner in accordance with the agreement.
Mr. Hochhauser remains bound by his current confidentiality/nondisclosure agreement and non-compete
agreement, except that any references in those agreements to the termination or end of his employment are
deemed to refer instead to the termination or end of Mr. Hochhauser’s consulting period.
The transition and consulting agreement also contains provisions that address (1) any termination of the
agreement based on death or disability, termination by Harte-Hanks for cause or termination by Mr. Hochhauser,
(2) a release of claims against Harte-Hanks and its affiliated parties by Mr. Hochhauser, and (3) other terms and
provisions described in the actual agreement. Mr. Hochhauser is also entitled to indemnification for his acts or
failures to act in his capacity as a consultant during the consulting period for services requested from time to time
by Harte-Hanks pursuant to his transition and consulting agreement, to the same extent provided by our
certificate of incorporation with respect to our officers and directors.
Gorman
In December 2000, we entered into a severance agreement with Pete Gorman. If (i) Harte-Hanks terminates
Mr. Gorman’s employment without “justification,” (ii) Mr. Gorman terminates his employment for good reason
due to specified adverse actions taken by Harte-Hanks, (iii) Harte-Hanks terminates Mr. Gorman’s employment
after a change in control of Harte-Hanks other than for “cause,” death or disability, or (iv) Mr. Gorman
terminates his employment after a change in control of Harte-Hanks and after specified adverse actions are taken
by Harte-Hanks or he elects to terminate his employment for any reason during the thirty-day period following
the first anniversary of a change in control of Harte-Hanks, then in any of such events Mr. Gorman will be
entitled to:
•
•
•
•
severance compensation in a lump sum cash amount equal to 200% of the sum of (A) his annual base
salary in effect just prior to the change in control or termination date, whichever is larger, plus (B) the
average of the bonus or incentive compensation for the two fiscal years preceding the year in which the
change in control or the termination date occurred, whichever is larger,
a cash payment sufficient to cover health insurance premiums for a period of 18 months,
accelerated vesting of all unvested options, restricted stock and performance units previously granted to
Mr. Gorman (in the event of a change in control, Mr. Gorman’s equity awards vest upon the change in
control without regard to termination of his employment), and
a tax gross-up payment to Mr. Gorman, if applicable.
44
As used in the severance agreement, “cause” means that Mr. Gorman committed an intentional material act
of fraud or embezzlement, material damage to Harte-Hanks’ property or intentional wrongful disclosure of
Harte-Hanks’ material secret processes or confidential information. “Change in control” means: (i) Harte-Hanks
is merged, consolidated or reorganized or sells substantially all of its assets and after such transaction less than
60% of the combined voting power of the surviving corporation is received in exchange for voting securities of
Harte-Hanks, (ii) any person has become a beneficial owner of securities of Harte-Hanks, which when added to
any securities already owned by such person would represent in the aggregate 30% or more of the combined
voting power of the then outstanding securities of Harte-Hanks, or (iii) such other events that cause a change in
control of Harte-Hanks as determined by our Board of Directors. “Justification” means Mr. Gorman shall have
(i) committed an act of fraud, dishonesty, gross misconduct or other unethical practices, or (ii) materially failed
to perform his duties to the satisfaction of the CEO of the company, which failure has not been cured within 60
days after receipt of written notice from the CEO.
Other Named Executive Officers – Blythe, Shepard and Skidmore
We have also entered into severance agreements with each of our other named executive officers. We
entered into a change in control severance agreement with Mr. Blythe in March 2004, with Mr. Shepard in
December 2007 and with Mr. Skidmore in December 2000. Pursuant to each agreement, if, after a “change in
control” of Harte-Hanks, the executive (i) is terminated other than for “cause” (as defined in the agreement),
death or disability, (ii) elects to terminate his employment after specified adverse actions are taken by Harte-
Hanks or (iii) elects to terminate his employment for any reason during the thirty-day period following the first
anniversary of a change in control of Harte-Hanks, then the executive will be entitled to:
•
•
•
•
severance compensation in a lump sum cash amount equal to 200% of 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 average of the executive’s bonus or incentive compensation for the two fiscal years
preceding the year in which the change in control or the termination date occurred, whichever is larger,
a cash payment sufficient to cover health insurance premiums for a period of 18 months,
accelerated vesting of all unvested options, restricted stock and performance units previously granted to
the executive (the executive’s equity awards vest upon the change in control without regard to
termination of the executive’s employment), and
a tax gross-up payment to the executive, if applicable.
As used in these severance agreements, the terms “cause” and “change in control” have the same meanings
as used in Mr. Gorman’s severance agreement.
Payments Made Upon Retirement
For a description of the pension plans in which the named executive officers participate, see the Pension
Benefits table above. 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, 2007.
Payments Made Upon Death or Disability
For a discussion of the life insurance policies that provide coverage to the named executive officers, see 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, 2007.
45
Potential Termination and Change in Control Benefits Tables
The tables below under this heading illustrate the 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 termination was effective as of December 31,
2007, and therefore are estimates of the amounts that would have been paid to such executives upon their
termination. Actual amounts to be paid can only be determined at the time of such executive’s termination from
the company.
RICHARD HOCHHAUSER(1)
No Change in Control
Change in Control
Benefit
Voluntary
Termination
Early
Retirement
For Cause
Termination
Termination
Without
Cause or for
Good Reason
For Cause
Termination
Termination
Without
Cause or for
Good Reason Death
Disability
Cash Severance . . . . . . . . . . $
Unvested Equity . . . . . . . . .
Options . . . . . . . . . . . . . . $
Restricted Stock . . . . . . . $
Performance Stock
Units . . . . . . . . . . . . . . $
Bonus Stock Awards . . . $
— $
— $
— $
— $
— $
—
—
—
—
—
$
$
$
$
$
— $
— $
— $
— $
Retirement Benefits (2)
Health and Welfare
. . . $4,759,241 $5,025,002(5) $4,759,241(6) $4,759,241
— $
— $
—
—
—
$
$
$
— $
— $
— $
— $
— $
— $
—
—
—
— $
— $
— $
— $
—
—
— $
— $
$4,759,241(6) $4,759,241 $4,759,241 $4,759,241
— $
— $
—
—
$
$
Benefits . . . . . . . . . . . . . . $
Disability Income (3) . . . . . $
Life Insurance
— $
— $
Benefits (4) . . . . . . . . . . . $
Excise Tax Gross-up . . . . . . $
ESTIMATED TOTAL . . . $4,759,241
— $
— $
—
—
—
—
5,025,002
$
$
— $
— $
— $
— $
$
$
$4,759,241
— $
$
$4,759,241
— $
— $
$4,759,241
—
—
—
—
$
$
— $
— $
— $
—
— $ 207,105
— $4,050,000 $
— $
— $
$
$
$4,759,241 $8,809,241 $4,966,346
—
—
(1) On August 29, 2007, Harte-Hanks and Mr. Hochhauser entered into a transition and consulting agreement, which superseded
Mr. Hochhauser’s amended and restated severance agreement dated December 15, 2000. Please refer to the section above entitled,
“Payments Pursuant to Severance Agreements” for a description of the benefits provided to Mr. Hochhauser under his transition and
consulting agreement.
(2) Except as otherwise noted, reflects the estimated single sum present value of qualified and non-qualified retirement plans accumulated as
of December 31, 2007, which Mr. Hochhauser would be entitled to receive upon reaching age 65. Acceleration of vesting occurs in the
event of a change of control. However, since Mr. Hochhauser is 100% vested at the measurement date, no additional benefits will be paid
in the event of a change of control. As of December 31, 2007, Mr. Hochhauser had not attained our normal retirement age of 65.
(3) Reflects the aggregate estimated amount of all future payments to which Mr. Hochhauser would be entitled to receive under our
disability program. Mr. Hochhauser would be entitled to receive such benefits until age 65.
(4) Reflects (a) the aggregate amount of 10 annual payments of $90,000 each under Mr. Hochhauser’s life insurance benefits, payable over
the 10 year period following death, and (b) a lump sum of $3,150,000 payable to Mr. Hochhauser’s beneficiaries in the event of his
death.
(5) Reflects the estimated single sum present value of qualified and non-qualified retirement plans which Mr. Hochhauser would be entitled
to receive if the election was made to begin receiving early retirement benefits as of December 31, 2007.
(6)
In the event of a “for cause” termination related to dishonest conduct, the Compensation Committee may deny vested retirement benefits
to Mr. Hochhauser.
46
DEAN BLYTHE
No Change in Control
Change in Control
Benefit
Voluntary
Termination
Early
Retirement
For Cause
Termination
Termination
Without
Cause or for
Good Reason
Termination
Without
Cause or for
Good Reason Death Disability
For Cause
Termination
Cash Severance . . . . . . . . . . . . . .
Unvested Equity (1) . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . .
Restricted Stock . . . . . . . . . . .
Performance Stock Units . . . .
Bonus Stock Awards . . . . . . .
. . . . . . .
Retirement Benefits (2)
Health and Welfare
Benefits (3) . . . . . . . . . . . . . . .
Disability Income (4) . . . . . . . . .
Life Insurance Benefits (5) . . . . .
Excise Tax Gross-up . . . . . . . . . .
ESTIMATED TOTAL . . . . . . .
$ —
$ —
$ —
$ —
$ —
$154,361
$ —
$ —
$ —
$ —
$154,361
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$ —
$ —
$ —
$1,463,735 $ — $
—
$ —
$ —
$ —
$ —
$154,361(6) $154,361
$ —
$ —
$ —
$ —
$ —
$129,750
$129,750
$ —
$154,361(6) $ 154,361 $154,361 $ 154,361
— $ — $
$
$ 129,750 $ — $
$ 129,750 $ — $
— $ — $
$
—
—
—
—
$ —
$ —
$ —
$ —
$154,361
$ —
$ —
$ —
$ —
$154,361
$ —
$ —
$ —
$ —
$413,861
27,013 $ — $
—
$
— $ — $2,690,390
$
—
$
— $700,000 $
$1,494,194 $ — $
—
$3,398,803 $854,361 $2,844,751
(1) Values are calculated based on the closing price of our common stock of $17.30 on December 31, 2007.
(2) Reflects the estimated single sum present value of qualified and non-qualified retirement plans accumulated as of December 31, 2007
which Mr. Blythe would be entitled to receive upon reaching age 65. Acceleration of vesting occurs in the event of a change of control.
However, since Mr. Blythe is 100% vested at the measurement date, no additional benefits will be paid in the event of a change of
control. As of December 31, 2007, Mr. Blythe had not attained our normal retirement age of 65.
(3) Reflects the lump-sum payment to be paid by us to Mr. Blythe to permit him to pay 18 months worth of future premiums under our
health and welfare benefit plans.
(4) Reflects the aggregate estimated amount of all future payments to which Mr. Blythe would be entitled to receive under our disability
program. Mr. Blythe would be entitled to receive such benefits until age 65.
(5) Reflects the aggregate amount of 10 annual payments of $70,000 each under Mr. Blythe’s life insurance benefits, payable over the 10
year period following death.
(6)
In the event of a “for cause” termination related to dishonest conduct, the Compensation Committee may deny vested retirement benefits
to Mr. Blythe.
47
PETE GORMAN
No Change in Control
Change in Control
Benefit
Voluntary
Termination
Early
Retirement
For Cause
Termination
Termination
Without
Cause or for
Good Reason
For Cause
Termination
Termination
Without
Cause or for
Good Reason
Death
Disability
Cash Severance . . . . . . . . . . . . $
Unvested Equity (1)
— $
— $
— $ 929,983
$
— $ 929,983 $
— $
—
Options . . . . . . . . . . . . . . . . $
Restricted Stock . . . . . . . . . $
Performance Stock Units . . . $
Bonus Stock Awards (2) . . . $
— $
— $
— $
45,551 $
Retirement Benefits (3) . . . . . . $1,468,540 $1,641,196(7) $1,468,540(8)$1,468,540
Health and Welfare
28,740
— $
— $ 104,665
— $ 104,665
— $
— $
— $
— $
$
45,551
— $
28,740
$
$ 104,665
$ 104,665
—
—
—
45,551
$1,468,540(8)$1,468,540 $1,468,540 $1,468,540
28,740 $
$
$ 104,665 $
$ 104,665 $
45,551 $
— $
— $
— $
45,551 $
— $
Benefits (4) . . . . . . . . . . . . . $
Disability Income (5)
. . . . . . . $
Life Insurance Benefits (6) . . . $
Excise Tax Gross-up . . . . . . . . $
ESTIMATED TOTAL . . . . . $1,514,091 $1,686,747
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
18,667
$
— $
— $
— $
— $
— $
— $
— $
18,667 $
— $
— $ 700,000 $
— $
— $
— $
—
— $ 925,626
—
—
$1,468,540
$2,655,260
$1,706,610
$2,700,811 $2,214,091 $2,439,717
(1) Values are calculated based on the closing price of our common stock of $17.30 on December 31, 2007.
(2) The bonus stock awards vest upon termination of employment by death, disability, retirement or, after a Change in Control, termination
by the company without Cause, or at such other time as determined by the Board of Directors or Compensation Committee. “Change of
Control” and “Cause,” for purposes of the Unvested Bonus Stock Awards, are defined pursuant to the 2005 Plan. The amounts shown in
the Voluntary Termination column assume that the Board of Directors or Compensation Committee determined to accelerate vesting.
(3) Except as otherwise noted, reflects the estimated single sum present value of qualified and non-qualified retirement plans accumulated as
of December 31, 2007, which Mr. Gorman would be entitled to receive upon reaching age 65. Acceleration of vesting occurs in the event
of a change of control. However, since Mr. Gorman is 100% vested at the measurement date, no additional benefits will be paid in the
event of a change of control. As of December 31, 2007, Mr. Gorman had not attained our normal retirement age of 65.
(4) Reflects the estimated lump-sum payment to be paid by us to Mr. Gorman to permit him to pay 18 months worth of future premiums
under our health and welfare benefit plans.
(5) Reflects the aggregate estimated amount of all future payments to which Mr. Gorman would be entitled to receive under our disability
program. Mr. Gorman would be entitled to receive such benefits until age 65.
(6) Reflects the aggregate amount of 10 annual payments of $70,000 each under Mr. Gorman’s life insurance benefits, payable over the 10
year period following death.
(7) Reflects the estimated single sum present value of qualified and non-qualified retirement plans which Mr. Gorman would be entitled to
receive if the election was made to begin receiving early retirement benefits as of December 31, 2007.
(8)
In the event of a “for cause” termination related to dishonest conduct, the Compensation Committee may deny vested retirement benefits
to Mr. Gorman.
48
DOUG SHEPARD
Benefit
Cash Severance . . . . . . . . . . . . . . .
Unvested Equity (1)
Options . . . . . . . . . . . . . . . . . . .
Restricted Stock . . . . . . . . . . . .
Performance Stock Units . . . . . .
Bonus Stock Awards . . . . . . . . .
Retirement Benefits . . . . . . . . . . . .
Health and Welfare Benefits (2) . .
Disability Income (3)
. . . . . . . . . .
Life Insurance Benefits (4) . . . . . .
Excise Tax Gross-up . . . . . . . . . . .
ESTIMATED TOTAL . . . . . . . .
No Change in Control
Change in Control
Voluntary
Termination
Early
Retirement
For Cause
Termination
Termination
Without
Cause or for
Good Reason
For Cause
Termination
Termination
Without
Cause or for
Good Reason Death
Disability
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$ —
$700,000
$ — $
—
$ —
$204,746
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$204,746
—
$ — $ — $
—
$204,746
$ — $
—
$ — $ — $
—
$ — $ — $
—
$ — $ — $
—
$ — $
$ 27,013
$ — $ — $4,364,476
—
$ — $700,000 $
$ — $ — $
—
$931,759
$700,000 $4,364,476
(1) Values are calculated based on the closing price of our common stock of $17.30 on December 31, 2007.
(2) Mr. Shepard is entitled to receive a lump-sum payment to permit him to pay 18 months worth of future premiums to continue coverage
under our health and welfare benefit plans. Mr. Shepard was not yet eligible to participate in our health and welfare plans as of
December 31, 2007. The amount related is an estimate of the cost of 18 months of future premiums.
(3) Reflects the aggregate estimated amount of all future payments to which Mr. Shepard would be entitled to receive under our disability
program. Mr. Shepard would be entitled to receive such benefits until age 65.
(4) Reflects the aggregate amount of 10 annual payments of $70,000 each under Mr. Shepard’s life insurance benefits, payable over the 10
year period following death.
49
GARY SKIDMORE
No Change in Control
Change in Control
Voluntary
Termination
Early
Retirement
For Cause
Termination
Termination
Without
Cause or for
Good Reason
For Cause
Termination
Termination
Without
Cause or for
Good Reason
Death
Disability
$ —
$ —
$ —
$ —
$ —
$1,249,461
$
— $
—
$ —
$ —
$ —
$ 42,523
$413,195
$ —
$ —
$ —
$ —
$455,718
$ —
$ —
$ —
$42,523
$ —
$ —
$ —
$ —
$ —
$42,523
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$413,195(7) $413,195
28,740
$
$ 28,740
$ 111,153
$111,153
$ 111,153
$111,153
$ —
42,523
$
$413,195(7) $ 413,195
— $
— $
— $
42,523 $
—
$
—
$
—
$
$
42,523
$ 413,195 $ 413,195
$ —
$ —
$ —
$ —
$413,195
$ —
$ —
$ —
$ —
$413,195
$ —
$ —
$ —
$ —
$664,241
21,612
$
$
$
$1,045,395
$3,023,232
$
— $
— $ 700,000 $
— $
— $
—
— $1,997,988
—
—
$
$1,155,718 $2,453,706
Benefit
Cash Severance . . . . . . . . . . . .
Unvested Equity (1)
Options . . . . . . . . . . . . . . . .
Restricted Stock . . . . . . . . . .
Performance Stock Units . . .
Bonus Stock Awards (2) . . .
Retirement Benefits (3) . . . . . .
Health and Welfare Benefits
(4)
. . . . . . . . . . . . . . . . . . . .
Disability Income (5) . . . . . . . .
Life Insurance Benefits (6) . . .
Excise Tax Gross-up . . . . . . . .
ESTIMATED TOTAL . . . . .
(1) Values are calculated based on the closing price of our common stock of $17.30 on December 31, 2007.
(2) The bonus stock awards vest upon termination of employment by death, disability, retirement or, after a Change in Control, termination
by the company without Cause, or at such other time as determined by the Board of Directors or Compensation Committee. “Change of
Control” and “Cause,” for purposes of the Unvested Bonus Stock Awards, are defined pursuant to the 2005 Plan. The amounts shown in
the Voluntary Termination column assume that the Board of Directors or Compensation Committee determined to accelerate vesting.
(3) Reflects the estimated single sum present value of qualified and non-qualified retirement plans accumulated as of December 31, 2007
which Mr. Skidmore would be entitled to receive upon reaching age 65. Acceleration of vesting occurs in the event of a change of
control. However, since Mr. Skidmore is 100% vested at the measurement date, no additional benefits will be paid in the event of a
change of control. As of December 31, 2007, Mr. Skidmore had not attained our normal retirement age of 65.
(4) Reflects the lump-sum payment to be paid by us to Mr. Skidmore to permit him to pay 18 months worth of future premiums under our
health and welfare benefit plans.
(5) Reflects the aggregate estimated amount of all future payments to which Mr. Skidmore would be entitled to receive under our disability
program. Mr. Skidmore would be entitled to receive such benefits until age 65.
(6) Reflects the aggregate amount of 10 annual payments of $70,000 each under Mr. Skidmore’s life insurance benefits, payable over the 10
year period following death.
(7)
In the event of a “for cause” termination related to dishonest conduct, the Compensation Committee may deny vested retirement benefits
to Mr. Skidmore.
50
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. As of the date of this proxy statement, 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.
Element
Annual Cash
Retainer for Board
Service
Annual Cash
Retainer for
Committee Chairs
Description
Amount
Payable to “independent” Board members, as determined by
the Board in accordance with applicable rules.
$50,000
• Audit Committee Chair
• Compensation Committee Chair
• Nominating and Corporate Governance Committee Chair
$10,000
$5,000
$2,000
Cash Meeting Fees
• Per
in-person Board meeting attended (payable to
$2,000
independent directors)
Annual Cash
Chairman’s Fee
Annual Equity
Election In Lieu of
Cash Fees
2008 Annual Equity
Awards
• Per in-person Committee meeting attended (payable
$1,000
to applicable Committee members)
• Per telephonic Board meeting attended (payable to
$750
independent directors)
• Per telephonic Committee meeting attended (payable
$750
to applicable Committee members)
In lieu of all other compensation to the Chairman of the Board
for Board or Committee service
$200,000
• Each independent director may elect, annually or
in
connection with such director’s appointment to the Board,
such director’s cash
to receive all or a portion of
compensation otherwise payable for such director’s services
in shares of the company’s common stock.
• These shares of common stock are granted as soon as
administratively practicable following the end of each of the
company’s fiscal quarters, with the number of shares
delivered based on the closing sale price of the company’s
common stock on the NYSE on the last trading day of the
immediately preceding quarter.
• These shares of common stock are granted pursuant to the
2005 Plan or any applicable future equity compensation
plan that may be adopted by the company.
• For the calendar year 2008, each independent director
received shares of restricted common stock, with a grant
date of February 5, 2008 (the fixed date previously selected
for long-term incentive awards, as described above in this
proxy statement) and which vest 100% on the third
anniversary of their grant date.
51
Up to 100% of a
director’s
cash
compensation
S h a r e s e q u a l
$50,000
t o
Element
Description
Amount
Initial Equity Award
for New Directors
• The number of shares of restricted stock delivered was based on
the closing sale price of the company’s common stock on the
NYSE on the grant date.
• These shares of restricted stock were granted pursuant to the 2005
Plan and the other terms and conditions set forth in the applicable
form of award agreement under the 2005 Plan.
• Each new independent director appointed to the Board receives a
one-time initial equity award of shares of restricted common
stock, with a grant date on the date of appointment to the Board
(or, if not a trading day, the first trading day thereafter on the
NYSE) and which vest 100% on the third anniversary of their
grant date.
• The number of shares of restricted stock delivered is based on the
closing sale price of the company’s common stock on the NYSE
on the grant date.
• These shares of restricted stock are granted pursuant to the 2005
Plan and the other terms and conditions set forth in the applicable
form of award agreement under the 2005 Plan or any applicable
future equity compensation plan that may be adopted by the
company.
Shares equal
to $50,000
Other
• Non-management directors may also receive compensation from
time-to-time for any service on special Board committees, site
visits or other matters, as determined by the Board.
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
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 2007.
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, including the Chairman’s fee, is structured predominantly based upon the
results of such reviews as well as 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. The
Committee did not engage a compensation consultant for its 2007 director compensation determinations.
In mid-2007, the Committee retained an outside compensation consultant to assist the Committee with its
evaluation and determinations for our 2008 director compensation program. The consulting firm, Longnecker &
Associates, was engaged by and reported directly to the Committee. The Committee asked Longnecker &
Associates to conduct a comprehensive review of Harte-Hanks’ current director compensation program and
recommend specific changes and improvements to the Committee to ensure that compensation remains aligned
52
with the goal of enhancing stockholder value through competitive programs that allow the company to attract,
properly motivate and retain qualified non-employee directors who will contribute to Harte-Hanks’ long-term
success and the creation of stockholder value.
In January 2008, based on the recommendation of the Compensation Committee, the Board decided to
maintain the same director compensation levels in 2008 as in 2007, with the following principal exceptions:
(1) the amount of the Chairman’s fee was decreased from $250,000 per year to $200,000 per year, and (2) the
initial equity awards for new directors were changed from 5,000 stock options to $50,000 of restricted common
stock to align the initial grant with the current annual equity grant practices for directors. The Board believes this
overall compensation level is appropriate to attract and retain top board candidates.
Director Stock Ownership Guidelines
Under our Corporate Governance Principles adopted by the Board, each director is expected to own, at a
date no later than three years after election to the Board, shares of our common stock valued at not less than two
times the annual cash retainer (or, for 2007, stock valued at $100,000). As of December 31, 2007, each director
owned at least this amount of Harte-Hanks stock.
2007 Director Compensation for Non-Employee Directors
The following table shows 2007 compensation recognized for financial statement reporting purposes of our
non-employee directors. Consequently, the amounts reflected in the “Stock Awards” and “Options Awards”
columns below also include amounts from awards granted in prior years.
Name
Fees
Earned or
Paid in
Cash ($)
(1)
Stock
Awards
($) (2) (3)
(a)
David L. Copeland . . . . . . . . . . . . . . . . . . . . . .
William F. Farley . . . . . . . . . . . . . . . . . . . . . . .
Larry D. Franklin (7) . . . . . . . . . . . . . . . . . . . .
William K. Gayden . . . . . . . . . . . . . . . . . . . . .
Christopher M. Harte . . . . . . . . . . . . . . . . . . . .
Houston H. Harte . . . . . . . . . . . . . . . . . . . . . . .
Judy C. Odom . . . . . . . . . . . . . . . . . . . . . . . . .
(b )
$ 78,750
$ 70,750 (6)
$250,000
$ 67,000 (8)
$ 75,750 (9)
$ —
$ 72,000 (10) $31,938
(c)
$31,938
$31,938
$ —
$31,938
$31,938
$ —
(1) Fees were paid in cash, unless otherwise designated.
Option
Awards
($) (2) (4)
(d)
$19,358
$19,584
$ —
$19,358
$19,358
$ —
$20,029
All Other
Compensation
($) (5)
(e)
$1,079
$1,079
$ —
$1,079
$1,079
$ —
$1,079
Total ($)
(f)
$131,125
$123,351
$250,000
$119,375
$128,125
$ —
$125,046
(2) These amounts in columns (c) and (d) reflect the aggregate compensation costs for financial statement
reporting purposes for fiscal 2007 under SFAS 123R, for restricted stock and stock option grants in 2007
and prior years. These amounts do not reflect amounts paid to or realized by the director for fiscal 2007.
Assumptions used in the calculation of these amounts are included in note I of our audited financial
statements for the fiscal year ended December 31, 2007 included in our Form 10-K.
(3) Each of the independent directors was granted 1,918 shares of restricted stock in 2007 with grant date fair
values, computed in accordance with SFAS 123R, of $15,211. Restricted stock awards are granted with no
exercise price and vest 100% on the third anniversary of their date of grant.
(4) There were no option awards granted to any of the directors during 2007. Each of our independent directors
had 13,400 option awards outstanding as of December 31, 2007. While each of the independent directors
hold the same number of outstanding options, the dollar award value variances in column (d) are the result
of certain of these options (for Mr. Farley and Ms. Odom) having been granted at different dates – the date,
respectively, on which each first joined the Board – than the grant dates for the other three independent
directors.
(5) Reflects the amount of dividends paid by Harte-Hanks during the year on shares of restricted stock held by
each of the directors.
53
(6) Fees totaling $35,375 were paid in cash and the remaining $35,375 of fees were paid in the form of
company stock at the director’s election.
(7)
In January 2008, based on the recommendation of the Compensation Committee, the Board reduced the
amount of the Chairman’s fee from $250,000 per year to $200,000 per year. During 2007, Mr. Franklin
received pension payments and deferred compensation payments arising out of pre-existing compensation
arrangements based on his former service as an executive officer of Harte-Hanks.
(8) Fees totaling $16,500 were paid in cash and the remaining $50,500 of fees were paid in the form of
company stock at the director’s election.
(9) All fees were paid in the form of company stock at the director’s election.
(10) Fees totaling $36,000 were paid in cash and the remaining $36,000 of fees were paid in the form of
company stock at the director’s election.
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, 2007.
Name
Number of
Outstanding
Shares of
Restricted
Stock (#)
Number of
Outstanding
Stock
Options (#)
David L. Copeland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William F. Farley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Larry D. Franklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William K. Gayden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Christopher M. Harte . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Houston H. Harte . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Judy C. Odom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,855
3,855
—
3,855
3,855
—
3,855
13,400
13,400
307,500 (1)
13,400
13,400
—
13,400
Total (#)
17,255
17,255
307,500
17,255
17,255
—
17,255
(1) As of December 31, 2007, Mr. Franklin had 307,500 option awards outstanding, all of which were awarded
during Mr. Franklin’s former service as an executive officer of the Company.
54
AUDIT COMMITTEE AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of the Audit Committee
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.
The Audit Committee is comprised of three directors. The Board has determined in its business judgment
that each Committee member 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. The Committee has the authority and
responsibility to select, determine the compensation of, evaluate and, when appropriate, replace the company’s
independent auditors. Each of Messrs. Copeland and Farley is a Committee member that the Board has
determined is an audit committee financial expert under applicable federal securities laws.
We act under a written charter. The functions of the Committee focus primarily on its oversight of:
•
•
•
•
The integrity of the company’s financial statements, including the financial reporting process and
systems of internal controls regarding finance, accounting and legal compliance;
The qualifications and performance of the company’s independent auditors;
The performance of the company’s internal audit function; and
The company’s compliance with legal and regulatory requirements.
The Committee’s functions are not
intended to duplicate or certify the activities of the company’s
independent auditors or management, nor can the Committee certify that the company’s auditors are independent
under applicable federal securities laws and NYSE rules.
We meet with management periodically to consider the scope and adequacy of the company’s internal
controls and the objectivity of its financial reporting and discuss these matters with the company’s independent
auditors, the company’s internal auditors and appropriate company financial personnel. We also meet privately
with the company’s independent auditors, KPMG LLP (KPMG), and the company’s internal auditors. The
company’s independent auditors and its internal auditors have unrestricted access to the Committee and can meet
with us upon request.
In addition, we review the company’s financial statements and report our recommendations to the full Board
for approval and to authorize action. It is not the Committee’s duty or responsibility to conduct auditing or
accounting reviews or procedures. In rendering this report, we have relied, without independent verification, on
management’s representations that the financial statements have been prepared in conformity with generally
accepted accounting principles (GAAP) and on representations of the company’s independent auditors included
in their report on the company’s financial statements. Our considerations and discussions with management and
the independent auditors, however, do not assure that the company’s financial statements are presented in
accordance with GAAP. Likewise, our considerations and discussions with management and the independent
auditors do not assure that the audit of the company’s financial statements has been performed in accordance
with generally accepted auditing standards, or that the company’s independent auditors are in fact independent.
Management is responsible 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 and for attesting
to management’s report on the company’s internal control over financial reporting. Our 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.
55
We held 12 meetings during 2007. The meetings were designed, among other things, to facilitate and
encourage communication among the Committee, management, the internal auditors and KPMG. We discussed
with the company’s internal auditors and KPMG the overall scope and plans for their respective audits. In
addition, we reviewed the audited consolidated financial statements for the 2007 fiscal year and met and held
discussions with management and the company’s independent auditors to discuss those financial statements and
the audit related thereto.
We reviewed and discussed the company’s compliance with Section 404 of the Sarbanes-Oxley Act of
including the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 2
2002,
regarding the audit of internal control over financial reporting. We reviewed and discussed the company’s
guidelines, policies and procedures for risk assessment and risk management and the major risk exposures of the
company and its business units, as appropriate. We reviewed and discussed the audited consolidated financial
statements for the fiscal year ended December 31, 2007 with management, the internal auditors and KPMG. We
reviewed and discussed with management, the internal auditors and KPMG management’s annual report on the
company’s internal control over financial reporting and KPMG’s audit report.
We discussed with management, the internal auditors and KPMG the processes supporting certifications by
the company’s Chief Executive Officer and Chief Financial Officer that are required by the Sarbanes-Oxley Act
of 2002 to accompany the company’s periodic filings with the SEC. In addition, we discussed with management,
the internal auditors and KPMG the processes supporting management’s annual report on the company’s internal
controls over financial reporting. We met with the internal auditors and KPMG, with and without management
present, to discuss the results of their examinations and their evaluations of the company’s internal controls.
We discussed with KPMG matters that independent accounting firms must discuss with audit committees.
Our discussions included generally accepted auditing standards and standards of the PCAOB, including, among
other things, matters related to the conduct of the audit of the company’s consolidated financial statements and
the matters required to be discussed by Statement on Auditing Standards No. 114 (Communication with Audit
Committees).
KPMG provided to the Committee the written disclosures and the letter required by Independence Standards
Board Standard No. 1 (Independence Discussions with Audit Committees) and represented that it is independent
from the company. We discussed with KPMG their independence from the company. When considering
KPMG’s independence, we reviewed the services KPMG provided to the company that were not in connection
with their 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
and the attestation of management’s report on internal control over financial reporting. We also reviewed the
audit, audit-related and tax services performed by, and the amount of fees paid for such services to, KPMG. In
addition, when considering KPMG’s independence, we considered any fees received by the company from
KPMG.
Based on these activities, we recommended to the Board that the company’s audited consolidated financial
statements for the fiscal year ended December 31, 2007 be included in the company’s Annual Report on Form
10-K. We also have selected KPMG as the company’s independent auditors for the fiscal year ended
December 31, 2008.
Audit Committee
David L. Copeland, Chairman
William F. Farley
Christopher M. Harte
56
Independent Auditors
Representatives of KPMG LLP, who were our independent auditors for the year 2007, are expected to be
present at the 2008 annual meeting. They will have the opportunity to make a statement if they desire to do so
and will be available to respond to appropriate questions. KPMG has been selected as the company’s independent
auditors for the fiscal year ended December 31, 2008.
Independent Auditor Fees and Services
The following table sets forth the aggregate fees billed by KPMG or fees payable for professional services
in or related to 2006 and 2007.
Audit Fees (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit Related Fees (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Fees (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,078,830
85,398
$
33,390
$
—
$1,067,815
$ 103,660
33,565
$
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,197,618
$1,205,040
2006
2007
(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 2007 and 2006.
(3) Fees for tax services and matters principally relating to the company’s foreign operations, including foreign
transfer pricing and international taxes.
Pre-Approval for Non-Audit Services
Pursuant to its charter, the Audit Committee preapproves 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 decisions of such subcommittee to grant preapprovals shall be
presented to the full Audit Committee at its next scheduled meeting.
PROPOSAL I
ELECTION OF DIRECTORS
Election of Class III Directors
The current number of members of our Board is eight. Our Board is divided into three classes, each of
which serves for a three-year term. One class of directors is elected each year at the annual meeting of
stockholders. The current term of our three Class III directors will expire at the 2008 annual meeting. The Class
III directors elected in 2008 will serve for a term of three years, which expires at the annual meeting of
stockholders in 2011 or when their successors are duly elected and qualified.
The nominees for Class III directors are (1) Houston Harte, (2) Dean Blythe and (3) Judy Odom. Mr. Harte
and Ms. Odom are each current members of our Board. Mr. Blythe is our President and CEO and, if elected at the
2008 annual meeting, will fill the seat previously held by our former CEO and Class III director, Mr. Richard
Hochhauser. Each of the nominees has indicated his or her willingness to serve as a member of the Board if
57
elected. If, however, a nominee is unable to serve, the shares represented by all valid proxies will be voted for the
election of such substitute as the Board may recommend, or the Board may reduce the number of directors to
eliminate the vacancy, and if any director is unable to serve his or her full term, the Board may by resolution
provide for a lesser number of directors or by a majority vote of the directors then in office may designate a
substitute.
Information with respect to the nominees is set forth in the section of this proxy statement entitled
“Directors and Executive Officers.” We believe that our directors and officers currently intend to vote their
shares in favor of each of the nominees for Class III directors.
Board Recommendation on Proposal
The Board of Directors unanimously recommends a vote FOR the election of each of the nominees for
Class III Director named above. The management proxy holders will vote all duly submitted proxies FOR
election unless duly instructed otherwise.
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
PROPOSAL II
Description of Proposal
In accordance with its charter, the Audit Committee has selected KPMG LLP as Harte-Hanks’ independent
auditors to audit our consolidated financial statements for fiscal 2008 and to render other services required of
them. The Board is submitting the appointment of KPMG LLP for ratification at the annual stockholders
meeting. Representatives of KPMG LLP are expected to be present at the meeting with the opportunity to make a
statement if they so desire and to be available to respond to appropriate questions.
The submission of this matter for approval by stockholders is not legally required; however, the Board and
its Audit Committee believe that such submission is consistent with best practices in corporate governance and is
an opportunity for stockholders to provide direct feedback to the Board and its Audit Committee on an important
issue of corporate governance. If the stockholders do not approve the selection of KPMG LLP, the Audit
Committee will reconsider the selection of such firm as independent auditors, although the results of the vote are
not binding on the Audit Committee.
The Audit Committee has the sole authority and responsibility to retain, evaluate, and, where appropriate,
replace the independent auditors. Ratification by the stockholders of the appointment of KPMG LLP does not
limit the authority of the Audit Committee to direct the appointment of new independent auditors at any time
during the year or thereafter.
Board Recommendation on Proposal
The Board of Directors unanimously recommends a vote FOR ratification of the appointment of KPMG
LLP as Harte-Hanks’ independent auditors for fiscal 2008. The management proxy holders will vote all duly
submitted proxies FOR ratification unless duly instructed otherwise.
OTHER BUSINESS
The Board is not aware of any matter to be presented for action at the annual meeting other than the matters
set forth above. Should any other matter requiring a vote of stockholders properly arise, the proxies in the
enclosed form confer upon the person or persons entitled to vote the shares represented by such proxies
discretionary authority to vote the same in accordance with their best judgment in the interest of the company.
58
PROPOSALS FOR 2009 ANNUAL MEETING OF STOCKHOLDERS
There are two different deadlines for the submission of stockholder proposals. Stockholder proposals that
are being submitted for inclusion in our proxy statement and form of proxy for our 2009 annual meeting must be
received by us at our principal executive offices on or before December 14, 2008. Such proposals when
submitted must be in full compliance with applicable laws, including Rule 14a-8 of the Exchange Act, and our
bylaws.
Under our bylaws, stockholder proposals that are being submitted other than for inclusion in the proxy
statement and form of proxy for our 2009 annual meeting must be received at our principal executive offices no
earlier than February 12, 2009 and no later than March 14, 2009. Such proposals when submitted must be in full
compliance with applicable law and our bylaws.
59
2007 Annual Report on
Form 10-K
(Mark One)
X
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-7120
HARTE-HANKS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
74-1677284
(I.R.S. Employer
Identification No.)
200 Concord Plaza Drive, Suite 800, San Antonio, Texas 78216
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code -- 210-829-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Name of each exchange on which registered
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 X No___
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 _ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X Accelerated filer ___ Non-accelerated filer ___
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes __ No X
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to
the closing price ($25.68) as of the last business day of the registrant’s most recently completed second fiscal quarter (June
30, 2007), was approximately $1,280,015,000.
The number of shares outstanding of each of the registrant’s classes of common stock as of January 31, 2008 was
66,756,439 shares of common stock, all of one class.
Documents incorporated by reference:
Portions of the Proxy Statement to be filed for the Company’s 2008 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
THIS ANNUAL REPORT ON FORM 10-K IS BEING DISTRIBUTED TO STOCKHOLDERS IN LIEU OF A
SEPARATE ANNUAL REPORT PURSUANT TO RULE 14a-3(b) OF THE ACT AND SECTION 203.01 OF THE NEW
YORK STOCK EXCHANGE LISTED COMPANY MANUAL.
Harte-Hanks, Inc. and Subsidiaries
Table of Contents
Form 10-K Report
December 31, 2007
Part I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
2
Page
3
12
19
19
19
19
20
23
24
40
41
41
41
41
42
42
43
43
43
43
45
ITEM 1. BUSINESS
INTRODUCTION
PART I
Harte-Hanks, Inc. (Harte-Hanks) is a worldwide direct and targeted marketing company that provides direct
marketing services and shopper advertising opportunities to a wide range of local, regional, national and
international consumer and business-to-business marketers. We manage our operations through two operating
segments: Direct Marketing, which operates both nationally and internationally, and Shoppers, which operates
in local and regional markets in California and Florida.
Marketing today is under intense focus in many organizations. Many corporations have a chief-level executive
charged with marketing who is under pressure to utilize a combination of data, technology, channels and
resources to demonstrate a return on marketing investment. This has led many to use direct and targeted
marketing, as accountability and measurability are hallmarks of the discipline, allowing customer insight to be
leveraged to create and accelerate value. Direct Marketing, which represented 63% of our total revenues in
2007, is a leader in the movement toward highly targeted marketing. Our Shoppers business applies geographic
targeting principles. Our strategy is based on six key elements:
Increasing revenues through growing our base businesses;
Introducing new services, products and innovations;
• Being a market leader in each of our businesses;
•
•
• Entering new markets and making acquisitions;
• Using technology to create competitive advantages; and
• Employing people who understand our clients’ businesses and markets;
Harte-Hanks is the successor to a newspaper business begun in Texas in the early 1920s by Houston Harte and
Bernard Hanks. In 1972, Harte-Hanks went public and was listed on the New York Stock Exchange (NYSE).
We became private in a leveraged buyout initiated by management in 1984. In 1993, we again went public and
listed our common stock on the NYSE. In 1997, we sold all of our remaining traditional media operations
(consisting of newspapers, television and radio companies) in order to focus all of our efforts on two business
segments - Direct Marketing and Shoppers. See segment financial information in Note O “Business Segments”
in the Notes to Consolidated Financial Statements.
Harte-Hanks provides public access to all reports filed with the Securities and Exchange Commission (SEC)
under the Securities Exchange Act of 1934, as amended (the 1934 Act). These documents may be accessed free
of charge on our website at the following address: http://www.harte-hanks.com. Since November 15, 2002,
these documents have been provided as soon as practical after they are filed with the SEC. The documents may
also be found at the SEC’s website at http://www.sec.gov. Additionally, we have adopted and posted on our
website a code of ethics that applies to our principal executive officer, principal financial officer and principal
accounting officer. Our website also includes our corporate governance guidelines and the charters for each of
our audit, compensation, and nominating and corporate governance committees. We will provide a printed copy
of any of the aforementioned documents to any requesting stockholder.
DIRECT MARKETING
General
Direct marketing services are targeted to specific industries or markets with services and software products
tailored to each industry or market. Our Direct Marketing clients include many of the largest retailers; financial
companies including banks, financing companies, mutual funds and insurance companies; high-tech and
telecommunications companies; and pharmaceutical companies and healthcare organizations. Direct Marketing
3
clients are also from such selected markets as automotive, consumer packaged goods, government/not-for-profit,
business services, energy, publishing, travel/hospitality and utilities. We believe that we generally have the
ability to provide services to new industries and markets by modifying our services and applications as
opportunities are presented. In 2007, 2006 and 2005, Harte-Hanks Direct Marketing had revenues of $732.5
million, $709.7 million, and $694.6 million, respectively, which accounted for approximately 63%, 60%, and
61% of our total revenues, respectively.
Depending on the needs of our clients, our Direct Marketing capabilities are provided in an integrated approach
through more than 30 facilities worldwide, more than 10 of which are located outside of the United States. Each
of these centers possesses some specialization and is linked with others to support the needs of our clients.
We use various capabilities and technologies to enable our clients to identify, reach, influence and nurture their
customers. Harte-Hanks Direct Marketing improves the return on its clients’ marketing investment by
increasing their prospect and customer value through solutions and services organized around five groupings of
integrated activities:
Information (data collection/management);
•
• Opportunity (data access/utilization);
•
Insight (data analysis/interpretation);
• Engagement (program and campaign creation and development); and
•
Interaction (program execution).
Harte-Hanks Direct Marketing uses various capabilities and technologies as enablers to capture, analyze and
disseminate customer and prospect data across all points of customer contact. Using both proprietary software
and open software solutions, we build contact databases for our clients using the information gained from the
client’s marketing and communication activities across different media such as mail, websites, e-mail, inbound
and outbound teleservices, trade shows, point-of-sale and other sources. We believe that these databases enable
clients to measure the return on their marketing communications investments and make more informed decisions
about future marketing efforts. We help clients manage the inquiries they receive from a myriad of sources
related to their marketing efforts. These inquiries, or leads, are qualified, tracked and distributed both to
appropriate sales channels and to client management for analysis, decision-making and/or additional interaction
in order for clients to manage their customer and prospect relationships more effectively. These leads are also
developed for business-to-business clients through our CI Technology Database and through research efforts of
our Aberdeen business.
Our Direct Marketing activities often start with the development of a roadmap, followed by building customized
marketing databases for specific clients and providing them with easy-to-use tools to perform analysis and to
target their best customers and prospects. Using our proprietary name and address matching software, the
Trillium Software System®, we investigate and standardize large numbers of customer records from multiple
sources, integrate them into a single database for each client and, if needed, append demographic and lifestyle
information.
Our Allink® databases are built for clients and tailored to specific market segments. These databases are moved
to the client’s site or maintained at Harte-Hanks with online access from client locations. In addition to building
a client’s database and providing solutions for analytics and campaign management, we perform regular
database updates.
These solutions are linked to our service bureau. Our service bureau services include preparing list selections,
maximizing deliverability and reducing clients’ mailing costs through our Advanced Data Quality services,
including Trillium Software and Global Address capabilities in addition to sophisticated postal coding, hygiene
and address updates through a non-exclusive National Change of Address license with the U.S. Postal Service.
4
As a further extension of the client’s marketing arm, we provide customer insight by using marketing research
and analytics services. Specific capabilities include tracking and reporting, media analysis, modeling, database
profiling, primary data collection, marketing applications, consulting and program development.
We engage with our client’s customers by offering direct marketing agency services that combine information-
based strategy and brand-building creative efforts that are channel independent, using both traditional direct and
interactive media.
In addition, Harte-Hanks provides a variety of services to help clients develop and execute targeted marketing
communication programs. These include services such as telephone, email using our proprietary Postfuture®
offering, website development and search marketing, personalization of communication pieces using laser and
inkjet printing, targeted mail and fulfillment, transportation logistics, and print-on-demand as well as traditional
printing.
Our mail tracking capability and long-standing relationship with the U.S. Postal Service assist our customer’s
mailings to reach their destinations on time. By controlling the final stage of the print distribution process
through its logistics operations, we facilitate the delivery of our clients’ materials while also managing costs.
Customers
Direct marketing services are marketed to specific industries or markets with services and software products
tailored to each industry or market. We believe that we are generally able to provide services to new industries
and markets by modifying our existing services and applications. We currently provide direct marketing
services to the retail, high-tech/telecom, financial services and pharmaceutical/healthcare vertical markets, in
addition to a range of selected markets. Our Direct Marketing business is not overly dependent on any one
client or any group of clients. The largest client, measured in revenue, comprised 8% of total Direct Marketing
revenues in 2007 and 5% of our total revenues in 2007. The largest 25 clients, measured in revenue, comprised
41% of total Direct Marketing revenues in 2007 and 26% of our total revenues in 2007.
Sales and Marketing
Our national direct marketing sales force is headquartered in Cincinnati, Ohio, with additional offices
maintained throughout the United States. There are also product specific sales forces and sales groups in
Europe, Australia, South America and Asia. The sales forces, with industry-specific knowledge and experience,
emphasize the cross-selling of a full range of direct marketing services and are supported by employees in each
sector. The overall sales focus is to position Harte-Hanks as a marketing partner offering various services and
solutions (including end-to-end) as required to meet our client’s targeted marketing needs.
5
Direct Marketing Facilities
Direct marketing services are provided at the following facilities:
National Offices
Austin, Texas
Baltimore, Maryland
Billerica, Massachusetts
Bloomfield, Connecticut
Boston, Massachusetts
Cincinnati, Ohio
Clearwater, Florida
Deerfield Beach, Florida
East Bridgewater, Massachusetts
Fort Worth, Texas
Fullerton, California
Glen Burnie, Maryland
Grand Prairie, Texas
Jacksonville, Florida
Lake Mary, Florida
Langhorne, Pennsylvania
Monroe Township, New Jersey
New York, New York
Ontario, California
Pennsauken, New Jersey
Richardson, Texas
San Diego, California
For more information please refer to Item 2 - Properties.
Shawnee, Kansas
Texarkana, Texas
Troy, Michigan
Wilkes-Barre, Pennsylvania
Yardley, Pennsylvania
National Markets Headquarters
Cincinnati, Ohio
International Offices
Aldermaston, United Kingdom
Böblingen, Germany
Bristol, United Kingdom
Frenchs Forest (Sydney), Australia
Hasselt, Belgium
Iasi, Romania
Les Ulis, France
Madrid, Spain
Manila, Philippines
Melbourne, Australia
São Paulo, Brazil
Uxbridge, United Kingdom
6
Competition
Our Direct Marketing business faces competition in all of its offerings and within each of its vertical markets.
Direct marketing is a dynamic business, subject to technological advancements, 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 against
whom we compete for individual projects, entire client relationships and marketing expenditures by clients and
prospective clients. There are various competitive factors in our industry, including the quality and scope of
services, technical and strategic expertise, the value of the services provided as compared to the price of the
services, reputation and brand recognition. We also compete against print and electronic media and other forms
of advertising for marketing and advertising dollars in general. Failure to continually improve our current
processes, advance and upgrade our technology applications and to develop new products and services in a
timely and cost-effective manner could result in the loss of our clients or prospective clients to current or future
competitors. In addition, failure to gain market acceptance of new products and services could adversely affect
our growth. Although we believe that our capabilities and breadth of services, combined with our national and
worldwide production capability, industry focus and ability to offer a broad range of integrated services enable
us to compete effectively, our business results may be adversely impacted by competition. Please refer to Item
1A, “Risk Factors” for additional information regarding risks related to competition.
Seasonality
Our Direct Marketing business is somewhat seasonal as revenues in the fourth quarter tend to be higher than
revenues in other quarters during a given year. This increased revenue is a result of overall increased marketing
activity prior to and during the holiday season, primarily related to our retail vertical.
SHOPPERS
General
Harte-Hanks Shoppers is North America’s largest owner, operator and distributor of shopper publications, based
on weekly circulation and revenues. Shoppers are weekly advertising publications delivered free by Standard
Mail to households and businesses in a particular geographic area. Shoppers offer advertisers a targeted, cost-
effective local advertising system, with virtually 100% penetration in their area of distribution. Shoppers are
particularly effective in large markets with high media fragmentation in which major metropolitan newspapers
generally have low penetration.
As of December 31, 2007, Shoppers delivered approximately 13 million shopper packages in five major markets
each week covering the greater Los Angeles market (Los Angeles County, Orange County, Riverside County,
San Bernardino County, Ventura County and Kern County), the greater San Diego market, Northern California
(San Jose, Sacramento, Stockton and Modesto), South Florida (Dade County and Broward County) and the
greater Tampa market. Two editions of the shopper publication are delivered to approximately 239,000
in South Orange County where both an “early” and “late” edition
households and businesses
PennySaverUSA.com are published each week. Our California publications account for approximately 80% of
Shoppers’ weekly circulation.
Harte-Hanks publishes 1,077 individual shopper editions each week distributed to zones with circulation of
approximately 12,000 each. This allows single-location, local advertisers to saturate a single geographic zone,
while enabling multiple-location advertisers to saturate multiple zones. This unique delivery system gives large
and small advertisers alike a cost-effective way to reach their target markets. We believe that our zoning
capabilities and production technologies have enabled us to saturate and target areas in a number of ways
including geographic, demographic, lifestyle, behavioral and language allowing our advertisers to effectively
target their customers. Our strategy is to increase our share of local advertising in our existing circulation areas,
and, over time, to increase circulation through internal expansion into contiguous areas. In 2007, 2006, and
2005, Harte-Hanks Shoppers had revenues of $430.4 million, $475.0 million, and $440.4 million, respectively,
accounting for approximately 37%, 40%, and 39% of our total revenues, respectively.
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As a result of the difficult economic environment in California, we shut down approximately 600,000 of
unprofitable circulation at the end of June 2007. This consisted of approximately 380,000 of circulation in the
greater Los Angeles market and approximately 220,000 of circulation in the Northern California market. We
will continue to evaluate all of our circulation performance, but do not currently anticipate further circulation
reductions of this magnitude in the near future. Despite this recent circulation reduction, we continue to believe
that future expansions may provide increased revenue opportunities in the long term.
Publications
The following table sets forth certain information with respect to Shoppers publications:
Market
Greater Los Angeles
Publication Name
PennySaverUSA.com
December 31, 2007
Number of
Circulation Zones
504
5,650,000
Northern California
PennySaverUSA.com
2,600,500
Greater San Diego
PennySaverUSA.com
1,887,500
South Florida
TheFlyer.com
1,459,500
Greater Tampa
TheFlyer.com
1,314,500
Total
12,912,000
207
157
116
93
1,077
Our Shopper publications contain classified and display advertising and are delivered by Standard Mail
saturation. The typical shopper publication contains approximately 41 pages and is 7 by 9-1/2 inches in size.
Each edition, or zone, is targeted around a natural neighborhood marketing pattern. Shoppers also serve as a
distribution vehicle for multiple ads from national and regional advertisers; "print and deliver" single-sheet
inserts designed and printed by us, coupon books, preprinted inserts, and four-color glossy flyers printed by
third party printers. In addition, our Shoppers also provide advertising and other services online through our
websites – PennySaverUSA.com and TheFlyer.com. PennySaverUSA.com displays the ads published in the print
versions of the PennySaverUSA.com (California) and TheFlyer.com (Florida) publications, and is a leader in the
aggregation of online classified ads from free community papers and shoppers across the country. It is our
current policy that customers who purchase a classified ad in one of our weekly publications, also receive a
posting on our website.
We have acquired, developed and applied innovative technology and customized equipment in the publication
of our Shoppers, contributing to efficiency and growth. A proprietary pagination system has made it possible
for over a thousand weekly zoned editions to be designed, built and output to plate-ready negatives in a
paperless, digital environment. Automating the production process saves on labor, newsprint, and overweight
postage. This software also allows for better ad tracking, immediate checks on individual zone and ad status,
and more on-time press starts with less manpower.
Customers
Shoppers serves both business and individual advertisers in a wide range of industries, including real estate,
employment, automotive, retail, high-tech/telecom, financial services, and a number of other industries.
Shoppers is not overly dependent on any one client or any group of clients. The largest client, measured in
revenue, comprised 2% of total Shoppers revenue in 2007 and 1% of our total revenue in 2007. The top 25
clients in terms of revenue comprised 15% of Shoppers revenues in 2007 and 6% of our total revenues in 2007.
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Sales and Marketing
We maintain local Shoppers sales offices throughout our geographic markets and employ more than 700
commissioned sales representatives who develop both targeted and saturation advertising programs for clients.
The sales organization provides service to national, regional and local advertisers through its telemarketing
departments and field sales representatives. Shoppers clients vary from individuals with a single item for sale to
local neighborhood advertisers to large multi-location advertisers. The core clients continue to be local service
businesses and small retailers. We also focus our marketing efforts on larger national accounts by emphasizing
our ability to deliver saturation advertising in defined zones, or even partial zones for inserts, in combination
with advertising in the Shopper publication.
Additional focus is placed on particular industries/categories through the use of sales specialists. These sales
specialists are primarily used to target automotive, real estate and employment advertisers.
We utilize proprietary sales and marketing systems to enter client orders directly from the field, instantly
checking space availability, ad costs and other pertinent information. These systems efficiently facilitate the
placement of advertising into multiple-zoned editions and include built-in error-reducing safeguards that aid in
minimizing costly sales adjustments. In addition to allowing advertising information to be entered for
immediate publication, these systems feed a relational client database enabling sales personnel to access client
history by designated variables to facilitate the identification of similar potential clients and to assist with timely
follow-up on existing clients.
Shoppers Facilities
Our Shoppers are produced at owned or leased facilities in the markets they serve. We have six production
facilities – three in Southern California, one in Northern California, one in Southern Florida and one in Tampa,
Florida – and more than 30 sales offices.
For more information please refer to Item 2 - Properties.
Competition
Our Shoppers business competes for advertising, as well as for readers, with other print and electronic media.
Competition comes from local and regional newspapers, magazines, radio, broadcast, satellite and cable
television, other shoppers, the internet, other communications media and other advertising printers that operate
in our markets. The extent and nature of such competition are, in large part, determined by the location and
demographics of the markets targeted by a particular advertiser, and the number of media alternatives in those
markets. Failure to continually improve our current processes, advance and upgrade our technology
applications and to develop new products and services in a timely and cost-effective manner could result in the
loss of our clients to current or future competitors. In addition, failure to gain market acceptance of new
products and services and geographic areas could adversely affect our growth. We believe that our production
systems and technology, which enable us to publish separate editions in narrowly targeted zones, and our local
ad content, allow us to compete effectively, particularly in large markets with high media fragmentation.
However, our business results may be adversely impacted by competition. Please refer to Item 1A, “Risk
Factors” for additional information regarding risks related to competition.
Seasonality
Our Shoppers business is somewhat seasonal in that revenues from the last two publication dates in December
and first two to three publication dates in January each year are affected by a slowdown in advertising by
businesses and individuals after the holidays. In general the second and third quarters are the highest revenue
quarters for our Shopper business.
9
U.S. AND FOREIGN GOVERNMENT REGULATIONS
As a company with business activities around the world, we are subject to a variety of domestic and
international legal and regulatory requirements that impact our business, including, for example, regulations
governing consumer protection and unfair business practices, contracts, e-commerce, intellectual property, labor
and employment, securities, tax, and other laws that are generally applicable to commercial activities.
We are also subject to, or affected by, numerous domestic and foreign laws, regulations and industry standards
that regulate direct marketing activities, including those that address privacy, data security and unsolicited
marketing communications. Examples of some of these laws and regulations that may be applied to, or affect,
our business or the businesses of our clients include the following:
• The Financial Services Modernization Act of 1999, or Gramm-Leach-Bliley Act (GLB), which, among
other things, regulates the use for marketing purposes of non-public personal financial information of
consumers that is held by financial institutions. Although Harte-Hanks is not considered a financial
institution, many of our clients are subject to the GLB. The GLB also includes rules relating to the
physical, administrative and technological protection of non-public personal financial information.
• The Health Insurance Portability and Accountability Act of 1996 (HIPAA), which regulates the use of
personal health information for marketing purposes and requires reasonable safeguards designed to
prevent intentional or unintentional use or disclosure of protected health information.
• Federal and state laws governing the use of the Internet and regulating telemarketing, including the
federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-
SPAM), which regulates commercial email and requires that commercial emails give recipients an opt-
out method. Telemarketing activities are regulated by, among other requirements, the Federal Trade
Commission’s Telemarketing Sales Rule (TSR), the Federal Communications Commission’s Telephone
Consumer Protection Act (TCPA) and various state do-not-call laws.
• A number of states in the U.S. have passed versions of security breach notification laws, which
generally require timely notifications to affected persons in the event of data security breaches or other
unauthorized access to certain types of protected personal data.
• The Fair Credit Reporting Act (FCRA), which governs among other things, the sharing of consumer
report information, access to credit scores, and requirements for users of consumer report information.
• The 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 European Union (EU) data protection laws, including the comprehensive EU Directive on Data
Protection (1995), which imposes a number of obligations with respect to use of personal data, and
includes a prohibition on the transfer of personal information from the EU to other countries that do not
provide consumers with an “adequate” level of privacy or security. The EU standard for adequacy is
generally stricter and more comprehensive than that of the U.S. and most other countries.
There are additional consumer protection, privacy and data security regulations domestically and in other
countries in which we or our clients do business. These laws regulate the collection, use, disclosure and
10
retention of personal data and may require consent from consumers and grant consumers other rights, such as
the ability to access their personal data and to correct information in the possession of data controllers. We and
many of our clients also belong to trade associations that impose guidelines that regulate direct marketing
activities, such as the Direct Marketing Association’s Commitment to Consumer Choice.
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. We
anticipate that such proposals will continue to be introduced in the future, some of which may be adopted. In
addition, our business may be affected by the impact of these restrictions on our clients and their marketing
activities. These additional regulations could increase compliance requirements and restrict or prevent the
collection, management, aggregation, transfer, use or dissemination of information or data that is currently
legally available. Additional regulations may also restrict or prevent current practices regarding unsolicited
marketing communications. For example, many states are considering implementing do-not-mail legislation
that could impact our Direct Marketing and Shoppers businesses and the businesses of our clients and
customers. In addition, 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. Compliance with regulations is costly and time-consuming, and we may
encounter difficulties, delays or significant expenses in connection with our compliance. There could be a
material adverse impact on our business due to the enactment or enforcement of legislation or industry
regulations, the issuance of judicial or governmental interpretations, enforcement priorities of governmental
agencies or a change in customs arising from public concern over consumer privacy and data security issues.
INTELLECTUAL PROPERTY RIGHTS
Our intellectual property assets include, for example, trademarks and service marks that identify our company
and our products and services, software and other technology that we develop, our proprietary collections of
data and intellectual property licensed from third parties, such as prospect list providers. We generally seek to
protect our intellectual property through a combination of license agreements and trademark, service mark,
copyright, patent and trade secret laws. We also enter into confidentiality agreements with many of our
employees, vendors and clients and seek to limit access to and distribution of intellectual property and other
proprietary information. We pursue the protection of our trademarks and other intellectual property in the
United States and internationally. We have also filed certain patent applications in the United States.
Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy or otherwise
obtain and use our proprietary information and technology. Monitoring unauthorized use of our intellectual
property is difficult and unauthorized use of our intellectual property may occur. We cannot be certain that
patents or trademark registrations will be issued, nor can we be certain that any issued patents or trademark
registrations will give us adequate protection from competing products. For example, issued patents may be
circumvented or challenged and declared invalid or unenforceable. In addition, others may develop competing
technologies or databases on their own. Moreover, there is no assurance that our confidentiality agreements with
our employees or third parties will be sufficient to protect our intellectual property and proprietary information.
We may also be subject to infringement claims against us by third parties and may incur substantial costs and
devote significant management resources in responding to such claims. We are obligated under some
agreements to indemnify our clients as a result of claims that we infringe on the proprietary rights of third
parties. These costs and diversions could cause our business to suffer. If any party asserts an infringement claim,
we may need to obtain licenses to the disputed intellectual property. We cannot assure you, however, that we
will be able to obtain these licenses on commercially reasonable terms or that we will be able to obtain any
licenses at all. The failure to obtain necessary licenses or other rights may have an adverse affect on our ability
to provide our products and services.
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EMPLOYEES
As of December 31, 2007, Harte-Hanks employed 6,579 full-time employees and 447 part-time employees, as
follows: Direct Marketing – 4,365 full-time and 105 part-time employees; Shoppers – 2,193 full-time and 341
part-time employees; and corporate office – 21 full-time employees and 1 part-time employee. None of the
work force is represented by labor unions. We consider our relations with our employees to be good.
ITEM 1A.
RISK FACTORS
Cautionary Note Regarding Forward-Looking Statements
This report, including the Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A), contains “forward-looking statements” within the meaning of the federal securities laws.
All such statements are qualified by this cautionary note, which is provided pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933 (1933 Act) and Section 21E of the 1934 Act. Forward-
looking statements may also be included in our other public filings, press releases, our website and oral and
written presentations by management. Statements other than historical facts are forward-looking and may be
identified by words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “seeks,”
“could,” “intends,” or words of similar meaning. Examples include statements regarding (1) our strategies and
initiatives, (2) our financial outlook, (3) planned adjustments to our cost structure and other actions designed to
respond to market conditions and improve our performance, (4) expectations for our businesses and for the
industries in which we operate, including with regard to the recent negative performance trends in our Shoppers
business, (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 based on current information, expectations and estimates and involve
risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results
to vary materially from what is expressed in or indicated by the forward-looking statements. In that event, our
business, financial condition, results of operations or liquidity could be materially adversely affected and
investors in our securities could lose part or all of their investments. Some of these risks, uncertainties,
assumptions and other factors can be found in our filings with the SEC, including the factors discussed below in
this "Item 1A. Risk Factors" and any updates thereto in our Forms 10-Q. The forward-looking statements
included in this report and those included in our other public filings, press releases, our website and oral and
written presentations by management are made only as of the respective dates thereof, and we undertake no
obligation to update publicly any forward-looking statement in this report or in other documents, our website or
oral statements for any reason, even if new information becomes available or other events occur in the future.
In addition to the information set forth elsewhere in this report, including in the MD&A section, the factors
described below should be considered carefully in making any investment decisions with respect to our
securities. The risks described below are not the only ones we face or may face in the future. Additional risks
and uncertainties that are not presently anticipated, or that we may currently believe are immaterial, could also
impair our business operations and financial performance.
We face significant competition for individual projects, entire client relationships and advertising dollars in
general.
Our Direct Marketing business faces significant competition in all of its offerings and within each of its vertical
markets. Direct marketing is a dynamic business, subject to technological advancements, 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 against
whom we compete for individual projects, entire client relationships and marketing expenditures by clients and
prospective clients. We also compete against print and electronic media and other forms of advertising for
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marketing and advertising dollars in general. In addition, our ability to attract new clients and to retain existing
clients may, in some cases, be limited by clients’ policies on or perceptions of conflicts of interest. These
policies can prevent us from performing similar services for competing products or companies. Our Shoppers
business competes for advertising, as well as for readers, with other print and electronic media. Competition
comes from local and regional newspapers, magazines, radio, broadcast, satellite and cable television, other
shoppers, the internet, other communications media and other advertising printers that operate in our markets.
The extent and nature of such competition are, in large part, determined by the location and demographics of the
markets targeted by a particular advertiser and the number of media alternatives in those markets. Our failure to
improve our current processes or to develop new products and services could result in the loss of our clients to
current or future competitors. In addition, failure to gain market acceptance of new products and services could
adversely affect our growth.
Current and future competitors may have significantly greater financial and other resources than we do, and
they may sell competing products and services at lower prices or at lower profit margins, resulting in
pressures on our prices and margins.
The sizes of our competitors vary across market segments. Therefore, some of our competitors may have
significantly greater financial, technical, marketing or other resources than we do in one or more of our market
segments, or overall. As a result, our competitors may be in a position to respond more quickly than we can to
new or emerging technologies and changes in customer requirements, or may devote greater resources than we
can to the development, promotion, sale and support of products and services. Moreover, new competitors or
alliances among our competitors may emerge and potentially reduce our market share, revenue or margins.
Some of our competitors also may choose to sell products or services competitive to ours at lower prices by
accepting lower margins and profitability, or may be able to sell products or services competitive to ours at
lower prices given proprietary ownership of data, technical superiority or economies of scale. Price reductions
or pricing pressure by our competitors could negatively impact our margins and results of operations, and could
also harm our ability to obtain new customers on favorable terms.
We must maintain technological competitiveness, continually improve our processes and develop and
introduce new products and services in a timely and cost-effective manner.
We believe that our success depends on, among other things, maintaining technological competitiveness in our
Direct Marketing and Shopper products, processing functionality and software systems and services.
Technology changes rapidly and there are continuous improvements in computer hardware, network operating
systems, programming tools, programming languages, operating systems, database technology and the use of the
Internet. Advances in information technology may result in changing client preferences for products and product
delivery formats in our industry. We must continually improve our current processes and develop and introduce
new products and services in order to match our competitors’ technological developments and other
improvements in competing product and service offerings and the increasingly sophisticated requirements of our
clients. We may be unable to successfully identify, develop and bring new and enhanced services and products
to market in a timely and cost-effective manner, such services and products may not be commercially successful
and services, products and technologies developed by others may render our services and products
noncompetitive or obsolete.
Our success depends on our ability to consistently and effectively deliver our products and services to our
clients.
Our success depends on our ability to effectively and consistently staff and execute client engagements within
the agreed upon timeframe and budget. Depending on the needs of our clients, our Direct Marketing
engagements may require customization, integration and coordination of a number of complex product and
service offerings and execution across many of our facilities worldwide. Moreover, in some of our
engagements, we rely on subcontractors and other third parties to provide a portion of our overall services, and
we cannot guarantee that these third parties will effectively deliver their services or that we will have adequate
recourse against these third parties in the event they fail to effectively deliver their services. Other contingences
and events outside of our control may also impact our ability to provide our products and services. Our failure
13
to effectively and timely staff, coordinate and execute our client engagements may adversely impact existing
client relationships, the amount or timing of payments from our clients, our reputation in the marketplace and
ability to secure additional business and our resulting financial performance. In addition, our contractual
arrangements with our Direct Marketing clients and other customers may not provide us with sufficient
protections against claims for lost profits or other claims for damages.
If we lose key management or are unable to attract and retain the talent required for our business, our
operating results could suffer.
Our prospects depend in large part upon our ability to attract, train and retain experienced technical, client
services, sales, consulting, research and development, marketing, administrative and management personnel.
While the demand for personnel is dependent on employment levels, competitive factors and general economic
conditions, qualified personnel historically have been in great demand and from time to time and in the
foreseeable future may remain a limited resource. 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 have previously experienced, and may experience in the future, reduced demand for our products and
services because of general economic conditions, the financial conditions and marketing budgets of our
clients and other factors that may impact the industry verticals that we serve.
Economic downturns often severely affect the marketing services industry. In the past, our customers have
responded, and may respond in the future, to weak economic conditions by reducing their marketing budgets,
which are generally discretionary in nature and easier to reduce in the short-term than other expenses. In
addition, revenues from our Shoppers business are largely dependent on local advertising expenditures in the
markets in which they operate. Such expenditures are substantially affected by the strength of the local
economies in those markets. Direct Marketing revenues are dependent on national, regional and international
economies and business conditions. A lasting economic recession or downturn in the United States economy
and the economies we operate in abroad, could have material adverse effects on our business, financial position
or operating results. Similarly, there may be industry or company-specific factors that negatively impact our
clients and prospective clients or their industries and result in reduced demand for our products and services.
We may also experience reduced demand as a result of consolidation of clients and prospective clients in the
industry verticals that we serve.
Our Shoppers business is geographically concentrated and is subject to the California and Florida
economies.
Our Shoppers business is concentrated geographically in California and Florida. An economic downturn in
these states or a large disaster, such as a flood, hurricane, earthquake or other disaster or condition that disables
our facilities, immobilizes the United States Postal Service or causes a significant negative change in the
economies of these regions, could have a material adverse effect on our business, financial position or operating
results.
Our business plan requires us to effectively manage our costs. If we do not achieve our cost management
objectives, our financial results could be adversely affected.
Our business plan and expectations for the future require that we effectively manage our cost structure,
including our operating expenses and capital expenditures across our operations. To the extent that we do not
effectively manage our costs, our financial results may be adversely affected.
Privacy, security and other direct marketing regulatory requirements may prevent or impair our ability to
offer our products and services.
We are subject to, or affected by, numerous laws, regulations and industry standards that regulate direct
marketing activities,
that address privacy, data security and unsolicited marketing
communications. Please refer to the section above entitled, “U.S. and Foreign Government Regulations,” for
additional information regarding these regulations.
including
those
14
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. We
anticipate that such proposals will continue to be introduced in the future, some of which may be adopted. In
addition, our business may be affected by the impact of these restrictions on our clients and their marketing
activities. These additional regulations could increase compliance requirements and restrict or prevent the
collection, management, aggregation, transfer, use or dissemination of information or data that is currently
legally available. Additional regulations may also restrict or prevent current practices regarding unsolicited
marketing communications. For example, many states are considering implementing do-not-mail legislation
that could impact our Direct Marketing and Shoppers businesses and the businesses of our clients and
customers. In addition, 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. Compliance with regulations is costly and time-consuming, and we may
encounter difficulties, delays or significant expenses in connection with our compliance. There could be a
material adverse impact on our business due to the enactment or enforcement of legislation or industry
regulations, the issuance of judicial or governmental interpretations, enforcement priorities of governmental
agencies or a change in customs arising from public concern over consumer privacy and data security issues.
Consumer perceptions regarding the privacy and security of their data may prevent or impair our ability to
offer our products and services.
Pursuant to various federal, state, foreign and industry regulations, consumers have control as to how certain
data regarding them is collected, used and shared for marketing purposes. If due to privacy or security concerns,
consumers exercise their ability to prevent such data collection, use or sharing, this may impair our ability to
provide direct marketing to those consumers and limit our clients’ requirements for our services. Additionally,
privacy and security concerns may limit consumers’ voluntarily providing data to our customers or marketing
companies. Some of our services depend on voluntarily provided data and may be impaired without such data.
Our reputation and business results may be adversely impacted if we, or subcontractors upon whom we rely,
do not effectively protect sensitive personal information of our clients and our clients’ customers.
Current privacy and data security laws and industry standards impact the manner in which we capture, handle,
analyze and disseminate customer and prospect data as part of our client engagements. In many instances, client
contracts also mandate privacy and security practices. If we fail to effectively protect and control sensitive
personal information (such as personal health information, social security numbers or credit card numbers) of
our clients and their customers or prospects in accordance with these requirements, we may incur significant
expenses, suffer reputational harm and loss of business, and, in certain cases, be subjected to regulatory or
governmental sanctions or litigation. These risks may be increased due to our reliance on subcontractors and
other third parties in providing a portion of our overall services in certain engagements. We cannot guarantee
that these third parties will effectively protect and handle sensitive personal information or other confidential
information, or that we will have adequate recourse against these third parties in that event.
We may not be able to adequately protect our information systems.
Our ability to protect our information systems against damage from a data loss, security breach, computer virus,
fire, power loss, telecommunications failure or other disaster is critical to our future success. Some of these
systems may be outsourced to third-party providers from time to time. Any damage to our information systems
that causes interruptions in our operations or a loss of data could affect our ability to meet our clients'
requirements, which could have a material adverse effect on our business, financial position or operating results.
While we take precautions to protect our information systems, such measures may not be effective and existing
measures may become inadequate because of changes in future conditions.
15
Breaches of security, or the perception that e-commerce is not secure, could harm our business and
reputation.
Business-to-business and business-to-consumer electronic commerce, including that which is Internet-based,
requires the secure transmission of confidential information over public networks. Some of our products and
services are accessed through the Internet. Security breaches in connection with the delivery of our products and
services, or well-publicized security breaches that may affect us or our industry, such as database intrusion,
could be detrimental to our business, operating results and financial condition. We cannot be certain that
advances in criminal capabilities, new discoveries in the field of cryptography or other developments will not
compromise or breach the technology protecting the information systems that access our products, services and
proprietary database information.
Data suppliers could withdraw data that we rely on for our products and services.
We purchase or license much of the data we use. There could be a material adverse impact on our Direct
Marketing business if owners of the data we use were to withdraw or cease to allow access to the data, or
materially restrict the authorized uses of their data. Data providers could withdraw their data if there is a
competitive reason to do so, if there is pressure from the consumer community or if additional legislation is
passed restricting the use of the data. We also rely upon data from other external sources to maintain our
proprietary and non-proprietary databases, including data received from customers and various government and
public record sources. If a substantial number of data providers or other key data sources were to withdraw or
restrict their data, if we were to lose access to data due to government regulation, or if the collection of data
becomes uneconomical, our ability to provide products and services to our clients could be materially adversely
affected, which could result in decreased revenues, net income and earnings per share.
We must successfully evaluate acquisition targets and integrate acquisitions.
We frequently evaluate acquisition opportunities to expand our product and service offerings and geographic
locations, including potential international acquisitions. Acquisition activities, even if not consummated,
require substantial amounts of management time and can distract from normal operations. In addition, we may
be unable to achieve the profitability goals, synergies and other objectives initially sought in acquisitions, and
any acquired assets, data or businesses may not be successfully integrated into our operations. Acquisitions may
result in the impairment of relationships with employees and customers. Moreover, although we review and
analyze assets or companies we acquire, such reviews are subject to uncertainties and may not reveal all
potential risks and we may incur unanticipated liabilities and expenses as a result of our acquisition activities.
The failure to identify appropriate candidates, to negotiate favorable terms, or to successfully integrate future
acquisitions into existing operations could result in not achieving planned revenue growth and could negatively
impact our net income and earnings per share.
We are vulnerable to increases in paper prices.
In recent years, newsprint prices have fluctuated widely. We maintain, on average, less than 30 days of paper
inventory and do not purchase our paper pursuant to long-term paper contracts. Because we have a limited
ability to protect ourselves from fluctuations in the price of paper or to pass increased costs along to our clients,
these fluctuations could materially affect the results of our operations.
We are vulnerable to increases in postal rates and disruptions in postal services.
Our Shoppers and Direct Marketing services depend on the United States Postal Service to deliver products. Our
Shoppers are delivered by Standard Mail, and postage is the second largest expense, behind payroll, in our
Shoppers business. Standard postage rates have increased in recent years and are expected to increase again in
the first half of 2008. Overall Shoppers postage costs may increase as a result of increases in postage rates,
circulation and insert volumes. Postage rates also influence the demand for our Direct Marketing services even
though the cost of mailings is typically borne by our clients and is not directly reflected in our revenues or
expenses. Accordingly, future postal increases or disruptions in the operations of the U.S. Postal Service may
have an adverse impact on us.
16
Our indebtedness may adversely impact our ability to react to changes in our business or changes in general
economic conditions.
The amount of our indebtedness and the terms under which we have borrowed money under our credit facilities
or other agreements could have important consequences for our business. Our debt covenants require that we
maintain certain financial measures and ratios. As a result of these covenants and ratios, we may be limited in
the manner in which we can conduct our business, and we may be unable to engage in favorable business
activities or finance future operations or capital needs. A failure to comply with these restrictions or to maintain
the financial measures and ratios contained in the debt agreements could lead to an event of default that could
result in an acceleration of outstanding indebtedness. In addition, the amount and terms of our indebtedness
could:
•
•
•
limit our flexibility in planning for, or reacting to, changes in our business and the industries in which
we operate, including limiting our ability to invest in our strategic initiatives, and, consequently, place
us at a competitive disadvantage;
reduce the availability of our cash flows that would otherwise be available to fund working capital,
capital expenditures, acquisitions and other general corporate purposes; and
result in higher interest expense in the event of increases in interest rates because some of our
borrowings are at variable rates of interest, as discussed below under “Interest rate increases could affect
our results of operations, cash flows and financial position.”
We may incur additional indebtedness in the future and, if new debt is added to our current debt levels, the
above risks could be increased.
Interest rate increases could affect our results of operations, cash flows and financial position.
Interest rate movements in Europe and the United States can affect the amount of interest we pay related to our
debt and the amount we earn on cash equivalents. Our primary interest rate exposure is to interest rate
fluctuations in Europe, specifically Eurodollar rates due to their impact on interest related to our credit facilities.
As of December 31, 2007, we had $259.1 million of debt outstanding, all of which was at variable interest rates.
We manage a portion of our interest rate exposures by entering into an interest rate swap for a total notional
amount of $150.0 million, resulting in a net amount of $109.1 million of variable-rate debt at December 31,
2007. To the extent that we have debt with variable interest rates that is not hedged, our results of operations,
cash flows and financial position could be materially adversely affected by significant increases in interest rates.
We also have exposure to interest rate fluctuations in the United States, specifically money market, commercial
paper and overnight time deposit rates, as these affect our earnings on excess cash. Even with the offsetting
increase in earnings on excess cash in the event of an interest rate increase, we cannot be assured that future
interest rate increases will not have a material adverse impact on our business, financial position or operating
results.
We could fail to adequately protect our intellectual property rights and may face claims for intellectual
property infringement.
Our ability to compete effectively depends in part on the protection of our technology, products, services and
brands through intellectual property right protections, including patents, copyrights, database rights, trade
secrets and trademarks. The extent to which such rights can be protected and enforced varies in different
jurisdictions. There is also a risk of litigation relating to our use or future use of intellectual property rights of
third parties. Third-party infringement claims and any related litigation against us could subject us to liability for
damages, restrict us from using and providing our technologies, products or services or operating our business
generally, or require changes to be made to our technologies, products and services. Please refer to the section
above entitled, “Intellectual Property Rights,” for additional information regarding our intellectual property and
associated risks.
17
Our international operations subject us to risks associated with operations outside the U.S.
Harte Hanks Direct Marketing conducts business outside of the United States. During 2007, approximately 8.5%
of Harte Hanks Direct Marketing’s revenues were derived from businesses outside the United States, primarily
Europe, Asia and South America. We may expand our international operations in the future as part of our
growth strategy. Accordingly, our future operating results could be negatively affected by a variety of factors,
some of which are beyond our control, including:
social, economic and political instability;
changes in U.S. and foreign governmental legal requirements or policies resulting in burdensome
government controls, tariffs, restrictions, embargoes or export license requirements;
inflation;
the potential for nationalization of enterprises;
•
•
•
•
• potentially adverse tax treatment;
•
less favorable foreign intellectual property laws that would make it more difficult to protect our
intellectual properties from appropriation by competitors;
• more onerous or differing data privacy and security requirements or other marketing regulations;
•
•
longer payment cycles for sales in foreign countries; and
the costs and difficulties of managing international operations.
In addition, exchange rate movements may have an impact on our future costs or on future cash flows from
foreign investments. We have not entered into any foreign currency forward exchange contracts or other
derivative instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. The
various risks that are inherent in doing business in the United States are also generally applicable to doing
business outside of the United States, and may be exaggerated by the difficulty of doing business in numerous
sovereign jurisdictions due to differences in culture, laws and regulations.
We must maintain effective internal controls.
In designing and evaluating our internal controls over financial reporting, we recognize that any internal control
or procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving
desired control objectives and that no system of internal controls can be designed to provide absolute assurance
of effectiveness. If we fail to maintain a system of effective internal controls, it could have a material adverse
effect on our business, financial position or operating results. Additionally, adverse publicity related to a failure
in our internal controls over financial reporting could have a negative impact on our reputation and business.
Fluctuation in our revenue and operating results may impact our stock price.
From time to time, we may provide forward-looking statements regarding our anticipated or targeted financial
and operating performance, including with respect to our earnings per share and revenue growth. Fluctuations
in our quarterly revenues and operating results in any future period that fall below the performance indicated by
our forward-looking statements or the expectations of securities analysts and investors could cause a decline in
our stock price. These fluctuations could be caused by a variety of factors, including unanticipated variations in
the size, budget, or progress toward the completion of our engagements, variability in the market demand for our
services, client consolidations, the unanticipated termination of several major client engagements or other
factors discussed in this Item 1A. “Risk Factors.”
The granting of stock-based awards to our employees affects our expenses and our stock price.
Effective January 1, 2006, we became subject to new stock-based compensation accounting rules that require
that compensation costs related to stock-based payment transactions, including stock options, restricted stock
and performance stock units, be recognized in our financial statements. Previously, we accounted for stock-
based compensation of employees using the intrinsic value method, which resulted in no compensation expense
charged against income for stock option grants to employees where the exercise price was equal to the market
price of the underlying stock at the date of grant. Beginning January 1, 2006, grants of options, stock or other
forms of equity have been recognized as compensation expense in our statement of operations, increasing our
18
reported expenses for the same activities and negatively impacting our earnings per share. These increased
expenses could affect the price of our common shares.
War or terrorism could affect our business.
War and/or terrorism or the threat of war and/or terrorism involving the United States could have a significant
impact on our business, financial position or operating results. War or the threat of war could substantially affect
the levels of advertising expenditures by clients in each of our businesses. In addition, each of our businesses
could be affected by operation disruptions and a shortage of supplies and labor related to such a war or threat of
war.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our headquarters are located in San Antonio, Texas and we occupy approximately 17,000 square feet of leased
premises at that location. Our business is conducted in facilities worldwide containing aggregate space of
approximately 3.6 million square feet. Approximately 3.4 million square feet are held under leases, which
expire at dates through 2023. The balance of the properties, used in our Southern California Shopper operations
and Hasselt, Belgium Direct Marketing operations, are owned.
ITEM 3.
LEGAL PROCEEDINGS
We are 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, any ultimate liability arising out of currently pending claims and
lawsuits is not currently expected to have a material 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.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2007.
19
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
Our common stock is listed on the NYSE (symbol: HHS). The reported high and low quarterly sales price
ranges for 2007 and 2006 were as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2007
2006
High
28.78
27.85
26.67
20.52
Low
25.81
25.07
19.62
15.50
High
31.00
28.21
27.17
27.84
Low
25.60
24.33
22.35
25.03
In 2007, quarterly dividends were paid at the rate of 7.0 cents per share. In 2006, quarterly dividends were paid
at the rate of 6.0 cents per share.
In January 2008, we announced an increase in the regular quarterly dividend from 7.0 cents per share to 7.5
cents per share, payable March 14, 2008 to holders of record on February 29, 2008.
As of February 1, 2008, there are approximately 2,750 holders of record.
Issuer Purchases of Equity Securities
The following table contains information about our purchases of our equity securities during the fourth quarter
of 2007:
Total
Number of
Shares
Purchased
860,000
1,564,136
1,300,000
3,724,136
Average
Price
Paid per
Share
$ 18.69
$ 16.61
$ 16.97
$ 17.21
Total Number
of Shares
Purchased
as Part of
a Publicly
Announced Plan(1)
860,000
1,451,300
1,300,000
3,611,300
Maximum
Number of
Shares that
May Yet Be
Purchased Under
the Plan(2)
5,651,991
4,200,691
2,900,691
Period
October 1 – 31, 2007
November 1 – 30, 2007
December 1 – 31, 2007(3)
Total
(1) During the fourth quarter of 2007, 3,611,300 shares were purchased through our stock repurchase program that was publicly
announced in January 1997. Under this program shares can be purchased in the open market or through privately negotiated
transactions. As of December 31, 2007, our Board had authorized the repurchase of up to 61.9 million shares of our outstanding
common stock. As of December 31, 2007, we had repurchased a total of 59.0 million shares at an average price of $19.11 per share
under this program.
(2) Subsequent to year end, on January 29, 2008, our Board authorized an additional 12.5 million shares under our stock repurchase
program, bringing the total repurchase authorization to 74.4 million shares.
(3) On December 10, 2007, we purchased 0.1 million shares of our common stock from The Shelton Family Foundation (Foundation)
and 0.1 million shares of our common stock from The Scottie Ann Shelton Trust (Trust). These purchases were made at a price of
$16.93 per share (the closing price per share of our common stock on December 10, 2007). Mr. Larry D. Franklin, the Chairman of
our Board of Directors, and David L. Copeland, a member of our Board of Directors, both served as directors on the Foundation and
trustees of the Trust at the time of these purchases and both disclaim beneficial ownership of any shares held by the Foundation or
the Trust. In January 2008, Mr. Franklin resigned from the Board of the Foundation.
20
Comparison of Stockholder Returns
The material under this heading is not “soliciting material,” is not deemed “filed” with the SEC, and is not to
be incorporated by reference into any filing under the 1933 Act or the 1934 Act, whether made before or after
the date hereof and irrespective of any general incorporation language in such filing.
The following graph compares the cumulative total return of our common stock during the period December 31,
2002 to December 31, 2007 with the Standard & Poor’s 500 Stock Index (S&P 500 Index) and with two peer
groups. We made modifications to our peer group in this 2007 Annual Report on Form 10-K compared to our
previous peer group in order to be consistent with the modified 2008 peer group used by our Compensation
Committee in evaluating management compensation.
Our former peer group included Acxiom Corporation, Catalina Marketing Corporation, Choicepoint, Inc.,
Convergys Corporation, Equifax, Inc., Fair Isaac and Company, Incorporated, infoUSA, Inc., Sykes Enterprises,
Incorporated, and Teletech Holdings, Inc.
Our current peer group includes Acxiom Corporation, Alliance Data Systems Corporation, Catalina Marketing
Corporation, Choicepoint, Inc., Consolidated Graphics, Inc., Dun & Bradstreet Corporation, Equifax, Inc., Fair
Isaac and Company, Incorporated, ICT Group, Inc., infoUSA, Inc., Interpublic Group of Companies, Inc., PC
Mall, Inc., R.H. Donnelley Corporation, Source Interlink Companies, Inc., Sykes Enterprises, Incorporated,
Teletech Holdings, Inc., Valassis Communications, Inc., ValueClick, Inc., and Viad Corp.
The S&P Index includes 500 United States companies in the industrial, transportation, utilities and financial
sectors and is weighted by market capitalization. The peer groups are also weighted by market capitalization.
21
The graph depicts the results of investing $100 in our common stock, the S&P 500 Index and the peer groups at
closing prices on December 31, 2002.
Comparison of Cumulative Five Year Total Return
$200
$150
$100
$50
$0
2002
2003
2004
2005
2006
2007
Harte-Hanks, Inc.
S&P 500 Index
New Peer Group
Old Peer Group
Harte-Hanks, Inc. .......................................
S&P 500 Index ...........................................
New Peer Group.........................................
Old Peer Group ..........................................
Base
Period
Dec-02
100
100
100
100
Dec-03
117.23
128.68
121.11
112.11
Dec-04
140.97
142.69
143.30
129.12
Years Ending
Dec-05
144.25
149.70
142.51
142.27
Dec-06
152.80
173.34
166.03
158.91
Dec-07
96.64
182.86
140.12
128.32
22
ITEM 6.
SELECTED FINANCIAL DATA
Five-Year Financial Summary
In thousands, except per share amounts
Statement of Operations Data
Revenues ...................................................................................
Operating expenses
2007
2006
2005
2004
2003
$1,162,886
$1,184,688
$1,134,993
$1,030,461
$ 944,576
Payroll, production and distribution .......................................
Advertising, selling, general and administrative ....................
Depreciation ............................................................................
Intangible amortization ...........................................................
Total operating expenses ...............................................................
Operating income...........................................................................
Interest expense, net.......................................................................
871,468
89,787
33,195
3,509
997,959
164,927
12,453
Net Income ..................................................................................... $ 92,640
1.26
Earnings per common share—diluted............................................ $
Cash dividends per common share ................................................ $
0.28
Weighted-average common and common
874,088
90,516
31,566
2,466
998,636
186,052
6,102
$ 111,792
1.39
$
0.24
$
825,568
88,067
29,918
1,427
944,980
190,013
1,760
$ 114,458
1.34
$
0.20
$
755,715
80,682
28,169
600
865,166
165,295
679
$ 97,568
1.11
$
0.16
$
692,170
75,886
29,433
600
798,089
146,487
687
$ 87,362
0.97
$
0.12
$
equivalent shares outstanding—diluted ..................................
73,703
80,646
85,406
87,806
89,982
Segment Data
Revenues
Direct Marketing ..................................................................... $ 732,461
Shoppers ..................................................................................
430,425
Total revenues ......................................................................... $1,162,886
Operating income
Direct Marketing ..................................................................... $ 108,796
70,784
Shoppers ..................................................................................
General corporate ....................................................................
(14,653)
Total operating income ........................................................... $ 164,927
Capital expenditures ........................................................................... $ 28,217
Balance sheet data (at end of period)
Property, plant and equipment, net ................................................ $ 112,354
564,522
Goodwill and other intangibles, net...............................................
951,926
Total assets .....................................................................................
Total long-term debt.......................................................................
259,125
Total stockholders’ equity ............................................................. $ 408,512
$ 709,728
474,960
$1,184,688
$ 109,458
88,814
(12,220)
$ 186,052
$ 33,708
$ 116,591
568,795
969,285
205,000
$ 493,476
$ 694,558
440,435
$1,134,993
$ 108,095
94,231
(12,313)
$ 190,013
$ 28,215
$ 112,911
519,419
889,663
62,000
$ 561,346
$ 641,214
389,247
$1,030,461
$ 584,804
359,772
$ 944,576
$ 90,856
85,857
(11,418)
$ 165,295
$ 35,146
$ 76,641
78,007
(8,161)
$ 146,487
$ 31,915
$ 113,770
460,238
828,353
-
$ 571,799
$ 97,747
439,823
759,130
5,000
$ 555,598
23
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Note About Forward-Looking Statements
This report, including this Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A), contains “forward-looking statements” within the meaning of the federal securities laws.
All such statements are qualified by the cautionary note included under Item 1A. above, which is provided
pursuant to the safe harbor provisions of Section 27A of the 1933 Act and Section 21E of the 1934 Act. Actual
results may vary materially from what is expressed in or indicated by the forward-looking statements.
Overview
The following MD&A section is intended to help the reader understand the results of operations and financial
condition of Harte-Hanks, Inc. (Harte-Hanks). This section is provided as a supplement to, and should be read
in conjunction with, our financial statements and the accompanying notes to the financial statements.
Harte-Hanks is a worldwide direct and targeted marketing company that provides direct marketing services and
shopper advertising opportunities to a wide range of local, regional, national and international consumer and
business-to-business marketers. We manage our operations through two operating segments: Direct Marketing
and Shoppers.
In 2007, Harte-Hanks Direct Marketing had revenues of $732.5 million, which accounted for approximately
63% of our total revenues. Direct Marketing services are targeted to specific industries or markets with services
and software products tailored to each industry or market. Currently, our Direct Marketing business services
various vertical markets including retail, high-tech/telecom, financial services, pharmaceutical/healthcare, and a
wide range of selected markets. We believe that we are generally able to provide services to new industries and
markets by modifying our services and applications as opportunities are presented. Depending on the needs of
our clients, our Direct Marketing capabilities are provided in an integrated approach through more than 30
facilities worldwide, more than 10 of which are located outside of the United States. Each of these centers
possesses some specialization and is linked with others to support the needs of our clients.
We use various capabilities and technologies to enable our clients to identify, reach, influence and nurture their
customers. Harte-Hanks Direct Marketing improves the return on its clients’ marketing investment by
increasing their prospect and customer value through solutions and services organized around five groupings of
integrated activities:
Information (data collection/management);
•
• Opportunity (data access/utilization);
•
Insight (data analysis/interpretation);
• Engagement (program and campaign creation and development); and
•
Interaction (program execution).
We execute these activities by providing a range of products and services including:
• Database design and development;
• Data processing and service bureau;
• Software;
• Data enhancements and list brokerage;
• Analytics, modeling, research and strategy;
• E-Care including online technical support and inbound email management;
24
• Events management including registration and promotion;
• Website design, management and hosting services;
• Loyalty program management;
• Sales lead management;
• Web-based database marketing;
• Technology databases;
• Creative services;
• Traditional and interactive media planning, placement and buying;
• Fulfillment and distribution;
• Graphics and printing solutions;
•
• Lettershop services including laser personalization;
• Logistics; and
• Email marketing.
Inbound and outbound telemarketing including telesales and order processing;
Harte-Hanks Shoppers is North America’s largest owner, operator and distributor of shopper publications, based
on weekly circulation and revenues. Shoppers are weekly advertising publications delivered free by Standard
Mail to households and businesses in a particular geographic area. Shoppers offer advertisers a targeted, cost-
effective local advertising system, with virtually 100% penetration in their area of distribution. Shoppers are
particularly effective in large markets with high media fragmentation in which major metropolitan newspapers
generally have low penetration. Our Shoppers segment also provides advertising and other services online
through our websites, ThePennySaverUSA.com and TheFlyer.com. PennySaverUSA.com displays the ads
published in the print versions of the PennySaverUSA.com (California) and TheFlyer.com (Florida) publications,
and is a leader in the aggregation of online classified ads from free community papers and shoppers across the
country. In 2007, our Shoppers segment had revenues of $430.4 million, which represented 37% of our total
revenue.
As of December 31, 2007, our Shoppers are zoned into 1,077 separate editions with total circulation of
approximately 13 million in California and Florida each week. As a result of the difficult economic
environment in California, we shut down approximately 600,000 of unprofitable circulation at the end of June
2007. This consisted of approximately 380,000 of circulation in the greater Los Angeles market and
approximately 220,000 of circulation in the Northern California market. We will continue to evaluate all of our
circulation performance, but do not currently anticipate further circulation reductions of this magnitude in the
near future. Despite this recent circulation reduction, we continue to believe that future expansions may provide
increased revenue opportunities in the long term.
We derive revenues from the sale of direct marketing services and shopper advertising services. As a worldwide
business, direct marketing is affected by general national and international economic trends. Our Shoppers
operate in regional markets in California and Florida and are largely affected by the strength of the local
economies.
Our overall strategy is based on six key elements:
Increasing revenues through growing our base businesses;
Introducing new services and products;
• Being a market leader in each of our businesses;
•
•
• Entering new markets and making acquisitions;
• Using technology to create competitive advantages; and
• Employing people who understand our clients’ business and markets.
25
Our principal operating expense items are labor, postage and transportation.
Results of Operations
Operating results were as follows:
In thousands except
per share amounts
Revenues
Operating expenses
Operating income
2007
$ 1,162,886
997,959
$ 164,927
% Change
-1.8
-0.1
-11.4
2006
$ 1,184,688
998,636
$ 186,052
% Change
4.4
5.7
-2.1
2005
$ 1,134,993
944,980
$ 190,013
Net income
$
92,640
-17.1
$ 111,792
-2.3
$ 114,458
Diluted earnings per share $
1.26
-9.4
$
1.39
3.7
$
1.34
Year ended December 31, 2007 vs. Year ended December 31, 2006
Revenues
Consolidated revenues decreased 1.8%, to $1,162.9 million, in 2007 when compared to 2006. Our overall
results reflect decreased revenues of 9.4% from our Shoppers segment, partially offset by increased revenues of
3.2% from our Direct Marketing segment. The revenue performance from Shoppers was the result of decreased
sales in established markets, primarily attributable to the challenging economic environments in the California
and Florida geographies in which we operate, circulation reductions, and the discontinuation of commercial
printing operations in our Tampa facility. Direct Marketing comparisons were affected by $7.0 million of
revenue recognized in the second quarter of 2006 relating to a contract termination fee received from one of our
customers in the financial vertical. Excluding revenues from this contract termination, Direct Marketing’s
revenues in 2007 were up $29.7 million, or 4.2%, and consolidated revenues would have been down 1.3%
compared to 2006.
Operating Expenses
Overall operating expenses decreased 0.1%, to $998.0 million, in 2007 compared to 2006. This year-over-year
change includes $8.4 million of restructuring and transition costs, including compensation costs recognized
during the third quarter of 2007 associated with the announced retirement of our former President and Chief
Executive Officer, severance in both businesses and approximately $1.0 million recognized in our Shoppers
segment in the second quarter of 2007 related to the shut down of approximately 600,000 of unprofitable
circulation at the end of June 2007. The remaining overall decrease in operating expenses was driven by
decreased production and labor costs in Shoppers, attributable to the decline in Shoppers revenues. Direct
Marketing operating expenses increased $23.4 million, or 3.9%, and general corporate expense increased $2.4
million or 19.9%, while Shoppers operating expenses decreased $26.5 million or 6.9%. Direct Marketing’s
results were impacted by $2.4 million of operating expense recognized in the second quarter of 2006 as a result
of the contract termination discussed above.
Net Income/Earnings Per Share
Net income decreased 17.1%, to $92.6 million, while diluted earnings per share were down 9.4%, to $1.26 per
share, in 2007 when compared to 2006. The decrease in net income was a result of decreased operating income,
increased interest expense, and a higher effective tax rate in 2007 when compared to 2006.
On a consolidated basis, we incurred $8.4 million of expenses in 2007 related to actions designed to improve
short-term performance and better position us for longer-term growth in revenue and profits. In Direct
Marketing, actions were aimed at flattening our organizational structure to improve efficiency and bring our
sales, marketing and operations closer to our customers. In Shoppers, in addition to the circulation shut down,
actions were taken to reduce fixed costs and headcount, and included streamlining our structure from six
operating units into three operating units: the California PennySaver unit, the Florida Flyer unit and the
Shopper digital unit. For the full year 2007, these costs exceeded the overall benefit we experienced as a result
of these initiatives.
26
Year ended December 31, 2006 vs. Year ended December 31, 2005
Revenues
Consolidated revenues increased 4.4%, to $1,184.7 million, in 2006 when compared to 2005. Our overall
results reflect increased revenues of 7.8% from our Shoppers segment and 2.2% from our Direct Marketing
segment. The acquisition of The Flyer, located in Tampa, Florida (The Tampa Flyer) in April 2005 contributed
a little more than a third of the Shoppers revenue growth. The remaining Shoppers revenue increases primarily
were the result of improved sales in established markets, year-over-year geographic expansions and household
growth in California and Florida, and new products. Direct Marketing results were affected by (i) $7.0 million
of revenue recognized in the second quarter of 2006 relating to a contract termination fee received from one of
our financial vertical customers that was acquired in 2006, and (ii) a large, complex, world-wide project that was
launched and substantially completed in the first quarter of 2005 for a client in the high-tech vertical market.
Operating Expenses
Overall operating expenses increased 5.7%, to $998.6 million, in 2006 compared to 2005. The increase in
consolidated operating expenses was a result of increased operating expenses of 11.5% from the Shoppers
segment and 2.4% from the Direct Marketing segment, partially offset by a 0.8% decrease in general corporate
expense. The primary drivers of the increase in operating expenses were the acquisition of The Tampa Flyer in
April 2005, higher Shoppers postage costs due to the postal rate increase in January 2006, higher Shoppers
payrolls to support increased revenues, higher circulation volumes and expansions, $7.4 million of stock-based
compensation as a result of our adoption of Statement of Financial Accounting Standards (SFAS) No. 123, as
revised, Share-Based Payment (SFAS 123R), higher paper costs due to higher rates, and expenses related to the
contract termination discussed above.
Net Income/Earnings Per Share
Net income decreased 2.3%, to $111.8 million, while diluted earnings per share were up 3.7%, to $1.39 per
share, in 2006 when compared to 2005. The decrease in net income was a result of decreased operating income
and increased interest expense, partially offset by a lower effective tax rate in 2006 when compared to 2005. In
2006 we began expensing stock options and other equity-compensation, which impacted 2006 diluted earnings
per share by approximately $0.06 per share.
Direct Marketing
Direct Marketing operating results were as follows:
In thousands
Revenues
Operating expenses
Operating income
2007
$ 732,461
623,665
$ 108,796
% Change
3.2
3.9
-0.6
2006
$ 709,728
600,270
$ 109,458
% Change
2.2
2.4
1.3
2005
$ 694,558
586,463
$ 108,095
Year ended December 31, 2007 vs. Year ended December 31, 2006
Revenues
Direct Marketing revenues increased $22.7 million, or 3.2%, in 2007 compared to 2006. These results were
affected by $7.0 million of revenue recognized in the second quarter of 2006 relating to the contract termination
fee discussed above. Excluding revenues from this contract termination, 2007 revenues were up $29.7 million,
or 4.2%, compared to 2006. Our high tech/telecom vertical, which was helped by our September 2006
acquisition of Aberdeen Group, Inc. (Aberdeen), was up double-digits, and our select vertical grew in the high-
single digits. Our retail vertical was essentially flat, while our pharma/healthcare vertical was down in the low-
single digits. Excluding the impact of the contract termination fee, our financial vertical was down in the mid-
single digits.
From a service offering perspective, Direct Marketing experienced increased revenues from telesales, market
research, software sales, internet services and fulfillment. Partially offsetting these increases were declines in
revenues from print, data and database processing, and data sales.
27
The acquisitions of StepDot Software GmbH in June 2006, Global Address in July 2006 and Aberdeen in
September 2006 positively affected our revenues in 2007 compared to 2006. The sale of a print operation in
October 2006 negatively affected our revenues in 2007 compared to 2006.
Revenues from our vertical markets in 2007 were impacted by the economic fundamentals of each industry,
various market factors, including the demand for services by our clients, and the financial condition of and
budgets available to specific clients. In general, revenues for Direct Marketing are affected by general national
and international economic trends.
2008 revenues will depend on, among other factors, how successful we are at growing business with existing
clients, acquiring new clients, meeting client demands and the strength of the national and international
economy. We believe that in the long term we will continue to benefit from marketing and advertising
expenditures being moved from other advertising media to the targeted media space, the results of which can be
more effectively tracked, enabling measurement of the return on marketing investment. Standard postage rates
increased in January 2006 and May 2007 and are expected to increase again in the first half of 2008. Postage
rates influence the demand for our Direct Marketing services even though the cost of mailings is borne by our
clients and is not directly reflected in our revenues or expenses. There is no assurance that future postal
increases will not have an adverse impact on us.
Operating Expenses
Operating expenses increased $23.4 million, or 3.9%, in 2007 compared to 2006. The results were affected by
approximately $4.2 million of costs, primarily severance and lease termination costs, recognized in 2007 as part
of the restructuring initiative discussed above. Labor costs increased $33.7 million, or 11.4%, in 2007 compared
to 2006 due to severance and higher payrolls and temporary labor due to the relative increase in revenues from
more labor intensive service lines. Production and distribution costs decreased $14.8 million, or 6.5%, due to
lower logistics-related transportation costs and less expense related to printing materials. The shift in revenues
from high production cost, less labor intensive work done at our divested print facility to more labor intensive,
lower production cost work done at Aberdeen also contributed to the changes in labor and production and
distribution costs. General and administrative expense increased $2.5 million, or 5.0%, due primarily to
increased employee expenses including travel, recruiting and training costs, increased business service costs and
higher bad debt expense due primarily to timing. Depreciation and amortization expense increased $2.0 million,
or 7.7%, due to additional intangible amortization related to 2006 acquisitions, primarily Aberdeen, and
additional depreciation of assets related to our facility in Manila that was opened in the last half of 2006.
The acquisitions of StepDot Software GmbH in June 2006, Global Address in July 2006 and Aberdeen in
September 2006 contributed to the increase in operating expenses in 2007 compared to 2006. The sale of a print
operation in October 2006 partially offset the increase in operating expenses in 2007 compared to 2006.
Direct Marketing’s largest cost components are labor and transportation costs. Labor costs are partially variable
and tend to fluctuate with revenues and the demand for our Direct Marketing services. Fuel costs have
increased significantly in the last few years and were near historic levels throughout 2007. Fuel costs are
expected to remain at high levels for the foreseeable future which will continue to impact Direct Marketing’s
total production costs and total operating expenses.
28
Year ended December 31, 2006 vs. Year ended December 31, 2005
Revenues
Direct Marketing revenues increased $15.2 million, or 2.2%, in 2006 compared to 2005. These results were
affected by (i) $7.0 million of revenue recognized in the second quarter of 2006 relating to a contract
termination fee received from one of our financial vertical customers that was acquired in the second quarter of
2006, and (ii) a large, complex, world-wide project that was launched and substantially completed in the first
quarter of 2005 for a client in the high-tech vertical market. Our pharma/healthcare vertical was up over 15%,
and our select vertical grew in the mid-single digits compared to 2005. Retail, our largest vertical in terms of
annual revenue, grew in the low single digits. Our financial vertical (excluding the termination fee) was down
in the mid-single digits, and our high-tech vertical (excluding the one-time project) was down in the low single
digits compared to 2005.
From a service offering perspective, Direct Marketing experienced increased revenues from data processing,
software sales, logistics and telesales. Partially offsetting these increases were declines in revenues from
account management and database sales.
The acquisitions of StepDot Software GmbH in June 2006, Global Address in July 2006 and Aberdeen in
September 2006 positively affected our revenues in 2006 compared to 2005. The sale of a print operation in
October 2006 negatively affected our revenues in 2006 compared to 2005.
Operating Expenses
Operating expenses increased $13.8 million, or 2.4%, in 2006 compared to 2005. These results include (i) $3.0
million of operating expense recognized as a result of the contract termination discussed above, and (ii) $3.9
million of stock-based compensation recorded in 2006 as a result of our adoption of SFAS 123R. Excluding
these two factors, operating expense increased $6.9 million, or 1.2%. Labor costs increased $7.8 million, or
2.7% in 2006 compared to 2005. Excluding the additional labor costs associated with the contract termination
and stock-based compensation, labor costs increased $1.8 million, or 0.6% as salary increases and increased
healthcare costs were partially offset by decreased incentive compensation. Production and distribution costs
increased $2.0 million, or 0.9%, due to increased outsource costs and production services, partially offset by
lower job printing costs. General and administrative expense increased $2.5 million, or 5.2%, due to losses on
the sale of a print operation in October 2006, increased facility costs from our new facility in Manila, and higher
utility costs at existing facilities. These increases were partially offset by decreased insurance expense, due to
better experience, and bad debt expense, primarily due to timing of collections. Depreciation and amortization
expense increased $1.6 million, or 6.5%, due to accelerated depreciation of assets associated with the contract
termination, additional intangible amortization due to recent acquisitions, depreciation of assets related to the
new facility in Manila, and amortization beginning on a new release of our Trillium software.
The acquisitions of StepDot Software GmbH in June 2006, Global Address in July 2006 and Aberdeen in
September 2006 also contributed to the increase in our operating expenses in 2006 compared to 2005.
Shoppers
Shoppers operating results were as follows:
In thousands
Revenues
Operating expenses
Operating income
2007
$ 430,425
359,641
$ 70,784
% Change
-9.4
-6.9
-20.3
2006
$ 474,960
386,146
$ 88,814
% Change
7.8
11.5
-5.7
2005
$ 440,435
346,204
$ 94,231
Year ended December 31, 2007 vs. Year ended December 31, 2006
Revenues
Shoppers revenues decreased $44.5 million, or 9.4%, in 2007 compared to 2006. The decrease in revenues was
the result of decreased sales in established markets, the discontinuation of commercial printing operations in our
Tampa facility, and circulation reductions. Our Shoppers business continues to be impacted by the difficult
29
economic environments primarily attributable to the condition of the real estate and associated financing
markets in California and Florida. The impact became more pronounced throughout 2007, and affected virtually
all revenue categories. The 600,000 circulation reduction at the end of June 2007 discussed above represented
approximately $3.0 million of revenue in the first half of 2007. At December 31, 2007, our Shoppers circulation
reached approximately 13 million in California and Florida each week. We will continue to evaluate all of our
circulation performance. Despite this recent circulation reduction, we continue to believe that future expansions
may provide increased revenue opportunities in the long term.
In 2007, the economic environment faced by our Shoppers business was the most difficult we have seen in well
over a decade. We do not believe the Shoppers revenue environment will improve in any meaningful fashion in
2008 given the current cyclical issues impacting the California and Florida markets. In fact, this revenue
environment may deteriorate from 2007 levels.
Operating Expenses
Operating expenses decreased $26.5 million, or 6.9%, in 2007 compared to 2006. This decrease was partially
offset by approximately $1.8 million of costs recognized in 2007 related to the restructuring and circulation shut
down described above. Total labor costs decreased $7.9 million, or 5.7%, due to lower sales commissions and
lower incentive compensation related to the revenue decline. This decline was partially offset by severance
costs throughout the Shoppers segment, and labor investments associated with the Shopper digital unit. Total
production costs decreased $16.0 million, or 7.8%, due primarily to decreased paper costs resulting from the
overall decline in revenues and the discontinuation of commercial printing operations in our Tampa facility,
decreased offload printing costs due to decreased print-and-deliver volumes, and decreased postage costs due to
a decline in distribution revenues. This decrease was partially offset by costs incurred to terminate several
office leases related to the circulation reduction. Total general and administrative costs decreased $3.3 million,
or 9.2%, due to lower promotion costs and lower employee expenses including travel, recruiting and training
costs. Depreciation and amortization expense increased $0.7 million, or 8.4%, due to increased capital
expenditures in recent years to support growth, a change in how we address our publications, and the write-off
of assets related to the circulation shut down.
Shoppers’ largest cost components are labor, postage and paper. Shoppers’ labor costs are partially variable and
tend to fluctuate with the number of zones, circulation, volumes and revenues. Standard postage rates increased
in January 2006 and again in May 2007. However, we changed the manner in which we address our Shoppers
publications from detached cards to individual labels, and as a result our per-piece postage rates remained steady
when the May 2007 rates were put into effect. Standard postage rates are expected to increase in the first half of
2008, which will increase Shoppers’ production costs. Paper prices declined in the second half of 2007,
contributing to lower production costs. Paper prices are expected to remain at these levels for the first six
months of 2008, and increase in the second half.
Year ended December 31, 2006 vs. Year ended December 31, 2005
Revenues
Shoppers revenues increased $34.5 million, or 7.8%, in 2006 compared to 2005. The acquisition of The Tampa
Flyer in April 2005 contributed a little more than a third of this revenue growth. The remaining revenue
increases primarily were the result of improved sales in established markets, year-over-year geographic
expansions and household growth in California and Florida, and new products. Total Shoppers circulation
increased by 870,000 during 2006, including 555,000 in California and 315,000 in Florida. During the year the
Harte-Hanks Shoppers PennySaverUSA.com publication in Southern California increased circulation by
357,000. The Harte-Hanks Shoppers PennySaver.com publication in Northern California increased geographic
circulation by 198,000. The Harte-Hanks Shoppers publication TheFlyer.com, located in South Florida,
increased circulation by 17,000. The Harte-Hanks Shoppers publication TheFlyer.com, located in the Tampa,
Florida area increased circulation by 298,000. At December 31, 2006, Shoppers circulation reached over 13.4
million in California and Florida each week.
30
From a product-line perspective, Shoppers had growth from both run-of-press (ROP, or in-book) advertising,
including core sales and employment, real estate and automotive advertising, and from distribution products.
Operating Expenses
Operating expenses increased $39.9 million, or 11.5%, in 2006 compared to 2005 as a result of increased labor
costs, production and distribution costs, depreciation and amortization expense, stock-based compensation and
the acquisition of The Tampa Flyer in April 2005. Total labor costs increased $14.7 million, or 12.1%.
Excluding the Tampa acquisition, labor costs increased $9.3 million, or 8.2%. $1.8 million of this increase
relates to stock-based compensation recorded in 2006 as a result of our adoption of SFAS 123R. The remaining
increase in labor costs relates to higher payroll costs to support increased revenues, higher circulation volumes
and expansions and higher healthcare costs. The increase in labor costs was partially offset by lower incentive
compensation. Total production costs increased $24.1 million, or 13.3%. Excluding the Tampa acquisition,
production costs increased $17.1 million, or 10.1%, including increased postage costs, increased offload printing
expense due to increased print-and-deliver volumes and higher printing rates, and higher paper costs due to
increased newsprint and job paper rates and circulation growth. Excluding the Tampa acquisition, postage
expense was up $10.3 million, or 11.2%, due to the postal rate increase in January 2006 and circulation growth.
Total general and administrative costs were down slightly, 0.1%. Excluding the Tampa acquisition, general and
administrative costs decreased $1.2 million, or 3.4%, primarily due to lower insurance expense and lower bad
debt expense, partially offset by increased facilities costs and promotion expense. Total depreciation expense
was up $0.8 million, or 12.2%, with a little less than a third of the increase attributable to the Tampa acquisition.
Intangible amortization related to the Tampa acquisition was $1.2 million during 2006 compared to $0.8 million
during 2005.
General Corporate Expense
Year ended December 31, 2007 vs. Year ended December 31, 2006
General corporate expense increased $2.4 million, or 19.9%, during 2007 compared to 2006. The increase was
primarily due to $2.5 million of compensation costs recognized during the third quarter of 2007 associated with
the announced retirement of our former President and Chief Executive Officer, Mr. Richard Hochhauser.
Year ended December 31, 2006 vs. Year ended December 31, 2005
General corporate expense decreased $0.1 million, or 0.8%, during 2006 compared to 2005. The decrease in
general corporate expense was primarily due to decreased labor, as a result of lower incentive compensation,
and decreased insurance expense. Partially offsetting this decrease was $1.5 million of additional stock-based
compensation recorded in 2006 as a result of our adoption of SFAS 123R.
Interest Expense
Interest expense increased $6.7 million, or 105.1%, in 2007 compared to 2006, and $4.4 million, or 223.6%, in
2006 compared to 2005. These increases were due to higher outstanding debt levels, primarily due to the
repurchases of our common stock, and higher interest rates than in the previous years. Our debt at December
31, 2007 and 2006 is described in Note C of the “Notes to Consolidated Financial Statements,” included herein.
Interest Income
Interest income increased $0.3 million, or 133%, in 2007 compared to 2006 due to normal variances in cash
levels and higher interest rates on investments. Interest income was essentially unchanged in 2006 compared to
2005 as a result of the combination of normal variances in cash levels and an increase in rates on investments.
Other Income and Expense
Other net expense for 2007 and 2006 primarily consists of balance-based bank charges and stockholders’
expenses.
31
Income Taxes
Year ended December 31, 2007 vs. Year ended December 31, 2006
Income taxes decreased $9.0 million in 2007 compared to 2006 due to lower pretax income levels. The
effective income tax rate for 2007 was 38.7% compared to 37.6% in 2006. The increase in the effective tax rate
from 2006 to 2007 was principally due to higher production activities tax deductions in 2006, a favorable
resolution of a state tax matter in 2006 and the ability to use a one time favorable permanent timing item in
2006. The effective income tax rate calculated is higher than the federal statutory rate of 35% due to the
addition of state taxes.
Year ended December 31, 2006 vs. Year ended December 31, 2005
Income taxes decreased $4.6 million in 2006 compared to 2005 due to lower pretax income levels. The
effective tax rate for 2006 was 37.6% compared to 38.6% in 2005. Tax expense in 2006 was positively
impacted by a favorable resolution to a state tax matter and production activities tax deductions, resulting in the
lower effective tax rate compared to 2005. The effective income tax rate calculated is higher than the federal
statutory rate of 35% due to the addition of state taxes.
Acquisitions
We made several acquisitions in 2006 and 2005. We did not make any acquisitions in 2007.
Subsequent to year end, in January 2008, we acquired Mason Zimbler Limited, a full-service integrated digital
marketing agency specializing in the technology sector. With offices in Bristol, UK and Reading, UK, Mason
Zimbler provides technology companies with a full range of integrated digital marketing services, including
direct marketing, advertising and branding, incorporating Web site development, e-mail lead generation, viral,
channel incentive programs, media planning and buying, research and other services. We have not yet
completed the purchase accounting for this transaction. This acquisition is not expected to have a material
impact on our results of operations for 2008.
In September 2006, we acquired Aberdeen, a provider of technology market research, intelligence, and demand
generation services located in Boston, Massachusetts. Aberdeen offers market information and services through
research channels, and prepares reports based on primary research and benchmarking data from more than
25,000 companies. We believe this acquisition has provided synergy opportunities with our CI Technology
Database, which now tracks technology infrastructure, business profiles and technology purchase plans at
680,000 locations in North America, South America and Europe – expanding their base globally for research.
The results of Aberdeen's reports on current marketplace experiences and trends are used to generate qualified
leads by its clients, and we believe this intelligence assists our clients in their own marketing efforts. Goodwill
of $32.3 million, intangible assets not subject to amortization of $5.0 million, and intangible assets subject to
amortization of $4.3 million have been recognized in this transaction and assigned to the Direct Marketing
segment.
In July 2006, we acquired Global Address, a provider of global postal address data quality software and services
incorporating standards for more than 230 nations and territories worldwide. Global Address, located in Bristol,
UK, and with additional operations in Mountain View, CA, focuses on international address data, and has
provided key components of Harte-Hanks Global Data Management, one of our data services offerings. We
continue to integrate elements of Global Address into our existing international offerings, among them Global
Data Management and our Trillium Software data quality solutions, while continuing to support stand-alone
Global Address products and services in the marketplace. The total amount of goodwill recognized in this
transaction was $8.1 million and was assigned to the Direct Marketing segment. No intangible assets were
recognized in this transaction.
In June 2006, we acquired StepDot Software GmbH of Germany and integrated it into our Trillium Software
operations. Based in Böblingen, Germany, StepDot was a value-added reseller specializing in data quality and
integration solutions for Harte-Hanks since 2002. The acquisition provided us with a more strategic presence in
32
Central Europe and Germany. The total amount of goodwill recognized in this transaction was $0.4 million and
was assigned to the Direct Marketing segment. No intangible assets were recognized in this transaction.
In April 2006, we acquired certain assets of PrintSmart, Inc., a full-service print-on-demand provider located in
East Bridgewater, Massachusetts, in an effort to expand and enhance our digital printing capabilities. No
goodwill was recognized in this transaction. Intangible assets recognized in this transaction which are subject to
amortization, relating to a service contract, totaled approximately $1.0 million and were assigned to the Direct
Marketing segment.
In April 2005, we acquired substantially all of the assets of Flyer Printing Company, Inc. related to The Flyer
publication, located in Tampa, Florida. TheFlyer.com, our current name for this publication, is a weekly
shopper publication delivered by mail with circulation at the time of the acquisition of 955,000 in the Tampa,
Florida metropolitan area. The total amount of goodwill recognized in this transaction was $41.6 million.
Intangible assets recognized in this transaction that are subject to amortization, relating to client relationships
and non-compete agreements, totaled $8.3 million. Intangible assets recognized in this transaction that are not
subject to amortization, relating to trademarks and trade names, totaled $7.6 million. All goodwill and
intangibles recognized as part of this acquisition were assigned to the Shoppers segment.
In February 2005, we acquired long-standing Australian partner Communiqué Direct pursuant to a purchase
option we acquired in June 2003. Founded in 1992, Communiqué Direct, located in a north suburb of Sydney,
Australia, was a privately held firm that provided a range of marketing and information services for the
business-to-business sector across the Asia-Pacific region. Since 1998, Harte-Hanks and Communiqué Direct
had worked with each other on many Pacific Rim marketing applications, focusing on our high-tech clients.
The total cost of acquisitions in 2006 and 2005 was $53.9 million and $63.3 million, respectively, and all were
paid in cash. We did not make any acquisition-related payments in 2007. The operating results of these
acquisitions have been included in the accompanying Consolidated Financial Statements from the date of the
acquisitions.
Liquidity and Capital Resources
Sources and Uses of Cash
As of December 31, 2007, cash and cash equivalents were $22.8 million, decreasing $15.4 million from cash
and cash equivalents at December 31, 2006. This net decrease was a result of net cash provided by operating
activities of $143.2 million, offset by net cash used in investing activities of $28.1 million and net cash used in
financing activities of $130.8 million.
Operating Activities
Net cash provided by operating activities in 2007 was $143.2 million, compared to $146.4 million in 2006. The
$3.2 million year-over-year decrease was attributable to lower net income, partially offset by changes within
working capital assets and liabilities.
In 2007, our principal working capital changes, which directly affected net cash provided by operating activities,
were as follows:
• An increase in accounts receivable, primarily attributable to timing. Days sales outstanding of
approximately 60 days at December 31, 2007 compared to 56 days at December 31, 2006;
• A decrease in inventory due to sales of paper inventory related to the print operation that was sold in
October 2006;
• A decrease in prepaid expenses and other current assets due to timing of payments;
• An increase in accounts payable due to a reclassification of a net overdraft cash position and higher
33
health insurance reserves due to a change in provider and manner and timing of payments;
• A decrease in accrued payroll and related expenses due to a lower bonus accrual at December 31, 2007
than at December 31, 2006;
• An increase in customer deposits and unearned revenue due to timing of receipts; and
• An increase in income taxes payable due to the timing of quarterly estimated federal and state taxes
payments.
Investing Activities
Net cash used in investing activities was $28.1 million in 2007, compared to $86.8 million in 2006. The
difference is the result of less acquisition-related expenditures and capital spending in 2007 than in 2006.
Financing Activities
Net cash outflows from financing activities were $130.8 million in 2007 compared to net cash outflows of $46.2
million in 2006. The difference is attributable primarily to $88.9 million less net borrowing in 2007 than in
2006.
Credit Facilities
On August 12, 2005, we entered into a five-year $125 million revolving credit facility (Revolving Credit
Facility) with JPMorgan Chase Bank, N.A., as Administrative Agent. The Revolving Credit Facility allows us
to obtain revolving credit loans. For each borrowing under the Revolving Credit Facility, we can generally
choose to have the interest rate for that borrowing calculated based on either JPMorgan Chase Bank’s publicly
announced New York prime rate or on a Eurodollar (as defined in the Revolving Credit Agreement) rate plus a
spread. The spread is determined based on our total debt-to-EBITDA (as defined in the Revolving Credit
Agreement) ratio then in effect, and ranges from .315% to .60% per annum. There is a facility fee that we are
also required to pay under the Revolving Credit Facility that is based on a rate applied to the total commitment
amount under the Revolving Credit Facility, regardless of how much of that commitment we have actually
drawn upon. The facility fee rate ranges from .085% to .15% per annum, depending on our total debt-to-
EBITDA ratio then in effect.
On September 6, 2006, we entered into a five-year term loan facility (Term Loan Facility) with Wells Fargo
Bank, N.A., as Administrative Agent. The Term Loan Facility originally provided for a commitment of up to
$200 million. On December 31, 2007, we began making the scheduled quarterly principal payments as follows:
Quarterly
Installments
1 – 8
9 – 12
13 – 15
Maturity Date
Percentage of
Drawn Amounts
2.50% each
3.75% each
5.00% each
Remaining Principal Balance
As we have capacity under our Revolving Credit Facility and the intent to use the Revolving Credit Facility to
fund the required quarterly principal payments under the Term Loan Facility through 2008, we have classified
our entire debt balance at December 31, 2007 as long-term.
The Term Loan Facility matures on September 6, 2011. For each borrowing under the Term Loan Facility, we
can generally choose to have the interest rate for that borrowing calculated based on either (i) a Eurodollar (as
defined in the Term Loan Agreement) rate, plus a spread which is determined based on our total debt-to-
EBITDA ratio (as defined in the Term Loan Agreement) then in effect, and ranges from .315% to .60% per
annum, or (ii) the higher of Wells Fargo Bank’s prime rate in effect on such date or the Federal Funds rate in
effect on such date plus .50%. There is a facility fee that we are also required to pay under the Term Loan
Facility that is based on a facility fee rate applied to the outstanding principal balance owed under the Term
Loan Facility. The facility fee rate ranges from .085% to .15% per annum, depending on our total debt-to-
34
EBITDA ratio then in effect. We may elect to prepay the Term Loan Facility at any time without incurring any
prepayment penalties. Once an amount has been prepaid, it may not be reborrowed.
Subsequent to year end, on January 18, 2008, we entered into a six-month $50 million revolving credit facility
(Bridge Loan Facility) with Wells Fargo Bank, N.A., as Administrative Agent. The Bridge Loan Facility
matures on July 18, 2008 and allows us to obtain revolving credit loans up to that date. We intend to utilize the
availability under the Bridge Loan Facility primarily to repurchase shares of our common stock and for other
general corporate purposes. For each borrowing under the Bridge Loan Facility, we can generally choose to
have the interest rate for that borrowing calculated based on either (i) a Eurodollar (as defined in the Bridge
Loan Agreement) rate, plus a spread which is determined based on our total debt-to-EBITDA ratio (as defined in
the Bridge Loan Agreement) then in effect, and ranges from .40% to .75% per annum, or (ii) the higher of Wells
Fargo Bank’s prime rate in effect on such date or the Federal Funds rate in effect on such date plus .50%. There
is a facility fee that we are also required to pay under the Bridge Loan Facility that is based on a rate applied to
the total commitment amount under the Bridge Loan Facility. Prior to termination of the commitment under the
Bridge Loan Facility, the facility rate is applied to the total commitment amount under the Bridge Loan Facility,
regardless of how much of that commitment we have actually drawn upon. Commencing upon termination of
the commitment under the Bridge Loan Facility, the facility rate is applied to the outstanding principal balance
owed under the Bridge Loan Facility. The facility fee rate ranges from .10% to .25% per annum, depending on
our total debt-to-EBITDA ratio then in effect.
Under the credit facilities we are required to maintain an interest coverage ratio of not less than 2.75 to 1 and a
total debt-to-EBITDA ratio of not more than 3.0 to 1. The credit facilities also contain covenants restricting our
and our subsidiaries’ ability to grant liens and enter into certain transactions and limit the total amount of
indebtedness of our subsidiaries to $20 million.
The credit facilities each also include customary covenants regarding reporting obligations, delivery of notices
regarding certain events, maintaining our corporate existence, payment of obligations, maintenance of our
properties and insurance thereon at customary levels with financially sound and reputable insurance companies,
maintaining books and records and compliance with applicable laws. The credit facilities each also provide for
customary events of default including nonpayment of principal or interest, breach of representations and
warranties, violations of covenants, failure to pay certain other indebtedness, bankruptcy and material judgments
and liabilities, certain violations of environmental laws or ERISA or the occurrence of a change of control
prevent of default under existing agreements. As of December 31, 2007, we were in compliance with all of the
covenants of our credit facilities.
In September 2007, we entered into a two-year interest rate swap with a notional amount of $150 million and a
fixed rate of 4.655% in order to limit a portion of our interest rate exposure by converting a portion of our
variable-rate debt to fixed-rate debt.
Contractual Obligations
Contractual obligations at December 31, 2007 are as follows:
In thousands,
Debt..............................................................................
Interest on fixed-rate long-term debt...........................
Operating leases...........................................................
Deferred compensation liability ..................................
Unfunded pension plan benefit payments ...................
Other long-term obligations .......................................
Total contractual cash obligations...............................
2010
2011
2008
Total
2009
$ 259,125 $ 19,500 $ 21,938 $ 100,687 $ 117,000 $
5,295
21,406
702
671
3,613
$ 397,456 $ 56,361 $ 53,625 $ 120,195 $ 128,400 $
7,099
23,972
702
577
4,511
12,394
90,768
5,267
20,502
9,400
16,455
702
1,075
1,276
9,586
702
1,112
–
2012
Thereafter
–
– $
7,044
702
1,231
–
12,305
1,757
15,836
–
8,977 $ 29,898
At December 31, 2007, we had letters of credit in the amount of $24.9 million. No amounts were drawn against
these letters of credit at December 31, 2007. These letters of credit renew annually and exist to support
35
insurance programs relating to workers’ compensation, automobile and general liability, and leases. We had no
other off-balance sheet arrangements at December 31, 2007.
Dividends
We paid a quarterly dividend of 7.0 cents per common share and 6.0 cents per common share in each of the
quarters in the years ended December 31, 2007 and 2006, respectively. In January 2008, we announced an
increase in the regular quarterly dividend from 7.0 cents per share to 7.5 cents per share, payable March 14,
2008 to holders of record on February 29, 2008.
Share Repurchase
During 2007, we repurchased 8.4 million shares of our common stock for $183.9 million under our stock
repurchase program. As of December 31, 2007, we have repurchased 59.0 million shares since the beginning of
our January 1997 stock repurchase program. In May 2007, our Board of Directors authorized an additional 6
million shares under our stock repurchase program, increasing the total authorization to 61.9 million shares.
Under this program, we had authorization to repurchase approximately 2.9 million additional shares at
December 31, 2007. In January 2008, our Board authorized an additional 12.5 million shares under our stock
repurchase program, bringing the total repurchase authorization to 74.4 million shares.
During 2007, we received 0.1 million shares of our common stock, with an estimated market value of $1.9
million, in connection with stock option exercises. Since January 1997, we have received 1.6 million shares in
connection with stock option exercises.
Outlook
We consider such factors as current assets, current liabilities, total debt, revenues, operating income, cash flows
from operations, investing activities and financing activities when assessing our liquidity. Our primary sources
of liquidity have historically been cash and cash equivalents on hand and cash generated from operating
activities. Our management of cash is designed to optimize returns on cash balances and to ensure that it is
readily available to meet our operating, investing and financing requirements as they arise. Capital resources are
also available from and provided through our unsecured credit facilities, subject to the terms and conditions of
those facilities.
The amount of cash on hand and borrowings available under our credit facilities are influenced by a number of
factors, including fluctuations in our operating results, revenue growth, accounts receivable collections, capital
expenditures, tax payments, share repurchases, acquisitions and dividends.
Based on our current operational plans, we believe that our credit facilities, together with cash provided by
operating activities, will be sufficient to fund operations and anticipated capital expenditures, payments of
principal and interest on our borrowings, and dividends on our common stock for at least the next twelve
months. As of December 31, 2007, we had $56.0 million of unused borrowing capacity under our Revolving
Credit Facility. As of December 31, 2007, we did not have any unused borrowing capacity under our Term
Loan Facility. As of February 15, 2008, we had $50 million of unused borrowing capacity under our Bridge
Facility that we entered into in January 2008, which matures on July 18, 2008.
Subject to market conditions, we anticipate entering into an approximately $100 million, longer-term credit
facility prior to the maturity date of the Bridge Loan Facility, at which time we intend to repay any amounts then
owed under the Bridge Loan Facility. We intend to utilize the availability under this anticipated longer-term
credit facility primarily to continue to repurchase shares of our common stock and for other general corporate
purposes.
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
36
estimates. The areas that we believe involve the most significant management estimates and assumptions are
detailed below. Actual results could differ materially from those estimates under different assumptions and
conditions. Historically, actual results have not differed significantly from our estimates.
Revenue Recognition
We recognize revenue when all of the following criteria are satisfied: (i) persuasive evidence of an arrangement
exists; (ii) the price is fixed or determinable; (iii) collectibility is reasonably assured; and (iv) the service has
been performed or the product has been delivered.
Payments received in advance of the performance of services or delivery of the product are recorded as deferred
revenue until such time as the services are performed or the product is delivered.
Our accounting policy for revenue recognition has an impact on our reported results and relies on certain
estimates that require judgments on the part of management. The portion of our revenue that is most subject to
estimates and judgments is revenue recognized using the proportional performance method, as discussed below.
Direct Marketing revenue is derived from a variety of services and products, and may be billed at hourly rates,
monthly rates or a fixed price. For all sales, we require either a purchase order, a statement of work signed by
the client, a written contract, or some other form of written authorization from the client.
Revenue from database design and development, market research, agency services, analytical services, and
creative are typically billed based on time and materials or at a fixed price. If billed at a fixed price, revenue is
recognized on a proportional performance basis as the services specified in the arrangement are performed.
Proportional performance is based on the ratio of direct costs incurred to total estimated costs where the costs
incurred, primarily labor hours and outsourced services, represent a reasonable surrogate for output measures or
contract performance. Progress on a contract is matched against project costs and costs to complete on a
periodic basis. Provision for estimated contract losses, if any, is made in the period such losses are determined.
Management estimates and judgments are used in connection with determining the revenue recognized in these
instances. Should actual costs differ significantly from the original estimated costs, the timing of revenues and
overall profitability of the contract could be impacted. Contracts accounted for under the proportional
performance method constituted less than 7.5% of total Direct Marketing revenue and less than 4.5% of our total
revenue for the years ended December 31, 2007, 2006 and 2005.
Revenue from technology database subscriptions is based on a fixed price and is recognized ratably over the
term of the subscription. Revenue from database and website hosting services is recognized ratably over the
contractual hosting period, and pricing is typically based on a fixed price per month or price per contract.
Revenue from services such as data processing, printing, personalization of communication pieces using laser
and inkjet printing, targeted mail, fulfillment, email marketing and transportation logistics are recognized as the
work is performed. Revenue from these services is typically based on a fixed price or rate given to the client.
Revenue related to E-Care (including online technical support and inbound email management), inbound and
outbound telemarketing, and sales lead management is also typically based on a fixed price per transaction or
service provided. Revenue from these services is recognized as the service or activity is performed.
Revenue from software is recognized in accordance with the American Institute of Certified Public
Accountants’ (AICPA) Statement of Position (SOP) 97-2 “Software Revenue Recognition,” as amended by SOP
98-9 “Modification of SOP 97-2, Software Revenue Recognition.” SOP 97-2 generally requires revenue earned
on software arrangements involving multiple elements to be allocated to each element based on the vendor-
specific objective evidence of fair values of the respective elements. For software sales with multiple elements
(for example, software licenses with undelivered post-contract customer support or “PCS”), we allocate revenue
to each component of the arrangement using the residual value method based on the fair value of the undelivered
37
elements. This means we defer revenue from the software sale equal to the fair value of the undelivered
elements. The fair value of PCS is based upon separate sales of renewals to other clients. The fair value of
services, such as training and consulting, is based upon separate sales of these services to other clients.
The revenue allocated to PCS is recognized ratably over the term of the support period. Revenue allocated to
professional services is recognized as the services are performed. The revenue allocated to software products,
including time-based software licenses, is recognized, if collection is probable, upon execution of a licensing
agreement and shipment of the software or ratably over the term of the license, depending on the structure and
terms of the arrangement. If the licensing agreement is for a term of one year or less and includes PCS, we
recognize the software and the PCS revenue ratably over the term of the license.
We apply the provisions of Emerging Issues Task Force Issue No. 00-03 “Application of AICPA Statement of
Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entity’s Hardware” to
our hosted software service transactions.
For certain non-software arrangements, we enter into contracts that include delivery of a combination of two or
more of our service offerings. Typically, such multiple element arrangements incorporate the design and
development of data management tools or systems and an ongoing obligation to manage, host or otherwise run
solutions for our customer. Such arrangements are divided into separate units of accounting, provided that the
delivered item has stand-alone value and there is objective and reliable evidence of the fair value of the
undelivered items. The total arrangement fee is allocated to the undelivered elements based on their fair values
and to the initial delivered elements using the residual method. Revenue from these services is recognized
separately, and in accordance with our revenue recognition policy, for each element.
As described above, sometimes our customer arrangements have multiple deliverables, including service
elements. Generally, our multiple-element arrangements fall within the scope of specific accounting standards
that provide guidance regarding the separation of elements in multiple-deliverable arrangements and the
allocation of consideration among those elements (e.g., AICPA SOP 97-2 “Software Revenue Recognition”). If
not, we apply the provisions of Emerging Issues Task Force Issue No. 00-21, “Accounting for Revenue
Arrangements with Multiple Deliverables” (“EITF 00-21”). The provisions of EITF 00-21 require us to
unbundle multiple element arrangements into separate units of accounting when the delivered element(s) has
stand-alone value and fair value of the undelivered element(s) exist(s). When we are able to unbundle the
arrangement into separate units of accounting, we apply one of the accounting policies described above to each
unit. If we are unable to unbundle the arrangement into separate units of accounting, we apply one of the
accounting policies described above to the entire arrangement. This might impact the timing of revenue
recognition, but would not change the total revenue recognized from the arrangement.
Shopper services are considered rendered, and the revenue recognized, when all printing, sorting, labeling and
ancillary services have been provided and the mailing material has been received by the United States Postal
Service.
Taxes collected from customers and remitted to governmental authorities are not reflected in our revenues or
expenses.
Allowance for Doubtful Accounts
We maintain our allowance for doubtful accounts at a balance adequate to reduce accounts receivable to the
amount of cash expected to be realized upon collection. The methodology used to determine the minimum
allowance balance is based on our prior collection experience and is generally related to the accounts receivable
balance in various aging categories. The balance is also influenced by specific clients’ financial strength and
circumstance. Accounts that are determined to be uncollectible are written off in the period in which they are
determined to be uncollectible. Periodic changes to the allowance balance are recorded as increases or decreases
to bad debt expense, which is included in the “Advertising, selling, general and administrative” line of our
38
Consolidated Statements of Operations. We recorded bad debt expense of $3.5 million, $2.5 million and $4.2
million for the years ended December 31, 2007, 2006 and 2005, respectively. While we believe our reserve
estimate to be appropriate, we may find it necessary to adjust the allowance for doubtful accounts if future bad
debt expense exceeds the estimated reserve. Given the significance of accounts receivable to the consolidated
financial statements, the determination of net realizable values is considered to be a critical accounting estimate.
Reserve for Healthcare, Workers’ Compensation, Automobile and General Liability
Our deductible for individual healthcare claims is $0.2 million. Our deductible for workers’ compensation is
$0.5 million. We have a $0.3 million deductible for automobile and general liability claims. Our insurance
administrator provides us with estimated loss reserves, based upon its experience dealing with similar types of
claims, as well as amounts paid to date against these claims. Management makes various subjective judgments
about a number of factors in determining our reserve for healthcare, workers’ compensation, automobile and
general liability insurance, and the related expense. If ultimate losses were 10% higher than our estimate at
December 31, 2007, net income would be impacted by approximately $0.9 million, net of taxes. The amount
that earnings would be impacted is dependent on the claim year and our deductible levels for that plan year.
Periodic changes to the reserve for workers’ compensation, automobile and general liability are recorded as
increases or decreases to insurance expense, which is included in the "Advertising, selling, general and
administrative" line of our Consolidated Statement of Operations. Periodic changes to the reserve for healthcare
are recorded as increases or decreases to employee benefits expense, which is included in the “Payroll” line of
our Consolidated Statement of Operations.
Goodwill
Goodwill is recorded to the extent that the purchase price exceeds the fair value of the assets acquired in
accordance with SFAS No. 141, Business Combinations (SFAS 141). Pursuant to SFAS No. 142, Goodwill and
Other Intangible Assets (SFAS 142), goodwill and other intangibles with indefinite useful lives are periodically
tested for impairment.
We assess the impairment of our goodwill in accordance with SFAS 142, by determining the fair value of each
of our reporting units and comparing the fair value to the carrying value for each reporting unit. We have
identified our reporting units as Direct Marketing and Shoppers. Fair value is determined using projected
discounted future cash flows and cash flow multiple models, based on historical performance and management’s
estimate of future performance, giving consideration to existing and anticipated competitive and economic
conditions. If a reporting unit’s carrying amount exceeds its fair value, we must calculate the implied fair value
of the reporting unit’s goodwill by allocating the reporting unit’s fair value to all of its assets and liabilities
(recognized and unrecognized) in a manner similar to a purchase price allocation, and then compare this implied
fair value to its carrying amount. To the extent that the carrying amount of goodwill exceeds its implied fair
value, an impairment loss is recorded.
Both the Direct Marketing and Shoppers segments were tested for impairment using November 30 as our
valuation date. We have not recorded an impairment loss in any of the three years ended December 31, 2007.
Significant estimates utilized in our discounted cash flow model include weighted-average cost of capital and
the long-term rate of growth for each of our reporting segments. These estimates require management’s
judgment. Any significant changes in key assumptions about our businesses and their prospects, or changes in
market conditions, could have an impact on this annual analysis.
At December 31, 2007 and 2006, our goodwill balance was $543.6 million and $545.3 million, respectively.
Based upon our analysis, the estimated fair values of our reporting units as of December 31, 2007 were well in
excess of the reporting units’ carrying values.
39
Stock-based Compensation
Beginning January 1, 2006, we account for stock-based compensation in accordance with SFAS 123R. Under
the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant
date based on the value of the award and is recognized as expense over the requisite service period. Prior to
January 1, 2006, we accounted for share-based awards under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and
related interpretations. Accordingly, prior to January 1, 2006, no compensation expense was recognized for
share-based awards granted where the exercise price was equal to the market price of the underlying stock on
the date of grant. Determining the fair value of share-based awards requires judgment, including in some cases
estimating expected term, volatility and dividend yield. In addition, judgment is required in estimating the
amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from some
of these estimates, stock-based compensation expense and our results of operations could be materially
impacted. For the years ended December 31, 2007, 2006 and 2005, we recorded total stock-based compensation
expense of $7.1 million, $7.4 million and $0.2 million, respectively.
New Accounting Pronouncements
As discussed in Note A of the Notes to Consolidated Financial Statements, certain new financial accounting
pronouncements have been issued which either have already been reflected in the accompanying consolidated
financial statements, or will become effective for our financial statements at various dates in the future. Our
adoption of SFAS 141R, Business Combinations, in 2009 will affect the way we account for acquisitions,
including acquisition-related costs, contractual contingencies and contingent consideration, and may also impact
the amount of information we disclose about acquisitions.
The adoption of the remaining new accounting pronouncements discussed in Note A of the Notes to
Consolidated Financial Statements have not and are not expected to have a material effect on our consolidated
financial statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk includes the risk of loss arising from adverse changes in market rates and prices. We face market
risks related to interest rate variations and to foreign exchange rate variations. From time to time, we may
utilize derivative financial instruments as described below to manage our exposure to such risks.
We are exposed to market risk for changes in interest rates related to our credit facilities. Our earnings are
affected by changes in short-term interest rates as a result of our credit facilities, which bear interest at variable
rates based on Eurodollar rates (effective rate of 5.24% at December 31, 2007). The five-year $125 million
Revolving Credit Facility has a maturity date of August 12, 2010. At December 31, 2007, our debt balance
related to the Revolving Credit Facility was $69.0 million. The five-year $200 million Term Loan Facility has a
maturity date of September 6, 2011. At December 31, 2007, our debt balance related to the Term Loan Facility
was $190.1 million. In September 2007, we entered into a two-year interest rate swap with a notional amount of
$150 million and a fixed rate of 4.655% in order to limit a portion of our interest rate exposure by converting a
portion of our variable-rate debt to fixed-rate debt.
We are also subject to interest rate risk on our swap if interest rates decrease. To manage this risk, we may
refinance all or a portion of this swap at then-existing market interest rates.
Assuming the actual level of borrowing throughout 2007, and assuming a one percentage point change in the
year’s average interest rates, it is estimated that our 2007 net income would have changed by approximately
$1.1 million. Due to our interest rate swap, overall debt level at December 31, 2007, anticipated cash flows
from operations, and the various financial alternatives available to management should there be an adverse
change in interest rates, we do not believe that we currently have significant exposure to market risks associated
with changing interest rates.
40
Our earnings are also affected by fluctuations in foreign exchange rates as a result of our operations in foreign
countries, a portion of which are conducted in foreign currencies. We monitor these risks throughout the normal
course of business. Due to the current level of operations conducted in foreign currencies, we do not believe
that the impact of fluctuations in foreign exchange rates is significant to our overall earnings.
We do not enter into derivative instruments for any purpose other than cash flow hedging. We do not speculate
using derivative instruments.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required to be presented under Item 8 are presented in the Consolidated Financial
Statements and the notes thereto beginning at page F-1 of this Form 10-K (Financial Statements).
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with
the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the 1934 Act). It should be noted that, because of inherent limitations, our
disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the disclosure controls and procedures are met. Based upon that
evaluation, the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that
the design and operation of these disclosure controls and procedures were effective, at the “reasonable
assurance” level, to ensure information required to be disclosed by us in the reports that we file or submit under
the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules
and forms.
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with
the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer, of our internal control over financial reporting to determine whether any changes occurred
during the fourth quarter of 2007 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. Based on that evaluation, there were no changes in our internal control
over financial reporting or in other factors that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting. We may make changes in our internal control processes from
time to time in the future. It should also be noted that, because of inherent limitations, internal control over
financial reporting may not prevent or detect misstatements, and controls may become inadequate because of
changes in conditions or in the degree of compliance with the policies or procedures.
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered
Public Accounting Firm thereon are set forth in the Consolidated Financial Statements beginning on page F-1.
ITEM 9B.
OTHER INFORMATION
None.
41
PART III
Some of the information required by Items 10 through 14 of this Part III is incorporated by reference from our
definitive proxy statement to be filed for our 2008 annual meeting of stockholders (2008 Proxy Statement), as
indicated below. Our 2008 Proxy Statement will be filed with the SEC not later than 120 days after December
31, 2007. Because the 2008 Proxy Statement has not yet been finalized and filed, there may be certain minor
discrepancies between the currently anticipated section headings specified below and the final section headings
contained in the 2008 Proxy Statement.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The information required by this item regarding our directors and executive officers will be set forth in our 2008
Proxy Statement under the caption “Directors and Executive Officers”, which information is incorporated herein
by reference.
Section 16(a) Compliance
The information to appear in our 2008 Proxy Statement under the caption “General Information - Section 16(a)
Beneficial Ownership Reporting Compliance” is incorporated herein by reference.
Code of Ethics and Other Governance Information
The information required by this item regarding the Supplemental Code of Ethics for our Senior Financial
Officers (Code of Ethics), audit committee financial experts, audit committee members and procedures for
stockholder recommendations of nominees to our Board of Directors will be set forth in our 2008 Proxy
Statement under the caption “Corporate Governance,” which information is incorporated herein by reference.
Our Code of Ethics may be found on our website at www.harte-hanks.com by clicking on the link “About Us”
and then the link “Corporate Governance,” and a copy of our Code of Ethics is also available in print, without
charge, upon written request to Harte-Hanks, Inc., Attn: Corporate Secretary, 200 Concord Plaza Drive, San
Antonio, Texas 78216. In accordance with the rules of the NYSE and the SEC, we currently intend to disclose
any future amendments to our Code of Ethics, or waivers from our Code of Ethics for our Chief Executive
Officer, Chief Financial Officer and Controller, by posting such information on our website (www.harte-
hanks.com) within the time period required by applicable SEC and NYSE rules.
Management Certifications
In accordance with the Sarbanes-Oxley Act of 2002 and SEC rules thereunder, our Chief Executive Officer and
Chief Financial Officer have signed certifications under Sarbanes-Oxley Section 302, which have been filed as
exhibits to this Form 10-K. In addition, our Chief Executive Officer submitted his most recent annual
certification to the NYSE under Section 303A.12(a) of the NYSE listing standards on May 21, 2007.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item regarding the compensation of our “named executive officers” and
directors and other required information will be set forth in our 2008 Proxy Statement under the captions
“Executive Compensation,” and “Director Compensation,” which information is incorporated herein by
reference. In accordance with the rules of the SEC, information to be contained in the 2008 Proxy Statement
under the caption “Compensation Committee Report” is not deemed to be “filed” with the SEC or subject to the
liabilities of the 1934 Act.
42
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Beneficial Ownership Tables
The information required by this item regarding security ownership of certain beneficial owners, management
and directors will be set forth in our 2008 Proxy Statement under the caption “Security Ownership of
Management and Principal Stockholders,” which information is incorporated herein by reference.
Equity Compensation Plan Information
The information required by this item regarding securities authorized for issuance under equity compensation
plans will be set forth in our 2008 Proxy Statement under the caption “Executive Compensation - Equity
Compensation Plan Information at Year-End 2007,” which information is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Transactions with Related Persons
The information required by this item regarding transactions with related persons, including our policies and
procedures for the review, approval or ratification of related person transactions that are required to be disclosed
under the SEC’s rules and regulations, will be set forth in our 2008 Proxy Statement under the caption
“Corporate Governance - Certain Relationships and Related Transactions,” which information is incorporated
herein by reference.
Director Independence
The information required by this item regarding director independence will be set forth in our 2008 Proxy
Statement under the caption “Corporate Governance—Independence of Directors,” which information is
incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item regarding the audit committee’s pre-approval policies and procedures and
the disclosures of fees billed by our principal independent auditor will be set forth in our 2008 Proxy Statement
under the caption “Audit Committee and Independent Registered Public Accounting Firm,” which information
is incorporated herein by reference.
ITEM 15.
15(a)(1)
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements:
PART IV
The financial statements filed as part of this report and referenced in Item 8 are presented in the
Consolidated Financial Statements and the notes thereto beginning at page F-1 of this Form 10-
K (Financial Statements).
15(a)(2)
Financial Statement Schedules
All schedules for which provision is made in the applicable rules and regulations of the SEC
have been omitted as the schedules are not required under the related instructions, are not
applicable, or the information required thereby is set forth in the Consolidated Financial
Statements or notes thereto.
43
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.
44
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.
SIGNATURES
HARTE-HANKS, INC.
By: /s/ Dean Blythe
Dean Blythe
President and Chief Executive Officer
Date: February 29, 2008
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/ Dean Blythe
Dean Blythe
President and Chief Executive Officer
Date:
February 29, 2008
/s/ Jessica Huff
Jessica Huff
Vice President, Finance and
Chief Accounting Officer
Date:
February 29, 2008
/s/ Larry Franklin
Larry Franklin, Chairman
Date:
February 29, 2008
/s/ Houston H. Harte
Houston H. Harte, Vice Chairman
Date:
February 29, 2008
/s/ David L. Copeland
David L. Copeland, Director
Date:
February 29, 2008
/s/ Richard Hochhauser
Richard Hochhauser, Director
February 29, 2008
Date:
/s/ Douglas Shepard
Douglas Shepard
Executive Vice President and
Chief Financial Officer
Date:
February 29, 2008
/s/ William F. Farley
William F. Farley, Director
Date:
February 29, 2008
/s/ William K. Gayden
William K. Gayden, Director
Date:
February 29, 2008
/s/ Christopher M. Harte
Christopher M. Harte, Director
February 29, 2008
Date:
/s/ Judy C. Odom
Judy C. Odom, Director
Date:
February 29, 2008
45
Harte-Hanks, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2007
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2007
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for each of the years in the three-
year period ended December 31, 2007
Notes to Consolidated Financial Statements
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.
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Harte-Hanks, Inc.:
We have audited the accompanying consolidated balance sheets of Harte-Hanks, Inc. and subsidiaries (the
Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations,
stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period
ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Harte-Hanks, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123, as revised, Share-Based Payment, effective January 1,
2006, and Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans, as of December 31, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February 29, 2008, expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
San Antonio, Texas
February 29, 2008
F-2
Management’s Report on Internal Control Over Financial Reporting
We are responsible for the preparation and integrity of the consolidated financial statements appearing in our
Annual Report. The consolidated financial statements were prepared in conformity with U.S. generally
accepted accounting principles and include amounts based on management’s estimates and judgments. All other
financial information in this report has been presented on a basis consistent with the information included in the
consolidated financial statements.
We are also responsible for establishing and maintaining adequate internal controls over financial reporting. We
maintain a system of internal controls that is designed to provide reasonable assurance as to the fair and reliable
preparation and presentation of the consolidated financial statements, as well as to safeguard assets from
unauthorized use or disposition.
Our control environment is the foundation for our system of internal controls over financial reporting. It sets the
tone of our organization and includes factors such as integrity and ethical values. Our internal controls over
financial reporting are supported by formal policies and procedures that are reviewed, modified and improved as
changes occur in business conditions and operations.
The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets
periodically with members of management, the internal auditors and the independent auditors to review and
discuss internal controls over financial reporting and accounting and financial reporting matters. Our
independent registered public accounting firm and internal auditors report to the Audit Committee and
accordingly have full and free access to the Audit Committee at any time.
We conducted an evaluation of the effectiveness of our internal controls over financial reporting based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). This evaluation included review of the documentation of
controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and
a conclusion on this evaluation. Based on our evaluation, we concluded that internal control over financial
reporting was effective as of December 31, 2007.
KPMG LLP, an independent registered public accounting firm, has issued a report on the effectiveness of the
Company’s internal control over financial reporting, which is included on page F-4 of this Form 10-K.
February 29, 2008
/s/ Dean Blythe
Dean Blythe
President and Chief Executive Officer
/s/ Douglas Shepard
Douglas Shepard
Executive Vice President and
Chief Financial Officer
/s/ Jessica Huff
Jessica Huff
Vice President, Finance and
Chief Accounting Officer
F-3
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Harte-Hanks, Inc.:
We have audited Harte-Hanks, Inc. and subsidiaries’ (the Company) internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). 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, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
In our opinion, Harte-Hanks, Inc. and subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Harte-Hanks, Inc. and subsidiaries as of December 31, 2007
and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive
income, and cash flows for each of the years in the three-year period ended December 31, 2007, and our report
dated February 29, 2008 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
San Antonio, Texas
February 29, 2008
F-4
Harte-Hanks, Inc. and Subsidiaries Consolidated Balance Sheets
In thousands, except per share and share amounts
ASSETS
Current assets
December 31,
2007
2006
Cash and cash equivalents .................................................................................
Accounts receivable (less allowance for doubtful accounts of $3,556
in 2007 and $3,928 in 2006) ....................................................................
Inventory ............................................................................................................
Prepaid expenses ................................................................................................
Deferred income tax asset ..................................................................................
Other current assets ............................................................................................
Total current assets...................................................................................
Property, plant and equipment
Land ...................................................................................................................
Buildings and improvements..............................................................................
Software .............................................................................................................
Equipment and furniture ....................................................................................
Less accumulated depreciation and amortization...............................................
Software development and equipment installations in progress.........................
Net property, plant and equipment ...........................................................
$
22,847
199,222
6,007
15,473
12,628
9,503
265,680
3,376
39,783
98,089
196,687
337,935
(229,190)
108,745
3,609
112,354
Intangible and other assets
Goodwill, net......................................................................................................
Other intangible assets (less accumulated amortization of $10,235
in 2007 and $6,826 in 2006) ...................................................................
Other assets ........................................................................................................
Total intangible and other assets ..............................................................
Total assets ...............................................................................................
543,583
20,939
9,370
573,892
$ 951,926
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable ...............................................................................................
Accrued payroll and related expenses ................................................................
Customer deposits and unearned revenue .........................................................
Income taxes payable .........................................................................................
Other current liabilities ......................................................................................
Total current liabilities .............................................................................
Long-term debt.............................................................................................................
Other long-term liabilities (including deferred income taxes of $66,060
$
67,167
26,443
61,988
12,482
12,028
180,108
259,125
in 2007 and $65,080 in 2006) ............................................................................
Total liabilities .........................................................................................
104,181
543,414
Stockholders’ equity
Common stock, $1 par value, authorized: 250,000,000 shares
Issued 2007: 117,692,688; Issued 2006: 116,497,473 shares...................
Additional paid-in capital...................................................................................
Retained earnings...............................................................................................
Less treasury stock, 2007: 49,756,675; 2006: 41,282,969 shares at cost ...........
Accumulated other comprehensive loss .............................................................
Total stockholders’ equity ........................................................................
Total liabilities and stockholders’ equity .................................................
117,693
323,182
1,145,736
(1,160,205)
(17,894)
408,512
$ 951,926
See Accompanying Notes to Consolidated Financial Statements.
F-5
$ 38,270
189,444
7,956
18,207
17,319
8,779
279,975
3,317
39,427
91,903
197,616
332,263
(220,314)
111,949
4,642
116,591
545,347
23,448
3,924
572,719
$ 969,285
$ 58,853
27,966
61,275
10,608
12,534
171,236
205,000
99,573
475,809
116,497
295,555
1,073,395
(974,625)
(17,346)
493,476
$ 969,285
Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Operations
In thousands, except per share amounts
Revenues
Operating expenses
..........................................................................................................
Payroll ........................................................................................................
Production and distribution ........................................................................
Advertising, selling, general and administrative ........................................
Depreciation ...............................................................................................
Intangible amortization ..............................................................................
Total operating expenses......................................................................
Operating income.................................................................................................
Other expenses (income)
Interest expense..........................................................................................
Interest income...........................................................................................
Other, net....................................................................................................
Income before income taxes.................................................................................
Income tax expense..............................................................................................
Net income ..........................................................................................................
Basic earnings per common share........................................................................
$
$
Year Ended December 31,
2007
2006
2005
$1,162,886
$1,184,688
$1,134,993
468,675
402,793
89,787
33,195
3,509
997,959
164,927
12,992
(539)
1,337
13,790
151,137
58,497
92,640
440,496
433,592
90,516
31,566
2,466
998,636
186,052
6,333
(231)
702
6,804
179,248
67,456
$ 111,792
418,056
407,512
88,067
29,918
1,427
944,980
190,013
1,957
(197)
1,774
3,534
186,479
72,021
$ 114,458
1.28
$
1.41
$
1.37
Weighted-average common shares outstanding .........................................
72,524
79,049
83,734
Diluted earnings per common share.....................................................................
$
1.26
$
1.39
$
1.34
Weighted-average common and common equivalent shares outstanding ..
73,703
80,646
85,406
See Accompanying Notes to Consolidated Financial Statements.
F-6
Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Cash Flows
In thousands
Cash Flows from Operating Activities
Net income .................................................................................................
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation ...................................................................................
Intangible amortization ..................................................................
Stock-based compensation .............................................................
Excess tax benefits from stock-based compensation ......................
Deferred income taxes....................................................................
Other, net........................................................................................
Changes in operating assets and liabilities,
net of effects from acquisitions:
Increase in accounts receivable, net ...............................................
Decrease (increase) in inventory ....................................................
Decrease (increase) in prepaid expenses and other current assets ..
Increase in accounts payable ..........................................................
Increase (decrease) in other accrued expenses and other liabilities
Other, net........................................................................................
Net cash provided by operating activities.................................
Cash Flows from Investing Activities
Acquisitions ...............................................................................................
Purchases of property, plant and equipment...............................................
Proceeds from the sale of property, plant and equipment .........................
Net cash used in investing activities.........................................
Cash Flows from Financing Activities
Long-term borrowings................................................................................
Payments on debt .......................................................................................
Issuance of common stock .........................................................................
Excess tax benefits from stock-based compensation..................................
Issuance of treasury stock ..........................................................................
Purchase of treasury stock..........................................................................
Dividends paid ...........................................................................................
Net cash used in financing activities ........................................
Year Ended December 31,
2007
2006
2005
$
92,640
$ 111,792
$ 114,458
33,195
3,509
7,067
(2,455)
8,631
556
(10,251)
1,949
2,010
8,314
2,221
(4,171)
143,215
–
(28,217)
120
(28,097)
123,000
(68,875)
16,566
2,455
181
(183,867)
(20,299)
(130,839)
31,566
2,466
7,434
(2,950)
6,716
1,577
(460)
23
(4,180)
1,916
(4,750)
(4,779)
146,371
(53,931)
(33,708)
877
(86,762)
342,000
(199,000)
12,546
2,950
190
(186,003)
(18,902)
(46,219)
319
13,709
24,561
$ 38,270
29,918
1,427
161
–
6,555
459
(14,250)
(1,083)
829
6,171
(4,938)
5,707
145,414
(63,274)
(28,215)
165
(91,324)
112,000
(60,000)
10,397
–
183
(114,213)
(16,703)
(68,336)
–
(14,246)
38,807
$ 24,561
Effect of exchange rate changes on cash and cash equivalents............................
Net (decrease) increase in cash and cash equivalents ..........................................
Cash and cash equivalents at beginning of year...................................................
Cash and cash equivalents at end of year.............................................................
298
(15,423)
38,270
22,847
$
See Accompanying Notes to Consolidated Financial Statements.
F-7
Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Common
In thousands, except per share amounts
Stock
Balance at December 31, 2004......................................... $ 114,505
Common stock issued — employee benefit plans ...........
Exercise of stock options for cash and by
surrender of shares ................................................
Tax benefit of options exercised ......................................
Dividends paid ($0.20 per share) .....................................
Treasury stock issued .......................................................
Treasury stock repurchased ..............................................
Comprehensive income, net of tax:
Net income ............................................................
Adjustment for minimum pension liability
174
774
–
–
–
–
–
(net of tax benefit of $3,567)..........................
Foreign currency translation adjustment...............
Total comprehensive income............................................
Balance at December 31, 2005......................................... $ 115,453
–
–
Additional
Paid-in
Capital
$ 253,515
3,874
7,311
5,133
–
32
–
–
–
–
Retained
Earnings
$ 882,750
Treasury
Stock
(663,779)
$
–
–
–
–
(16,703)
–
–
114,458
–
–
(4,654)
–
–
151
(114,213)
–
–
–
Common stock issued — employee benefit plans ...........
Exercise of stock options for cash and by
surrender of shares ................................................
Tax benefit of options exercised ......................................
Stock-based compensation ...............................................
Dividends paid ($0.24 per share) .....................................
Treasury stock issued .......................................................
Treasury stock repurchased ..............................................
Comprehensive income, net of tax:
Net income ............................................................
Adjustment for minimum pension liability
(net of tax expense of $16,297)......................
Foreign currency translation adjustment...............
Total comprehensive income............................................
Adjustment to initially adopt SFAS 158
201
843
–
–
–
–
–
–
–
–
4,277
9,679
3,769
7,941
–
24
–
–
–
–
–
–
–
–
–
(18,902)
–
–
111,792
–
–
(6,293)
–
–
–
166
(186,003)
–
–
–
Accumulated
Other
Total
Comprehensive Stockholders’
Equity
Income(Loss)
$ 571,799
$ (15,192)
–
–
–
–
–
–
–
(5,450)
(1,340)
–
–
–
–
–
–
–
–
4,048
3,431
5,133
(16,703)
183
(114,213)
114,458
(5,450)
(1,340)
107,668
$ 561,346
4,478
4,229
3,769
7,941
(18,902)
190
(186,003)
111,792
24,909
1,290
24,909
1,290
137,991
$ 269,865
$ 980,505
$
(782,495)
$ (21,982)
(net of tax benefit of $14,108) ..............................
–
Balance at December 31, 2006......................................... $ 116,497
–
$ 295,555
–
$1,073,395
–
(974,625)
$
(21,563)
$ (17,346)
(21,563)
$ 493,476
Common stock issued — employee benefit plans ...........
Exercise of stock options for cash and by
surrender of shares ................................................
Tax benefit of options exercised ......................................
Stock-based compensation ...............................................
Dividends paid ($0.28 per share) .....................................
Treasury stock issued .......................................................
Treasury stock repurchased ..............................................
Comprehensive income, net of tax:
Net income ............................................................
Adjustment to pension liability
(net of tax benefit of $595).............................
Change in value of derivative instrument
213
983
–
–
–
–
–
–
–
3,851
13,163
3,554
7,057
–
2
–
–
–
–
–
–
–
–
(20,299)
–
–
92,640
–
(1,892)
–
–
–
179
(183,867)
–
–
–
–
–
–
–
–
–
–
4,064
12,254
3,554
7,057
(20,299)
181
(183,867)
92,640
(484)
(484)
accounted for as a cash flow hedge
–
(net of tax benefit of $1,038)..........................
–
Foreign currency translation adjustment........
Total comprehensive income............................................
–
Balance at December 31, 2007......................................... $ 117,693
See Accompanying Notes to Consolidated Financial Statements.
–
–
–
$ 323,182
–
–
–
$1,145,736
–
–
–
$ (1,160,205)
(1,557)
1,493
–
$ (17,894)
(1,557)
1,493
92,092
$ 408,512
F-8
Harte-Hanks, Inc. and Subsidiaries Notes to Consolidated Financial Statements
Note A – Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements present the financial position and the results of operations
and cash flows of Harte-Hanks, Inc. and subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation. Certain prior year amounts have been reclassified for comparative purposes.
As used in this report, the terms “Harte-Hanks,” “we,” “us,” or “our” may refer to Harte-Hanks, one or more of
its consolidated subsidiaries, or all of them taken as a whole.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods.
Revenue Recognition
We recognize revenue when all of the following criteria are satisfied: (i) persuasive evidence of an arrangement
exists; (ii) the price is fixed or determinable; (iii) collectibility is reasonably assured; and (iv) the service has
been performed or the product has been delivered.
Payments received in advance of the performance of services or delivery of the product are recorded as deferred
revenue until such time as the services are performed or the product is delivered.
Our accounting policy for revenue recognition has an impact on our reported results and relies on certain
estimates that require judgments on the part of management. The portion of our revenue that is most subject to
estimates and judgments is revenue recognized using the proportional performance method, as discussed below.
Direct Marketing revenue is derived from a variety of services and products, and may be billed at hourly rates,
monthly rates or a fixed price. For all sales, we require either a purchase order, a statement of work signed by
the client, a written contract, or some other form of written authorization from the client.
Revenue from database design and development, market research, agency services, analytical services, and
creative are typically billed based on time and materials or at a fixed price. If billed at a fixed price, revenue is
recognized on a proportional performance basis as the services specified in the arrangement are performed.
Proportional performance is based on the ratio of direct costs incurred to total estimated costs where the costs
incurred, primarily labor hours and outsourced services, represent a reasonable surrogate for output measures or
contract performance. Progress on a contract is matched against project costs and costs to complete on a
periodic basis. Provision for estimated contract losses, if any, is made in the period such losses are determined.
Management estimates and judgments are used in connection with determining revenue recognized in these
instances. Should actual costs differ significantly from the original estimated costs, the timing of revenues and
overall profitability of the contract could be impacted. Contracts accounted for under the proportional
performance method constituted less than 7.5% of total Direct Marketing revenue and less than 4.5% of our total
revenue for the years ended December 31, 2007, 2006 and 2005.
Revenue from technology database subscriptions is based on a fixed price and is recognized ratably over the
term of the subscription. Revenue from database and website hosting services is recognized ratably over the
contractual hosting period, and pricing is typically based on a fixed price per month or price per contract.
F-9
Revenue from services such as data processing, printing, personalization of communication pieces using laser
and inkjet printing, targeted mail, fulfillment, email marketing and transportation logistics are recognized as the
work is performed. Revenue from these services is typically based on a fixed price or rate given to the client.
Revenue related to E-Care (including online technical support and inbound email management), inbound and
outbound telemarketing, and sales lead management is also typically based on a fixed price per transaction or
service provided. Revenue from these services is recognized as the service or activity is performed.
Revenue from software is recognized in accordance with the American Institute of Certified Public
Accountants’ (AICPA) Statement of Position (SOP) 97-2 Software Revenue Recognition, as amended by SOP
98-9 Modification of SOP 97-2, Software Revenue Recognition. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each element based on the vendor-specific
objective evidence of fair values of the respective elements. For software sales with multiple elements (for
example, software licenses with undelivered post-contract customer support or “PCS”), we allocate revenue to
each component of the arrangement using the residual value method based on the fair value of the undelivered
elements. This means we defer revenue from the software sale equal to the fair value of the undelivered
elements. The fair value of PCS is based upon separate sales of renewals to other clients. The fair value of
services, such as training and consulting, is based upon separate sales of these services to other clients.
The revenue allocated to PCS is recognized ratably over the term of the support period. Revenue allocated to
professional services is recognized as the services are performed. The revenue allocated to software products,
including time-based software licenses, is recognized, if collection is probable, upon execution of a licensing
agreement and shipment of the software or ratably over the term of the license, depending on the structure and
terms of the arrangement. If the licensing agreement is for a term of one year or less and includes PCS, we
recognize the software and the PCS revenue ratably over the term of the license.
We apply the provisions of Emerging Issues Task Force Issue No. 00-03 Application of AICPA Statement of
Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entity’s Hardware to
our hosted software service transactions.
For certain non-software arrangements, we enter into contracts that include delivery of a combination of two or
more of our service offerings. Typically, such multiple element arrangements incorporate the design and
development of data management tools or systems and an ongoing obligation to manage, host or otherwise run
solutions for our customer. Such arrangements are divided into separate units of accounting, provided that the
delivered item has stand-alone value and there is objective and reliable evidence of the fair value of the
undelivered items. The total arrangement fee is allocated to the undelivered elements based on their fair values
and to the initial delivered elements using the residual method. Revenue from these services is recognized
separately, and in accordance with our revenue recognition policy, for each element.
As described above, sometimes our customer arrangements have multiple deliverables, including service
elements. Generally, our multiple-element arrangements fall within the scope of specific accounting standards
that provide guidance regarding the separation of elements in multiple-deliverable arrangements and the
allocation of consideration among those elements (e.g., AICPA SOP 97-2 Software Revenue Recognition). If
not, we apply the provisions of Emerging Issues Task Force Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables (“EITF 00-21”). The provisions of EITF 00-21 require us to unbundle
multiple element arrangements into separate units of accounting when the delivered element(s) has stand-alone
value and fair value of the undelivered element(s) exist(s). When we are able to unbundle the arrangement into
separate units of accounting, we apply one of the accounting policies described above to each unit. If we are
unable to unbundle the arrangement into separate units of accounting, we apply one of the accounting policies
described above to the entire arrangement. This might impact the timing of revenue recognition, but would not
change the total revenue recognized from the arrangement.
F-10
Shopper services are considered rendered, and the revenue recognized, when all printing, sorting, labeling and
ancillary services have been provided and the mailing material has been received by the United States Postal
Service.
Taxes collected from customers and remitted to governmental authorities are not reflected in our revenues or
expenses.
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. At December 31,
2007, we reclassified $8.4 million from cash equivalents to accounts payable due to net book overdraft cash
positions at certain banks. We did no such reclassification at December 31, 2006 as we did not have any net
book overdraft cash positions at that date.
Allowance for Doubtful Accounts
We maintain our allowance for doubtful accounts at a balance adequate to reduce accounts receivable to the
amount of cash expected to be realized upon collection. The methodology used to determine the minimum
allowance balance is based on our prior collection experience and is generally related to the accounts receivable
balance in various aging categories. The balance is also influenced by specific clients’ financial strength and
circumstance. Accounts that are determined to be uncollectible are written off in the period in which they are
determined to be uncollectible. Periodic changes to the allowance balance are recorded as increases or decreases
to bad debt expense, which is included in the “Advertising, selling, general and administrative” line of our
Consolidated Statements of Operations. The changes in the allowance for doubtful accounts consisted of the
following:
Year Ended December 31,
In thousands
Balance at beginning of year.........
Additions charged to expense .......
Amounts charged against the
allowance, net of recoveries ........
Balance at end of year ...................
2007
$ 3,928
3,483
3,855
$ 3,556
2006
$ 3,832
2,491
2,395
$ 3,928
2005
$ 1,892
4,190
2,250
$ 3,832
Inventory
Inventory, consisting primarily of newsprint and operating supplies, is stated at the lower of cost (first-in, first-
out method) or market.
Property, Plant and Equipment
Property, plant and equipment are stated on the basis of cost. Depreciation is computed using the straight-line
method at rates calculated to amortize the cost of the assets over their useful lives. The general ranges of
estimated useful lives are:
Buildings and improvements
Equipment and furniture
Software
10 to 40 years
3 to 20 years
3 to 10 years
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), long-lived assets such as 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. We recorded an impairment loss of $0.5 million in the third quarter
of 2006 in anticipation of the sale of a Direct Marketing print operation that occurred in October 2006. We did
not record an impairment on long-lived assets in 2007 or 2005.
F-11
Goodwill and Other Intangibles
Goodwill and other intangibles are recorded in accordance with SFAS No. 141, Business Combinations (SFAS
141). Goodwill is recorded to the extent that the purchase price exceeds the fair value of the assets acquired.
Other intangibles with indefinite useful lives are recorded at fair value at the date of the acquisition. Other
intangibles with definite useful lives are recorded at cost. Pursuant to SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), goodwill and other intangibles with indefinite useful lives were tested for
impairment using November 30 as our valuation date. Fair value has been determined using discounted cash
flow methodology. SFAS 142 also requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives and reviewed for impairment in accordance with SFAS 144. We have
determined that no impairment of goodwill or other intangibles existed in any of the three years ended
December 31, 2007.
Income Taxes
Income taxes are calculated using the asset and liability method required by SFAS No. 109, Accounting for
Income Taxes (SFAS 109). Deferred income taxes are recognized for the tax consequences resulting from
timing differences by applying enacted statutory tax rates applicable to future years. These timing differences
are associated with differences between the financial and the tax basis of existing assets and liabilities. Under
SFAS 109, a statutory change in tax rates will be recognized immediately in deferred taxes and income.
Earnings Per Share
Basic earnings per common share are based upon the weighted-average number of common shares outstanding.
Diluted earnings per common share are based upon the weighted-average number of common shares outstanding
and dilutive common stock equivalents from the assumed exercise of stock options using the treasury stock
method.
Stock-Based Compensation
On January 1, 2006, we adopted SFAS No. 123, as revised, Share-Based Payment (SFAS 123R) under the
modified-prospective transition method. SFAS 123R requires that all share-based awards be recognized as
operating expense, based on their fair values on the date of grant, over the requisite service period, in the
consolidated statement of operations. Prior to January 1, 2006, we accounted for share-based awards under the
recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25) and related interpretations. Accordingly, prior to January 1, 2006, no
compensation expense was recognized for share-based awards granted where the exercise price was equal to the
market price of the underlying stock on the date of grant.
Reserve for Healthcare, Workers’ Compensation, Automobile and General Liability
Our deductible for individual healthcare claims is $0.2 million. Our deductible for workers’ compensation is
$0.5 million. We have a $0.3 million deductible for automobile and general liability claims. Our insurance
administrator provides us with estimated loss reserves, based upon its experience dealing with similar types of
claims, as well as amounts paid to date against these claims. We apply actuarial factors to both insurance
estimated loss reserves and to paid claims and then determine reserve levels, taking into account these
calculations. 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 Statement of Operations. Periodic changes to the reserve for
healthcare are recorded as increases or decreases to employee benefits expense, which is included in the
“Payroll” line of our Consolidated Statement of Operations.
Accounting for Derivative Instruments and Hedging Activities
We use derivative instruments to manage the risk of changes in prevailing interest rates adversely affecting
future cash flows associated with our credit facilities. The derivative instrument used to manage such risk is the
interest rate swap. We account for interest rate swaps in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). We have designated our interest rate swap as a cash
F-12
flow hedge. As such, we report the fair value of the swap as an asset or liability on our balance sheet, any
ineffectiveness as interest expense, and effective changes to the fair value of the swap in other comprehensive
loss. Periodic gains and losses on the swap are used to offset related results on the hedged item in the statement
of operations. Cash flows from derivatives accounted for as cash flow hedges are reported as cash flow from
operating activities, in the same category as the cash flows from the items being hedged.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with
FASB Statement No. 109, Accounting for Income Taxes, by prescribing a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. An enterprise would be required to recognize in its financial statements the
largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement only if that
position meets the more-likely-than-not recognition threshold. We adopted the provisions of FIN 48 on January
1, 2007. We did not recognize a change to our unrecognized tax benefits as a result of this adoption.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS 157 is effective for us beginning January 1, 2008
and is not expected to have a significant impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans (SFAS 158), an amendment of SFAS 87, SFAS 88, SFAS 106, and SFAS 132R and
other related accounting literature. SFAS 158 requires an employer to recognize the overfunded or underfunded
status of defined benefit postretirement plans as an asset or a liability in its statement of financial position. The
funded status is measured as the difference between plan assets at fair value and the benefit obligation (the
projected benefit obligation for pension plans or the accumulated benefit obligation for other postretirement
benefit plans). An employer is also required to measure the funded status of a plan as of the date of its year-end
balance sheet with changes in the funded status recognized through comprehensive income. SFAS 158 also
requires certain disclosures regarding the effects on net periodic benefit cost for the next fiscal year that arise
from delayed recognition of gains or losses, prior service costs or credits, and the transition asset or obligation.
As of result of the adoption of SFAS 158 as of December 31, 2006, we recorded a noncurrent liability,
representing the combined underfunded status of our pension plans, of $18.2 million dollars on our consolidated
balance sheet.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for us
beginning January 1, 2008 and is not expected to have a significant impact on our consolidated financial
statements.
In June 2007, the FASB’s Emerging Issues Task Force (EITF) issued EITF 06-11, Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 requires the tax benefit received on
dividends associated with share-based awards that are charged to retained earnings to be recorded in additional
paid-in capital and included in the pool of excess tax benefits available to absorb potential future tax
deficiencies on share-based payment awards. Our adoption of EITF 06-11 on January 1, 2008 is not expected to
have a material impact on our consolidated financial statements.
In December 2007, the FASB revised SFAS No. 141, Business Combinations (SFAS 141). The revised SFAS
No. 141 (SFAS 141R) establishes principles and requirements for how an acquiring company:
F-13
• Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree;
• Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain
purchase; and
• Determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination.
SFAS 141R requires an acquiring company to recognize the assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree at fair value as of the acquisition date. Under SFAS 141, acquisition-
related costs were included in the total costs of the acquisition that were allocated to the assets acquired and the
liabilities assumed. Under SFAS 141R, these acquisition-related costs will be expensed in the period in which
they occur. SFAS 141R requires an acquiring company to recognize contractual contingencies as assets or
liabilities at fair value as of the acquisition date. SFAS 141 permitted deferred recognition of preacquisition
contingencies until certain recognition criteria were met. SFAS 141R also requires an acquiring company to
recognize contingent consideration at fair value as of the acquisition date. Under SFAS 141, contingent
consideration usually was not recognized until the contingency was resolved, in which case an adjustment was
made to goodwill. SFAS 141R is effective for us beginning January 1, 2009. Our adoption of SFAS 141R will
affect the way we account for acquisitions, including acquisition-related costs, contractual contingencies and
contingent consideration. Our adoption of SFAS 141R may also impact the amount of information we disclose
about acquisitions.
Note B – Acquisitions
We made several acquisitions in 2006 and 2005. We did not make any acquisitions in 2007.
Subsequent to year end, in January 2008, we acquired Mason Zimbler Limited, a full-service integrated digital
marketing agency specializing in the technology sector. With offices in Bristol, UK and Reading, UK, Mason
Zimbler provides technology companies with a full range of integrated digital marketing services, including
direct marketing, advertising and branding, incorporating Web site development, e-mail lead generation, viral,
channel incentive programs, media planning and buying, research and other services. We have not yet
completed the purchase accounting for this transaction. This acquisition is not expected to have a material
impact on our results of operations for 2008.
In September 2006, we acquired Aberdeen Group, Inc. (Aberdeen), a provider of technology market research,
intelligence, and demand generation services located in Boston, Massachusetts. Aberdeen offers market
information and services through research channels, and prepares reports based on primary research and
benchmarking data from more than 25,000 companies. We believe this acquisition has provided synergy
opportunities with our CI Technology Database, which now tracks technology infrastructure, business profiles
and technology purchase plans at 680,000 locations in North America, South America and Europe – expanding
their base globally for research. The results of Aberdeen's reports on current marketplace experiences and
trends are used to generate qualified leads by its clients, and we believe this intelligence assists our clients in
their own marketing efforts. Goodwill of $32.3 million, intangible assets not subject to amortization of $5.0
million, and intangible assets subject to amortization of $4.3 million have been recognized in this transaction
and assigned to the Direct Marketing segment.
In July 2006, we acquired Global Address, a provider of global postal address data quality software and services
incorporating standards for more than 230 nations and territories worldwide. Global Address, located in Bristol,
UK, and with additional operations in Mountain View, CA, focuses on international address data, and has
provided key components of Harte-Hanks Global Data Management, one of our data services offerings. We
continue to integrate elements of Global Address into our existing international offerings, among them Global
Data Management and our Trillium Software data quality solutions, while continuing to support stand-alone
Global Address products and services in the marketplace. The total amount of goodwill recognized in this
transaction was $8.1 million and was assigned to the Direct Marketing segment. No intangible assets were
recognized in this transaction.
F-14
In June 2006, we acquired StepDot Software GmbH of Germany and integrated it into our Trillium Software
operations. Based in Böblingen, Germany, StepDot was a value-added reseller specializing in data quality and
integration solutions for Harte-Hanks since 2002. The acquisition provided us with a more strategic presence in
Central Europe and Germany. The total amount of goodwill recognized in this transaction was $0.4 million and
was assigned to the Direct Marketing segment. No intangible assets were recognized in this transaction.
In April 2006, we acquired certain assets of PrintSmart, Inc., a full-service print-on-demand provider located in
East Bridgewater, Massachusetts, in an effort to expand and enhance our digital printing capabilities. No
goodwill was recognized in this transaction. Intangible assets recognized in this transaction which are subject to
amortization, relating to a service contract, totaled approximately $1.0 million and were assigned to the Direct
Marketing segment.
In April 2005, we acquired substantially all of the assets of Flyer Printing Company, Inc. related to The Flyer
publication, located in Tampa, Florida. TheFlyer.com, our current name for this publication, is a weekly
shopper publication delivered by mail with circulation at the time of the acquisition of 955,000 in the Tampa,
Florida metropolitan area. The total amount of goodwill recognized in this transaction was $41.6 million.
Intangible assets recognized in this transaction that are subject to amortization, relating to client relationships
and non-compete agreements, totaled $8.3 million. Intangible assets recognized in this transaction that are not
subject to amortization, relating to trademarks and trade names, totaled $7.6 million. All goodwill and
intangibles recognized as part of this acquisition were assigned to the Shoppers segment.
In February 2005, we acquired long-standing Australian partner Communiqué Direct pursuant to a purchase
option we acquired in June 2003. Founded in 1992, Communiqué Direct, located in a north suburb of Sydney,
Australia, was a privately held firm that provided a range of marketing and information services for the
business-to-business sector across the Asia-Pacific region. Since 1998, Harte-Hanks and Communiqué Direct
had worked with each other on many Pacific Rim marketing applications, focusing on our high-tech clients.
The total cost of acquisitions in 2006 and 2005 was $53.9 million and $63.3 million, respectively, and all were
paid in cash. We did not make any acquisition-related payments in 2007. The operating results of these
acquisitions have been included in the accompanying Consolidated Financial Statements from the date of the
acquisitions. We have not disclosed proforma amounts including the operating results of prior years’
acquisitions as they are not considered material.
Note C – Long-Term Debt
Our long-term debt obligations at year-end were as follows:
In thousands
Revolving Credit Facility, various interest rates based on
Eurodollar (effective rate of 5.44% at December 31, 2007),
December 31,
2007
2006
due August 12, 2010 .....................................................................................
$ 69,000
$ 10,000
Term Loan Facility, various interest rates based on Eurodollar
(effective rate of 5.16% at December 31, 2007), due
September 6, 2011 ........................................................................................
190,125
$ 259,125
195,000
$ 205,000
Credit Facilities
On August 12, 2005, we entered into a five-year $125 million revolving credit facility (Revolving Credit
Facility) with JPMorgan Chase Bank, N.A., as Administrative Agent. The Revolving Credit Facility allows us
to obtain revolving credit loans. For each borrowing under the Revolving Credit Facility, we can generally
choose to have the interest rate for that borrowing calculated based on either JPMorgan Chase Bank’s publicly
announced New York prime rate or on a Eurodollar (as defined in the Revolving Credit Agreement) rate plus a
F-15
spread. The spread is determined based on our total debt-to-EBITDA (as defined in the Revolving Credit
Agreement) ratio then in effect, and ranges from .315% to .60% per annum. There is a facility fee that we are
also required to pay under the Revolving Credit Facility that is based on a rate applied to the total commitment
amount under the Revolving Credit Facility, regardless of how much of that commitment we have actually
drawn upon. The facility fee rate ranges from .085% to .15% per annum, depending on our total debt-to-
EBITDA ratio then in effect.
On September 6, 2006, we entered into a five-year term loan facility (Term Loan Facility) with Wells Fargo
Bank, N.A., as Administrative Agent. The Term Loan Facility originally provided for a commitment of up to
$200 million. On December 31, 2007 we began making the scheduled quarterly principal payments as follows:
Quarterly
Installments
1 – 8
9 – 12
13 – 15
Maturity Date
Percentage of
Drawn Amounts
2.50% each
3.75% each
5.00% each
Remaining Principal Balance
The Term Loan Facility matures on September 6, 2011. For each borrowing under the Term Loan Facility, we
can generally choose to have the interest rate for that borrowing calculated based on either (i) a Eurodollar (as
defined in the Term Loan Agreement) rate, plus a spread which is determined based on our total debt-to-
EBITDA ratio (as defined in the Term Loan Agreement) then in effect, and ranges from .315% to .60% per
annum, or (ii) the higher of Wells Fargo Bank’s prime rate in effect on such date or the Federal Funds rate in
effect on such date plus .50%. There is a facility fee that we are also required to pay under the Term Loan
Facility that is based on a facility fee rate applied to the outstanding principal balance owed under the Term
Loan Facility. The facility fee rate ranges from .085% to .15% per annum, depending on our total debt-to-
EBITDA ratio then in effect. We may elect to prepay the Term Loan Facility at any time without incurring any
prepayment penalties. Once an amount has been prepaid, it may not be reborrowed.
Subsequent to year end, on January 18, 2008, we entered into a six-month $50 million revolving credit facility
(Bridge Loan Facility) with Wells Fargo Bank, N.A., as Administrative Agent. The Bridge Loan Facility
matures on July 18, 2008 and allows us to obtain revolving credit loans up to that date. We intend to utilize the
availability under the Bridge Loan Facility primarily to repurchase shares of our common stock and for other
general corporate purposes. For each borrowing under the Bridge Loan Facility, we can generally choose to
have the interest rate for that borrowing calculated based on either (i) a Eurodollar (as defined in the Bridge
Loan Agreement) rate, plus a spread which is determined based on our total debt-to-EBITDA ratio (as defined in
the Bridge Loan Agreement) then in effect, and ranges from .40% to .75% per annum, or (ii) the higher of Wells
Fargo Bank’s prime rate in effect on such date or the Federal Funds rate in effect on such date plus .50%. There
is a facility fee that we are also required to pay under the Bridge Loan Facility that is based on a rate applied to
the total commitment amount under the Bridge Loan Facility. Prior to termination of the commitment under the
Bridge Loan Facility, the facility rate is applied to the total commitment amount under the Bridge Loan Facility,
regardless of how much of that commitment we have actually drawn upon. Commencing upon termination of
the commitment under the Bridge Loan Facility, the facility rate is applied to the outstanding principal balance
owed under the Bridge Loan Facility. The facility fee rate ranges from .10% to .25% per annum, depending on
our total debt-to-EBITDA ratio then in effect.
Subject to market conditions, we anticipate entering into an approximately $100 million, longer-term credit
facility prior to the maturity date of the Bridge Loan Facility, at which time we intend to repay any amounts then
owed under the Bridge Loan Facility. We intend to utilize the availability under this anticipated longer-term
credit facility primarily to continue to repurchase shares of our common stock and for other general corporate
purposes.
F-16
The future minimum principal payments related to our debt at December 31, 2007 are as follows:
In thousands
2008.......................... $ 19,500
21,938
2009..........................
100,687
2010..........................
117,000
2011..........................
$ 259,125
As we have capacity under our Revolving Credit Facility and the intent to fund the required quarterly principal
payments under the Term Loan Facility through 2008, we have classified our entire debt balance at December
31, 2007 as long-term.
Under the credit facilities, we are required to maintain an interest coverage ratio of not less than 2.75 to 1 and a
total debt-to-EBITDA ratio of not more than 3.0 to 1. The credit facilities also contain covenants restricting our
and our subsidiaries’ ability to grant liens and enter into certain transactions and limit the total amount of
indebtedness of our subsidiaries to $20 million.
The credit facilities each also include customary covenants regarding reporting obligations, delivery of notices
regarding certain events, maintaining our corporate existence, payment of obligations, maintenance of our
properties and insurance thereon at customary levels with financially sound and reputable insurance companies,
maintaining books and records and compliance with applicable laws. The credit facilities each also provide for
customary events of default including nonpayment of principal or interest, breach of representations and
warranties, violations of covenants, failure to pay certain other indebtedness, bankruptcy and material judgments
and liabilities, certain violations of environmental laws or ERISA or the occurrence of a change of control
prevent of default under existing agreements. As of December 31, 2007, we were in compliance with all of the
covenants of our credit facilities.
Cash payments for interest were $13.2 million, $6.1 million, and $1.7 million for the years ended December 31,
2007, 2006 and 2005, respectively.
Note D – Interest Rate Risk
We use derivative instruments to manage the risk of changes in prevailing interest rates adversely affecting
future cash flows associated with our credit facilities. The derivative instrument used to manage such risk is the
interest rate swap. We account for interest rate swaps in accordance with SFAS 133, Accounting for Derivative
Instruments and Hedging Activities.
As with any financial instrument, derivative instruments have inherent risks, primarily market and credit risk.
Market risk associated with changes in interest rates is managed as part of our overall market risk monitoring
process by establishing and monitoring limits as to the degree of risk that may be undertaken. Credit risk occurs
when a counterparty to a derivative contract in which we have an unrealized gain fails to perform according to
the terms of the agreement. We minimize our credit risk by entering into transactions with counterparties that
maintain high credit ratings.
We have designated our interest rate swap as a cash flow hedge. For a derivative instrument designated as a
cash flow hedge, the effective portion of changes in the fair value of the derivative instrument is recorded in
other comprehensive income (loss) and is recognized as a component of interest expense in the statement of
operations when the hedged item affects results of operations. We discontinue hedge accounting prospectively
if it is determined that (i) an interest rate swap is not highly effective in offsetting changes in the cash flows of a
hedged item, (ii) the derivative expires or is sold, terminated or exercised, or (iii) the derivative is undesignated
as a hedge instrument because it is unlikely that a forecasted transaction will occur.
F-17
If hedge accounting is discontinued, the derivative instrument will continue to be carried at fair value, with
changes in the fair value of the derivative instrument recognized in the current period’s results of operations.
When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the
accumulated gains and losses included in accumulated other comprehensive income (loss) will be recognized
immediately in results of operations. When hedge accounting is discontinued because the derivative instrument
has not been or will not continue to be highly effective as a hedge, the remaining amount in accumulated other
comprehensive income (loss) is amortized into earnings over the remaining life of the derivative.
In September 2007, we entered into a two-year interest rate swap agreement with a notional amount of $150.0
million and a fixed rate of 4.655%. The two-year term began on September 28, 2007. This interest rate swap
changes the variable-rate cash flow exposure on the $150.0 million notional amount to fixed-rate cash flows by
entering into receive-variable, pay-fixed interest rate swap transactions. Under this swap transaction, we receive
London Interbank Offered Rate (LIBOR) based variable interest rate payments and make fixed-interest rate
payments, thereby creating fixed-rate debt. We designated this hedging relationship as hedging the risk of
changes in cash flows (a cash flow hedge) attributable to changes in the LIBOR rate applicable to our Revolving
Credit Facility and Term Loan Facility. As such, we report the fair value of the swap as an asset or liability on
our balance sheet, any ineffectiveness as interest expense, and effective changes to the fair value of the swap in
other comprehensive loss. Periodic gains and losses on the swap are used to offset related results on the hedged
item in the statement of operations. At December 31, 2007 this swap is recorded at fair value as a $2.6 million
liability. We reclassified into earnings gains of $0.1 million for the year ended December 31, 2007, that were
related to the swap and previously reported in other comprehensive loss. We expect losses of $1.2 million to be
reclassified into earnings over the next twelve months related to the swap and currently reported in other
comprehensive loss. The amount ultimately realized, however, could differ as interest rates change.
On a quarterly basis, we assess the ineffectiveness of the hedging relationship, and any gains or losses related to
the ineffectiveness are recorded as interest expense in our statement of operations. We do not expect the
ineffectiveness related to our current hedging activity to be material to our financial results in the future. There
were no components of the derivative instruments that were excluded from the assessment of hedge
effectiveness.
We do not enter into derivative instruments for any purpose other than cash flow hedging. We do not speculate
using derivative instruments.
We assess interest rate risk by regularly identifying and monitoring changes in interest rate exposure that may
adversely impact expected future cash flows and by evaluating hedging opportunities.
F-18
Note E – Income Taxes
The components of income tax expense (benefit) are as follows:
Year Ended December 31,
2007
2006
2005
In thousands
Current
Federal...........................................
State and local ...............................
Foreign ..........................................
Total current ..................................
$ 39,855
8,719
1,292
$ 49,866
Deferred
Federal...........................................
State and local ...............................
Foreign ..........................................
Total deferred ................................
$
$
8,145
609
(123)
8,631
$ 49,958
10,349
433
$ 60,740
$
$
5,487
891
338
6,716
$ 56,593
8,609
264
$ 65,466
$
$
5,130
471
954
6,555
Total income tax expense ..............
$ 58,497
$ 67,456
$ 72,021
The United States and foreign components of income before income taxes were as follows:
In thousands
United States .................................
Foreign ..........................................
2007
$ 148,291
2,846
2006
$ 176,777
2,471
2005
$ 183,393
3,086
Year Ended December 31,
Total income before income taxes.
$ 151,137
$ 179,248
$ 186,479
The differences between total income tax expense and the amount computed by applying the statutory federal
income tax rate to income before income taxes were as follows:
Year Ended December 31,
In thousands
Computed expected income tax expense.......... $ 52,898 35 %
6,063
4 %
Net effect of state income taxes .......................
-1 %
(1,282)
Production activities deduction ........................
1 %
818
Other, net..........................................................
39 %
Income tax expense for the period ................... $ 58,497
2007
Total income tax expense (benefit) was allocated as follows:
2006
$ 62,737
7,306
(1,940)
35%
4%
-1%
(647) 0%
38%
$ 67,456
2005
$ 65,269
5,960
–
792
$ 72,021
35%
3%
0%
1%
39%
In thousands
Results of operations ..............................
Stockholders’ equity...............................
Total .......................................................
2007
$ 58,497
(5,187)
$ 53,310
Year Ended December 31,
2006
$ 67,456
(1,580)
$ 65,876
2005
$ 72,021
(8,700)
$ 63,321
F-19
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and
deferred tax liabilities were as follows:
December 31,
2007
2006
In thousands
Deferred tax assets
Deferred compensation and retirement plan..............................
Accrued expenses not deductible until paid ..............................
Employee stock-based compensation........................................
Accounts receivable, net ...........................................................
Other, net .................................................................................
State income tax ........................................................................
Federal net operating loss carryforwards ..................................
Foreign net operating loss carryforwards..................................
State net operating loss carryforwards ......................................
Total gross deferred tax assets ..................................................
Less valuation allowance ..........................................................
Net deferred tax assets...............................................................
$
9,564
6,520
4,514
1,443
252
627
2,239
1,564
1,101
27,824
(1,047)
26,777
Deferred tax liabilities
Property, plant and equipment ..................................................
Goodwill and other intangibles .................................................
Other, net……………………………………………………...
Total gross deferred tax liabilities ............... .............................
Net deferred tax liabilities ........................... .............................
(11,825)
(67,997)
(387)
(80,209)
$ (53,432)
$ 10,158
6,193
2,622
1,306
111
1,321
2,303
1,672
821
26,507
(1,128)
25,379
(13,762)
(59,377)
___–
(73,139)
$ (47,760)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Based on the expectation of future taxable
income and that the deductible temporary differences will offset existing taxable temporary differences,
management believes it is more likely than not that we will realize the benefits of these deductible differences,
net of the existing valuation allowances, at December 31, 2007 and 2006.
Net deferred taxes are recorded both as a current deferred income tax asset and as other long-term liabilities
based upon the classification of the related timing difference. There are approximately $14.2 million and $8.1
million of deferred tax assets related to non-current items that are netted with long-term deferred tax liabilities at
December 31, 2007 and 2006, respectively.
Harte-Hanks or one of our subsidiaries files income tax returns in the U.S. federal, U.S. state and foreign
jurisdictions. For U.S. state and foreign returns, we are no longer subject to tax examinations for years prior to
2003. For U.S. federal returns, we are no longer subject to tax examinations for the years prior to 2004.
We adopted the provisions of FIN 48 on January 1, 2007. We did not recognize a change to our unrecognized
tax benefits as a result of the implementation of FIN 48. A reconciliation of the beginning and ending amount
of unrecognized tax benefit is as follows:
Balance at January 1, 2007................................... $ 12,209
640
Additions for current year tax positions ...............
2,128
Additions for prior year tax positions ..................
(871)
Reductions for prior year tax positions ................
(2,338)
Lapse of statute ....................................................
–
Settlements ...........................................................
Balance at December 31, 2007............................. $ 11,768
At December 31, 2007, unrecognized tax benefits totaled $7.7 million, net of tax, of which $1.3 million
represents accruals for interest and penalties that were recorded as additional tax expense in accordance with our
accounting policy. If recognized, the entire unrecognized tax benefit amount would impact the effective tax
F-20
rate. During the years ended December 31, 2007, 2006, and 2005, we recognized approximately $0.2 million,
$0.1 million and $0.3 million in taxes related to interest and penalties. We had approximately $1.3 million and
$1.1 million of interest and penalties accrued at December 31, 2007 and 2006, respectively.
We anticipate that it is reasonably possible that we will have a reduction in the liability related to filing positions
in the range of $1.2 million to $1.4 million during 2008 as a result of the lapsing statutes.
The adoption of SFAS 123R in January 2006 required the recognition of a deferred tax asset for the future
exercise and issuance of stock-based compensation grants. As a result of the adoption of SFAS 123R we
recorded $2.6 million in deferred tax assets in 2006.
As of December 31, 2007, we had net operating loss carryforwards that are available to reduce future taxable
income and that will begin to expire in 2020.
The valuation allowance for deferred tax assets as of January 1, 2006, was $.7 million. The valuation allowance
at December 31, 2007 and 2006 relates to foreign and state net operating loss carryforwards, which are not
expected to be realized.
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. If
those earnings were not considered permanently reinvested, U.S. federal deferred income taxes would have been
recorded. However, it is not practicable to estimate the amount of additional taxes which may be payable upon
distributions.
Cash payments for income taxes were $44.1 million, $59.1 million and $64.9 million in 2007, 2006 and 2005,
respectively.
Note F – Goodwill and Other Intangibles
Goodwill and other intangibles are recorded in accordance with SFAS 141. Goodwill is recorded to the extent
that the purchase price exceeds the fair value of the assets acquired. Pursuant to SFAS 142, goodwill and other
intangibles with indefinite useful lives are tested for impairment as described below.
We assess the impairment of goodwill and other intangibles with indefinite lives in accordance with SFAS 142,
by determining the fair value of each of our reporting units and comparing the fair value to the carrying value
for each reporting unit. We have identified our reporting units as Direct Marketing and Shoppers. Fair value is
determined using projected discounted future cash flows and cash flow multiple models, based on historical
performance and management’s estimate of future performance, giving consideration to existing and anticipated
competitive and economic conditions. If a reporting unit’s carrying amount exceeds its fair value, we must
calculate the implied fair value of the reporting unit’s goodwill and other intangibles with indefinite lives by
allocating the reporting unit’s fair value to all of its assets and liabilities (recognized and unrecognized) in a
manner similar to a purchase price allocation, and then compare this implied fair value to its carrying amount.
To the extent that the carrying amount of goodwill and other intangibles with indefinite lives exceeds its implied
fair value, an impairment loss is recorded.
Both the Direct Marketing and Shoppers segments were tested for impairment using the November 30, 2007
balances. Based on the results of our impairment test, we have not recorded an impairment loss related to
goodwill or other intangibles with indefinite useful lives in any of the three years ended December 31, 2007.
F-21
The changes in the carrying amount of goodwill for the years ended December 31, 2007 and 2006, are as
follows:
In thousands
Balance at December 31, 2005.............................
Direct
Marketing
$335,263
Shoppers
$167,487
Additional purchase consideration .......................
Balance at December 31, 2006.............................
42,597
$377,860
–
$167,487
Total
$502,750
42,597
$545,347
Purchase accounting adjustments.........................
Balance at December 31, 2007.............................
(1,764)
$376,096
–
$167,487
(1,764)
$543,583
Other intangibles with indefinite useful lives all relate to trademarks and trade names associated with the Tampa
Flyer acquisition in April 2005 and the Aberdeen acquisition in September 2006, and were recorded at fair
value.
The changes in the carrying amount of other intangibles with indefinite lives for the years ended December 31,
2007 and 2006, are as follows:
In thousands
Balance at December 31, 2005.............................
Additional purchase consideration .......................
Balance at December 31, 2006.............................
Additional purchase consideration .......................
Balance at December 31, 2007.............................
Direct
Marketing
–
$
5,000
$ 5,000
–
$ 5,000
Shoppers
$ 7,600
–
$ 7,600
–
$ 7,600
Total
$ 7,600
5,000
$ 12,600
–
$ 12,600
Other intangibles with definite useful lives all relate to contact databases, client relationships and non-compete
agreements. Other intangibles with definite useful lives are recorded on the basis of cost in accordance with
SFAS 141. Pursuant to SFAS 142, intangible assets with definite useful lives are amortized on a straight-line
basis over their respective estimated useful lives, typically a period of 5 to 10 years, and reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset my not
be recoverable. We have not recorded an impairment loss related to other intangibles with definite useful lives
in any of the three years ended December 31, 2007.
The changes in the carrying amount of other intangibles with definite lives for the years ended December 31,
2007 and 2006, are as follows:
In thousands
Balance at December 31, 2005.............................
Amortization ........................................................
Additional purchase consideration .......................
Balance at December 31, 2006.............................
Amortization ........................................................
Purchase accounting adjustments.........................
Balance at December 31, 2007.............................
Direct
Marketing
$ 1,547
(1,303)
4,245
$ 4,489
(2,347)
1,000
$ 3,142
F-22
Shoppers
$ 7,522
Total
$ 9,069
(1,163)
–
$ 6,359
(1,162)
–
$ 5,197
(2,466)
4,245
$ 10,848
(3,509)
1,000
$ 8,339
Amortization expense related to other intangibles with definite useful lives was $3.5 million, $2.5 million and
$1.4 million for the years ended December 31, 2007, 2006 and 2005, respectively. Expected amortization
expense for the next five years is as follows:
In thousands
2008........................... $ 2,950
1,712
2009...........................
934
2010...........................
674
2011...........................
648
2012...........................
Note G – Employee Benefit Plans
Prior to January 1, 1999, we maintained a defined benefit pension plan for which most of our employees were
eligible. In conjunction with significant enhancements to the 401(k) plan, we elected to freeze benefits under
this defined benefit pension plan as of December 31, 1998.
In 1994, we adopted a non-qualified, supplemental 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
this supplemental pension plan, which is an unfunded plan, will continue to accrue as if the principal pension
plan had not been frozen.
On December 31, 2006, we adopted SFAS 158, which requires that the overfunded or underfunded status of
defined benefit postretirement plans be recorded as an asset or liability in the 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 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:
In thousands
Change in benefit obligation
Benefit obligation at beginning of year.......................
Service cost .................................................................
Interest cost .................................................................
Actuarial loss (gain) ....................................................
Benefits paid................................................................
Benefit obligation at end of year .................................
Change in plan assets
Fair value of plan assets at beginning of year .............
Actual return on plan assets ........................................
Contributions...............................................................
Benefits paid................................................................
Fair value of plan assets at end of year .......................
Year Ended December 31,
2006
2007
$ 126,565
766
7,778
1,943
(6,003)
$ 131,049
$ 108,343
7,227
5,445
(6,003)
$ 115,012
$ 126,567
762
7,320
(2,135)
(5,949)
$ 126,565
$ 96,612
12,248
5,432
(5,949)
$ 108,343
Funded status at end of year........................................
$ (16,037)
$ (18,222)
F-23
The effect of applying SFAS 158 on individual lines in the Consolidated Balance Sheets as of December 31,
2006 was as follows:
In thousands
Other assets ..........................................................
Total assets....................................................
Deferred income taxes..........................................
Other long-term liabilities ....................................
Total liabilities ..............................................
Accumulated other comprehensive loss (pension-related)
Total stockholders’ equity.............................
Total liabilities and stockholders’ equity ......
$
Before
Application of
SFAS 158
35,337
1,000,698
(79,188)
(30,235)
(485,659)
336
(515,039)
$ (1,000,698)
Adjustments
$ (31,413)
(31,413)
14,108
(4,258)
9,850
21,563
21,563
$ 31,413
After
Application of
SFAS 158
$
3,924
969,285
(65,080)
(34,493)
(475,809)
21,899
(493,476)
$(969,285)
The following amounts have been recognized in the Consolidated Balance Sheets at December 31:
In thousands
Noncurrent assets ........................................................
Noncurrent liabilities...................................................
$
2007
4,537
(20,574)
$ (16,037)
$
2006
–
(18,222)
$ (18,222)
The following amounts have been recognized in accumulated other comprehensive loss at December 31:
In thousands
Net loss........................................................................
Transition obligation ...................................................
Prior service cost .........................................................
2007
$ 22,172
65
146
$ 22,383
2006
$ 21,591
124
184
$ 21,899
We plan to make a contribution to our frozen pension plan in 2008. That contribution will be at least equal to
the minimum required contribution in order to obtain the Pension Benefit Guaranty Corporation full funding
limit exemption, but not greater than the maximum amount deductible for tax purposes. At this point we cannot
estimate the amount or the timing of that contribution. We are not required to make and do not intend to make
any additional contributions to either pension plan in 2008 other than to the extent needed to cover benefit
payments related to the unfunded plan.
The following information is presented for pension plans with an accumulated benefit obligation in excess of
plan assets:
In thousands
Projected benefit obligation ........................................
Accumulated benefit obligation ..................................
Fair value of plan assets ..............................................
2007
$ 131,049
127,037
$ 115,012
2006
$ 126,565
122,307
$ 108,343
December 31,
The non-qualified, unfunded pension plan had an accumulated benefit obligation of $16.6 million and $14.4
million at December 31, 2007 and 2006, respectively.
F-24
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Loss:
In thousands
Net Period Benefit Cost (Pre-tax)
Service cost ......................................................................
Interest cost ......................................................................
Expected return on plan assets .........................................
Amortization of prior service cost....................................
Transition obligation ........................................................
Recognized actuarial loss .................................................
Net periodic benefit cost ..................................................
Year Ended December 31,
2006
2005
2007
$
766
7,778
(8,964)
61
96
2,442
$ 2,179
$
762
7,320
(8,258)
61
96
2,513
$ 2,494
$
738
7,024
(7,917)
61
96
2,377
$ 2,379
Amounts Recognized in Other Comprehensive
Loss (Pre-tax)
Net loss.............................................................................
Transition obligation ........................................................
Prior service cost ..............................................................
Minimum pension liability ...............................................
Total recognized in other comprehensive loss .................
$ 1,296
(132)
(85)
–
$ 1,079
Total recognized in net periodic benefit cost and other
comprehensive loss ...................................................
$ 3,258
The estimated net loss, prior service cost and transition obligation for the defined benefit pension plans that will
be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next year are
$2.0 million, $0.1 million and $0.1 million, respectively.
The weighted-average assumptions used for measurement of the defined pension plans were as follows:
Weighted-average assumptions used to determine
net periodic benefit cost
Discount rate ....................................................................
Expected return on plan assets .........................................
Rate of compensation increase .........................................
6.00%
8.25%
4.00%
6.00%
8.50%
4.00%
6.00%
8.50%
4.00%
2007
Year Ended December 31,
2006
2005
Weighted-average assumptions used to determine
benefit obligations
Discount rate ....................................................................
Rate of compensation increase .........................................
6.25%
4.00%
6.00%
4.00%
December 31,
2007
2006
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 expected 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 forward-looking return expectations.
F-25
The funded pension plan assets as of December 31, 2007 and 2006, by asset category are as follows:
In thousands
2007
%
Equity securities ............................................................... $ 87,432
76%
24%
27,580
Debt securities ..................................................................
$ 115,012 100%
Total plan assets
2006
$ 87,974
20,369
$ 108,343
%
81%
19%
100%
The expected future pension benefit payments for the next ten years as of December 31, 2007 are as follows:
In thousands
2008............................... $ 6,151
6,553
2009...............................
7,224
2010...............................
7,384
2011...............................
7,782
2012...............................
45,117
2013 - 2017 ...................
$ 80,211
The investment policy for the Harte-Hanks, Inc. Pension Plan focuses on the preservation and enhancement 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
Domestic Equities ....................... 57.5%
Large Cap Growth.................. 22.5%
Large Cap Value..................... 22.5%
7.5%
Mid Cap Value .......................
5.0%
Mid Cap Growth.....................
Acceptable Range
35% - 75%
15% - 30%
15% - 30%
5% - 15%
5% - 15%
Benchmark Index
S&P 500
Russell 1000 Growth
Russell 1000 Value
Russell Mid Cap Value
Russell Mid Cap Growth
Domestic Fixed Income .............. 25.0%
International Equities .................. 17.5%
20% - 50%
10% - 25%
LB Aggregate
MSC1 EAFE
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; 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 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.
We also sponsor a 401(k) retirement plan in which we match a portion of employees’ voluntary before-tax
contributions. Under this plan both employee and matching contributions vest immediately. Total 401(k)
expense recognized in 2007, 2006 and 2005 was $7.2 million, $7.0 million and $6.6 million, respectively.
F-26
Note H – Stockholders’ Equity
In January 2008, we announced an increase in the regular quarterly dividend from 7.0 cents per share to 7.5
cents per share, payable March 14, 2008 to holders of record on February 29, 2008.
During 2007, we repurchased 8.4 million shares of our common stock for $183.9 million under our stock
repurchase program. As of December 31, 2007, we have repurchased 59.0 million shares since the beginning of
the stock repurchase program in January 1997. In May 2007, our Board of Directors authorized an additional
6.0 million shares under our stock repurchase program, increasing the total authorization to 61.9 million shares.
Under this program, we had authorization to repurchase approximately 2.9 million additional shares at
December 31, 2007. In January 2008, our Board authorized an additional 12.5 million shares under our stock
repurchase program, bringing the total repurchase authorization to 74.4 million shares.
During 2007, we received 0.1 million shares of our common stock, with an estimated market value of $1.9
million, in connection with stock option exercises. Since January 1997, we have received 1.6 million shares in
exchange for proceeds related to stock option exercises.
In 2007, we purchased 0.2 million shares of our common stock from Mr. Houston H. Harte, a member of our
Board of Directors. In 2007, we also purchased 0.2 million shares of our common stock from The Shelton
Family Foundation (Foundation) and 0.1 million shares of our common stock from The Scottie Ann Shelton
Trust (Trust). Mr. Larry D. Franklin, the Chairman of our Board of Directors, and David L. Copeland, a
member of our Board of Directors, both served as directors on the Foundation and trustees of the Trust at the
time of these purchases and both disclaim beneficial ownership of any shares held by the Foundation or the
Trust. In January 2008, Mr. Franklin resigned from the board of the Foundation. Details of these purchases are
as follows:
Seller
Houston H. Harte
Shelton Family Foundation
Houston H. Harte
Shelton Family Foundation
Scottie Ann Shelton Trust
Purchase Date
February 5, 2007
February 20, 2007
March 7, 2007
December 10, 2007
December 10, 2007
Shares
100,000
100,000
100,000
100,000
100,000
Purchase
Price
$26.07
$27.58
$27.73
$16.93
$16.93
Closing
Price
$26.07
$27.58
$27.73
$16.93
$16.93
Note I – Stock-Based Compensation
On January 1, 2006, we adopted SFAS 123R under the modified-prospective transition method. SFAS 123R
requires that all share-based awards be recognized as operating expense, based on their fair values on the date of
grant, over the requisite service period, in the Consolidated Statement of Operations. Prior to January 1, 2006,
we accounted for share-based awards under the recognition and measurement principles of APB No. 25 and
related interpretations. Accordingly, prior to January 1, 2006, no compensation expense was recognized for
share-based awards granted where the exercise price was equal to the market price of the underlying stock on
the date of grant.
Compensation expense for stock-based awards is recognized on a straight-line basis over the vesting period of
the entire award in the Payroll line of the Consolidated Statement of Operations. For the years ended December
31, 2007, 2006, and 2005, we recorded total stock-based compensation expense of $7.1 million ($4.3 million,
net of tax), $7.4 million ($4.6 million, net of tax) and $0.2 million ($0.1 million, net of tax), respectively.
F-27
Had stock-based compensation been determined and recognized based on the fair value at grant date for awards
since January 1, 1995, consistent with the provisions of SFAS 123 as originally issued, our 2005 net income and
diluted earnings per share would have been reduced to the pro-forma amounts indicated below:
In thousands, except per share amounts
Net income — as reported....................................
Stock-based employee compensation
expense, included in reported net
income, net of related tax effects .......................
Stock-based employee compensation
expense determined under fair
value based methods for all awards,
net of related tax effects .....................................
Net income — pro forma .....................................
Basic earnings per share
— as reported .....................................................
Basic earnings per share – pro forma ...................
Diluted earnings per share
— as reported .....................................................
Diluted earnings per share
— pro forma.......................................................
Year Ended
December 31,
2005
$ 114,458
99
(4,291)
$ 110,266
$
$
$
$
1.37
1.32
1.34
1.29
In May 2005, we adopted the 2005 Omnibus Incentive Plan (2005 Plan), a shareholder approved plan, pursuant
to which we may issue to directors, officers and key employees up to 4.6 million equity securities. Under the
2005 Plan we have awarded stock options, nonvested shares and performance stock units. The 2005 Plan
replaced the 1991 Stock Option Plan (1991 Plan), a shareholder approved plan, pursuant to which we issued
stock options to officers and key employees. No additional options will be granted under the 1991 Plan. As of
December 31, 2007, there were 2.7 million shares available for grant under the 2005 Plan.
Stock Options
Under the 2005 Plan, all options have been granted at exercise prices equal to the market price of the common
stock on the grant date (2005 Plan market price options). All 2005 Plan market price options become
exercisable in 25% increments on the second, third, fourth and fifth anniversaries of their date of grant and
expire on the tenth anniversary of their date of grant. As of December 31, 2007, 2005 Plan market price options
to purchase 1.6 million shares were outstanding with exercise prices ranging from $16.08 to $28.85 per share.
Under the 1991 Plan, options were granted at exercise prices equal to the market price of the common stock on
the grant date (1991 Plan market price options) and at exercise prices below the market price of the common
stock (1991 Plan performance options). 1991 Plan market price options granted prior to January 1998 became
exercisable after the fifth anniversary of their date of grant and expire on the tenth anniversary of their date of
grant. Beginning January 1998, 1991 Plan market price options become exercisable in 25% increments on the
second, third, fourth and fifth anniversaries of their date of grant and expire on the tenth anniversary of their
date of grant. As of December 31, 2007, 1991 Plan market price options to purchase 5.1 million shares were
outstanding with exercise prices ranging from $11.92 to $26.55 per share.
At December 31, 2007, 1991 Plan performance options to purchase 22,000 shares were outstanding, all with
exercise prices of $1.33 per share. No 1991 Plan performance options have been granted since January 1999.
The 1991 Plan performance options became exercisable in whole or in part after three years, and the extent to
which they became exercisable at that time depended upon the extent to which we achieved certain goals
F-28
established at the time the options were granted. In December 2005, the remaining unvested 1991 Plan
performance options were amended to comply with Section 409A of the Internal Revenue Code of 1986, as
amended. Under this option amendment, these unvested 1991 Plan performance options will only be
exercisable on the business day following the vesting date of each option.
The following summarizes all stock option activity during 2007, 2006 and 2005:
Weighted-
Average Aggregate
Intrinsic
Remaining
Number
Value
Average Contractual
of Shares Option Price Term (Years) (Thousands)
Weighted-
Options outstanding at December 31, 2004 .........
7,228,685
$16.01
Granted.................................................................
Exercised ..............................................................
Cancelled..............................................................
Options outstanding at December 31, 2005 .........
1,220,050
(773,890)
(246,661)
7,428,184
Granted.................................................................
Exercised ..............................................................
Cancelled..............................................................
Options outstanding at December 31, 2006 .........
808,875
(846,652)
(238,436)
7,151,971
Granted.................................................................
Exercised ..............................................................
Cancelled..............................................................
Options outstanding at December 31, 2007 .........
1,028,125
(979,545)
(416,907)
6,783,644
25.88
9.98
21.82
$18.07
25.92
12.00
25.12
$19.44
24.91
14.16
24.67
$20.71
$ 13,329
$ 12,754
$ 9,009
5.45
$ 15,422
Exercisable at December 31, 2007 .......................
3,952,614
$17.90
3.75
$ 8,811
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,
2007. The pre-tax intrinsic value is the difference between the closing price of our common stock on December
31, 2007 and the exercise price for each in-the-money option. This value fluctuates with the changes in the
price of our common stock.
F-29
The following table summarizes information about stock options outstanding at December 31, 2007:
Range of
Number
Exercise Prices Outstanding
560,440
$ 1.33 – 14.50
618,921
$14.54 – 15.63
736,999
$15.75 – 17.30
857,768
$17.45 – 18.22
623,000
$18.31 – 21.23
745,717
$22.03 – 22.03
483,700
$22.78 – 24.42
868,799
$25.63 – 25.63
591,175
$25.76 – 25.76
697,125
$26.31 – 28.85
6,783,644
Outstanding
Weighted- Weighted-
Average
Exercise
Price
$ 13.26
$ 14.83
$ 16.53
$ 18.13
$ 19.83
$ 22.03
$ 23.76
$ 25.63
$ 25.80
$ 26.30
$ 20.71
Average
Remaining
Life (Years)
1.81
2.88
2.56
4.19
4.77
6.09
8.33
7.07
8.10
8.93
5.45
Exercisable
Weighted-
Average
Exercise
Price
$ 13.58
$ 14.83
$ 16.48
$ 18.16
$ 19.86
$ 22.03
$ 23.99
$ 25.63
$ 25.76
$ 27.34
$ 17.90
Number
Exercisable
546,038
618,921
685,499
820,009
599,250
357,347
94,450
213,846
1,250
16,004
3,952,614
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 2007, 2006 and 2005:
Expected term (in years) ......................................
Expected stock price volatility .............................
Risk-free interest rate ...........................................
Expected dividend yield.......................................
Years Ended December 31,
2006
6.75
23.25%
4.45%
0.89%
2005
6.59
25.64%
4.00%
0.75%
2007
6.75
21.43%
4.59%
1.11%
Expected term is estimated using the simplified method under Staff Accounting Bulletin No. 107, which takes
into account vesting and contractual term. The simplified method is being used to calculate expected term
instead of historical experience due to changes in the option vesting schedules and 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. Expected dividend yield is based
on historical stock price movement and anticipated future annual dividends over the expected term. Future
annual dividends over the expected term are estimated to range between $0.32 and $0.56 per share, with a
weighted-average annual dividend of $0.44 per share.
The weighted-average fair value of options granted during 2007, 2006 and 2005 was $7.32, $8.11 and $8.30,
respectively. As of December 31, 2007, there was $11.4 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 3.11 years.
Nonvested Shares
All nonvested shares have been granted under the 2005 Plan, and vest 100% on the third anniversary of their
date of grant. As of December 31, 2007, 0.2 million nonvested shares were outstanding, none of which had
vested.
F-30
The following summarizes all nonvested share activity during 2007 and 2006:
Nonvested shares outstanding at December 31, 2005
Granted.................................................................
Vested...................................................................
Cancelled..............................................................
Nonvested shares outstanding at
December 31, 2006 ............................................
Granted.................................................................
Vested...................................................................
Cancelled..............................................................
Nonvested shares outstanding at
December 31, 2007 ............................................
Number
of Shares
-
82,624
-
(3,201)
79,423
81,584
-
(7,048)
Weighted-
Average
Grant-Date
Fair Value
-
$
25.82
-
25.80
$ 25.82
25.01
-
25.27
153,959
$ 25.41
The fair value of each nonvested share is estimated on the date of grant as the closing market price of our
common stock on the date of grant. We did not grant any nonvested shares prior to 2006. As of December 31,
2007, there was $1.6 million of total unrecognized compensation cost related to nonvested shares. This cost is
expected to be recognized over a weighted average period of approximately 1.94 years.
Performance Stock Units
All performance stock units have been granted under the 2005 Plan. Performance stock units are a form of
share-based awards in which the number of shares ultimately issued is based on our performance against
specific performance goals over a three-year period. At the end of the performance period, the number of shares
of stock issued will be determined by adjusting upward or downward from the target in a range between 0% and
125%. As of December 31, 2007, 0.1 million performance stock units were outstanding. As of December 31,
2007, no shares of stock associated with the performance stock units have been issued.
F-31
The following summarizes all performance stock unit activity during 2007 and 2006:
Number
of Shares
Weighted-
Average
Grant-Date
Fair Value
Performance stock units outstanding at
December 31, 2005 ............................................
-
$
-
Granted.................................................................
Issued ...................................................................
Cancelled..............................................................
Performance stock units outstanding at
December 31, 2006 ............................................
Granted.................................................................
Issued ...................................................................
Cancelled..............................................................
Performance stock units outstanding at
December 31, 2007 ............................................
48,175
-
(3,025)
45,150
48,900
-
(5,600)
88,450
25.03
-
25.03
$ 25.03
25.29
-
25.08
$ 25.17
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 dividend payments anticipated to be paid over the
vesting period. Annual dividends over the vesting period are estimated to range between $0.28 and $0.36 per
share, with a weighted-average annual dividend of $0.32 per share. 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, 2007, none of the performance goals
associated with outstanding performance stock units are expected to be achieved. As a result, no compensation
expense related to performance stock awards has been recorded since June 30, 2007 and we reversed $0.5
million of previously recorded stock-based compensation related to performance stock units in the third quarter
of 2007.
Employee Stock Purchase Plan
The 1994 Employee Stock Purchase Plan (ESPP Plan), a shareholder approved plan, provides for a total of 6.0
million shares to be sold to participating employees at 85% of the fair market value at specified quarterly
investment dates. During 2007, we issued 0.2 million shares under our employee stock purchase plan at an
average price of $19.41 per share. 2.2 million shares were available for issuance at December 31, 2007.
Note J – Fair Value of Financial Instruments
Because of their maturities and/or variable interest rates, certain financial instruments have fair values
approximating their carrying values. These instruments include revolving credit agreements, accounts
receivable and trade payables. The carrying value of the interest rate swap is adjusted to fair value at the end of
each fiscal quarter.
Note K – Commitments and Contingencies
At December 31, 2007, we had letters of credit in the amount of $24.9 million. No amounts were drawn against
these letters of credit at December 31, 2007. These letters of credit exist to support insurance programs relating
to workers’ compensation, automobile and general liability, and leases.
We are 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, any ultimate liability arising out of currently pending claims and
F-32
lawsuits is not currently expected to have a material 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. 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 L – Leases
We lease certain real estate and equipment under various operating leases. Most of the leases contain renewal
options for varying periods of time. The total rent expense applicable to operating leases was $31.1 million,
$28.2 million and $27.5 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Step rent provisions and escalation clauses, capital improvement funding, 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, 2007 are as follows:
In thousands
2008........................... $ 23,972
21,406
2009...........................
16,455
2010...........................
9,586
2011...........................
7,044
2012...........................
12,305
After 2012 .................
$ 90,768
Note M – Selected Quarterly Data (Unaudited)
In thousands,
except per share amounts
Revenues...................................... $ 303,017
47,233
Operating income ........................
27,536
Net income...................................
0.39
Basic earnings per share .............. $
0.39
Diluted earnings per share ........... $
2007 Quarter Ended
2006 Quarter Ended
December 31 September 30
December 31 September 30
June 30 March 31
$ 286,696 $ 290,145 $ 283,028
36,115
41,579
40,000
20,327
21,882
22,895
0.27
$
0.27
$
0.31 $
0.31 $
0.30 $
0.30 $
$ 313,240
50,328
30,157
0.40
$
0.39
$
$ 294,681 $ 298,372
51,548
44,606
30,189
27,663
0.38
$
0.37
$
June 30 March 31
$ 278,395
39,570
23,783
0.29
$
0.29
$
0.35 $
0.35 $
Earnings per common share amounts are computed independently for each of the quarters presented. Therefore,
the sum of the quarterly earnings per share amounts may not equal the annual earnings per share.
F-33
Note N – Earnings Per Share
A reconciliation of basic and diluted earnings per share (EPS) is as follows:
In thousands, except per share amounts
Basic EPS
Net income ..................................................................
Weighted-average common shares outstanding
used in earnings per share computations ...............
Earnings per share .......................................................
Diluted EPS
Net income ..................................................................
Shares used in diluted earnings per share
computations..........................................................
Earnings per share .......................................................
Computation of Shares Used in Earnings
Per Share Computations
Average outstanding common shares..........................
Average common equivalent shares — dilutive
effect of option shares............................................
Shares used in diluted earnings per share
Year Ended December 31,
2006
2007
2005
$ 92,640
$ 111,792
$ 114,458
72,524
1.28
$
79,049
1.41
$
83,734
1.37
$
$ 92,640
$ 111,792
$ 114,458
73,703
1.26
$
80,646
1.39
$
85,406
1.34
$
72,524
79,049
83,734
1,179
1,597
1,672
computations..........................................................
73,703
80,646
85,406
For the purpose of calculating the shares used in the diluted EPS calculations, 2.5 million, 1.8 million and
42,000 anti-dilutive market price options have been excluded from the EPS calculations for the years ended
December 31, 2007, 2006 and 2005, respectively.
Note O – Business Segments
We are a worldwide direct and targeted marketing company with operations in two segments – Direct Marketing
and Shoppers.
Direct Marketing services are targeted to specific industries or markets with services and software products
tailored to each industry or market. Currently, our Direct Marketing business services various vertical markets
including retail, high-tech/telecom, financial services, pharmaceutical/healthcare, and a wide range of selected
markets. We believe that we are generally able to provide services to new industries and markets by modifying
our services and applications as opportunities are presented. Depending on the needs of our clients, our Direct
Marketing capabilities are provided in an integrated approach through more than 30 facilities worldwide, more
than 10 of which are located outside of the United States. Each of these centers possesses some specialization
and is linked with others to support the needs of our clients.
We use various capabilities and technologies to enable our clients to identify, reach, influence and nurture their
customers. Harte-Hanks Direct Marketing improves the return on its clients’ marketing investment by
increasing their prospect and customer value through solutions and services organized around five groupings of
integrated activities:
Information (data collection/management);
•
• Opportunity (data access/utilization);
•
Insight (data analysis/interpretation);
• Engagement (program and campaign creation and development); and
•
Interaction (program execution).
F-34
Harte-Hanks Shoppers is North America’s largest owner, operator and distributor of shopper publications, based
on weekly circulation and revenues. Shoppers are weekly advertising publications delivered free by Standard
Mail to households and businesses in a particular geographic area. Shoppers offer advertisers a targeted, cost-
effective local advertising system, with virtually 100% penetration in their area of distribution. As of December
31, 2007, our Shoppers publications are zoned into 1,077 separate editions with total circulation of
approximately 13 million in California and Florida each week. Shoppers are particularly effective in large
markets with high media fragmentation in which major metropolitan newspapers generally have low
penetration. Our Shoppers clients range from large national companies to local neighborhood businesses to
individuals with a single item for sale. The segment’s core clients are local service businesses and small
retailers. Shoppers client base is entirely domestic.
Included in Corporate Activities are general corporate expenses. Assets of Corporate Activities include
unallocated cash, investments and deferred income taxes.
Information about our operations in different business segments is set forth below based on the nature of the
products and services offered. We evaluate performance based on several factors, of which the primary financial
measures are segment revenues and operating income. The accounting policies of the business segments are the
same as those described in the summary of significant accounting policies (Note A).
In thousands
Revenues
Direct Marketing ....................................................................
Shoppers.................................................................................
Total revenues ........................................................................
Operating income
Direct Marketing ....................................................................
Shoppers.................................................................................
Corporate Activities ...............................................................
Total operating income...........................................................
Income before income taxes
Operating income ...................................................................
Interest expense......................................................................
Interest income .......................................................................
Other, net................................................................................
Income before income taxes...................................................
Depreciation
Direct Marketing ....................................................................
Shoppers.................................................................................
Corporate Activities ...............................................................
Total depreciation...................................................................
Other intangible amortization
Direct Marketing ....................................................................
Shoppers.................................................................................
Total goodwill and intangible amortization ...........................
Capital expenditures
Direct Marketing .........................................................
Shoppers......................................................................
Corporate Activities ....................................................
Total capital expenditures ...........................................
Year Ended December 31,
2006
2007
2005
$ 732,461
430,425
$ 1,162,886
$ 709,728
474,960
$ 1,184,688
$ 694,558
440,435
$1,134,993
$ 108,796
70,784
(14,653)
$ 164,927
$ 109,458
88,814
(12,220)
$ 186,052
$ 108,095
94,231
(12,313)
$ 190,013
$ 164,927
(12,992)
539
(1,337)
$ 151,137
$ 186,052
(6,333)
231
(702)
$ 179,248
$ 190,013
(1,957)
197
(1,774)
$ 186,479
$
$
$
$
$
$
25,569
7,606
20
33,195
2,347
1,162
3,509
21,270
6,947
–
28,217
$
$
$
$
$
$
24,618
6,930
18
31,566
$ 23,721
6,174
23
$ 29,918
1,303
1,163
2,466
$
$
620
807
1,427
25,758
7,935
15
33,708
$ 18,264
9,914
37
$ 28,215
F-35
In thousands
Total assets
Direct Marketing .........................................................
Shoppers......................................................................
Corporate Activities ....................................................
Total assets ..................................................................
Goodwill
Direct Marketing .........................................................
Shoppers......................................................................
Total goodwill .............................................................
Other intangible assets
Direct Marketing .........................................................
Shoppers......................................................................
Total other intangible assets
Year Ended December 31,
2006
2007
$ 657,462
269,910
24,554
$ 951,926
$ 642,843
273,656
52,786
$ 969,285
$ 376,096
167,487
$ 543,583
$ 377,860
167,487
$ 545,347
$
8,141
12,798
$ 20,939
$
9,488
13,960
$ 23,448
Information about the operations in different geographic areas:
In thousands
Revenues a
United States ...............................................................
Other countries ............................................................
Total revenues .............................................................
Long-lived net assets b
United States ...............................................................
Other countries ............................................................
Total long-lived assets.................................................
a
b
Geographic revenues are based on the location of the client.
Long-lived assets are based on physical location.
Year Ended December 31,
2006
2007
2005
$ 1,100,820
62,066
$ 1,162,886
$ 1,121,401
63,287
$ 1,184,688
$1,068,981
66,012
$1,134,993
$
95,685
16,669
$ 112,354
$
99,767
16,824
$ 116,591
F-36
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.
INDEX TO EXHIBITS
Exhibit
No.
Description of Exhibit
Charter Documents
3(a)
3(b)
Amended and Restated Certificate of Incorporation as
amended through May 5, 1998 (filed as Exhibit 3(e) to the
Company’s Form 10-Q for the six months ended June 30, 1998).
Second Amended and Restated Bylaws (filed as Exhibit 3(b) to
the Company’s Form 10-Q for the nine months ended September
30, 2001).
Instruments Defining Rights of Security Holders
4(a)
Registration Rights Agreement dated as of September 11, 1984
among HHC Holding Inc. and its stockholders (filed as Exhibit
10(b) to the Company’s Form 10-K for the year ended December
31, 1993).
Credit Agreements
10.1(a)
10.1(b)
10.1(c)
10.1(d)
Credit Agreement by and between the Company and JPMorgan
Chase Bank, N.A., as administrative agent, dated August 12, 2005
(filed as Exhibit 10.1 to Company’s Form 8-K dated August 12, 2005).
Term Loan Agreement by and between the Company and Wells Fargo
Bank, N.A., as administrative Agent, dated September 6, 2006 (filed as
Exhibit 10.1 to Company’s Form 8-K dated September 6, 2006).
First Amendment to Term Loan Agreement by and between the Company
and Wells Fargo Bank, N.A., as administrative Agent, dated September 18,
2006 (filed as Exhibit 10.1 to Company’s Form 8-K dated September 18,
2006).
Revolving Loan Agreement dated as of January 18, 2008 between
Harte-Hanks, Inc., the Lenders Party Thereto, and Wells Fargo Bank, N.A.,
as Administrative Agent, Sole Lead Arranger and Sole Book Runner (filed
as Exhibit 10.1 to Company’s Form 8-K dated January 18, 2008).
Management and Director Compensatory Plans and Forms of Award Agreements
10.2(a)
10.2(b)
Harte-Hanks, Inc. Amended and Restated Restoration Pension Plan
dated as of January 1, 2000 (filed as Exhibit 10(f) to the
Company’s Form 10-K for the year ended December 31, 1999).
Amendment One to Harte-Hanks, Inc. Amended and Restated
Restoration Plan dated December 18, 2000 (filed as Exhibit 10(l)
to the Company’s Form 10-K for the year ended December 31, 2000).
10.2(c)
10.2(d)
10.2(e)
10.2(f)
10.2(g)
10.2(h)
10.2(i)
10.2(j)
10.2(k)
10.2(l)
10.2(m)
10.2(n)
10.2(o)
Harte-Hanks, Inc. Deferred Compensation Plan (filed as Exhibit
10(i) to the Company’s Form 10-K for the year ended December 31,
1998).
Harte-Hanks, Inc. 1998 Director Stock Plan (filed as Exhibit 10(h)
to the Company’s Form 10-Q for the six months ended June 30, 1998).
Harte-Hanks Communications, Inc. 1996 Incentive Compensation
Plan (filed as Exhibit 10(p) to the Company’s Form 10-Q for the
six months ended June 30, 1996).
Harte-Hanks, Inc. Amended and Restated 1991 Stock Option Plan
(filed as Exhibit 10(g) to the Company’s Form 10-Q for the six
months ended June 30, 1998).
Form of Non Qualified Stock Option Agreement for employees granted
under the Amended and Restated 1991 Stock Option Plan (filed as
Exhibit 10(i) to the Company’s Form 10-K for the year ended December
31, 2005).
Form of Non Qualified Stock Option Agreement for directors granted
Under the Amended and Restated 1991 Stock Option Plan (filed as
Exhibit 10(j) to the Company’s Form 10-K for the year ended December
31, 2005).
Form of Non-Qualified Performance Stock Option Agreement for grants
dated January 6, 1997, September 24, 1997, January 7, 1998 and
January 28, 1998 (filed as Exhibit 10.2.a to the Company’s Form 8-K
dated December 15, 2005).
Form of Non-Qualified Performance Stock Option Agreement for grants
dated January 12, 1999 and January 25, 1999 (filed as Exhibit 10.2.b to
the Company’s Form 8-K dated December 15, 2005).
Form of Amendment to Harte-Hanks, Inc. Non-Qualified Performance
Stock Option Agreement for certain officers (filed as Exhibit 10.1.a to
the Company’s Form 8-K dated December 15, 2005).
Form of Amendment to Harte-Hanks, Inc. Non-Qualified Performance
Stock Option Agreement for non-officers. (filed as Exhibit 10.1.b to
the Company’s Form 8-K dated December 15, 2005).
2005 Omnibus Incentive Plan (filed as Annex A to the Company’s
Definitive 14A Proxy Statement filed on April 15, 2005).
First Amendment to the Harte-Hanks, Inc. 2005 Omnibus Incentive Plan,
dated February 1, 2007 (filed as Exhibit 10.1 to the Company’s Form 10-Q
for the three months ended March 31, 2007).
Form of 2005 Omnibus Non-Qualified Stock Option Agreement (filed as
Exhibit 10(p) to the Company’s Form 10-K for the year ended December
31, 2005).
10.2(p)
10.2(q)
10.2(r)
Form of 2005 Omnibus Incentive Plan Bonus Stock Agreement (filed
as Exhibit 10.1 to the Company’s Form 8-K dated January 25,
2006).
Form of 2005 Omnibus Incentive Plan Restricted Stock Award
Agreement (filed as Exhibit 10.2 to the Company’s Form 8-K dated
January 25, 2006).
Form of 2005 Omnibus Incentive Plan Performance Unit Award
Agreement (filed as Exhibit 10.3 to the Company’s Form 8-K
dated January 25, 2006).
*10.2(s)
Summary of Non-Employee Directors’ Compensation.
Executive Officer Employment and Separation Agreements
10.3(a)
10.3(b)
10.3(c)
10.3(d)
10.3(e)
10.3(f)
10.3(g)
Transition and Consulting Agreement, dated as of August 29, 2007, by
and between Harte-Hanks, Inc. and Richard Hochhauser (filed as Exhibit
10.1 to the Company’s Form 8-K dated August 29, 2007).
Severance Agreement between the Company and Pete Gorman (filed as
Exhibit 10(f) to the Company’s Form 10-K for the year ended December
31, 2000).
Form of Change of Control Severance Agreement between the Company
and its President and Chief Executive Officer and its Executive Vice
Presidents (other than Pete Gorman) and Senior Vice Presidents (filed as
Exhibit 10(e) to the Company’s Form 10-K for the year ended December 31,
2000).
Form of Change of Control Severance Agreement between the Company and
its Vice Presidents (filed as Exhibit 10.1 on the Company’s Form 8-K dated
June 13, 2005).
Agreement between Harte-Hanks, Inc. and Larry Franklin regarding role of
Chairman of the Board of Directors of Harte-Hanks, Inc. dated as of April 1,
2002 (filed as Exhibit 10(m) to the Company’s Form 10-Q for the three
months ended March 31, 2002).
Severance Agreement between Harte-Hanks, Inc. and Larry Franklin,
dated as of December 15, 2000 (filed as Exhibit 10(c) to the Company’s
Form 10-K for the year ended December 31, 2000).
Form of Non-Compete Agreement signed by certain officers and certain
employees of the Company (filed as Exhibit 10.4 to the Company’s
Form 8-K dated January 25, 2006).
Other Exhibits
*21
*23
*31.1
*31.2
*32.1
*32.2
Subsidiaries of the Company
Consent of KPMG LLP
Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Furnished Certification of Chief Executive Officer pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Furnished Certification of Chief Financial Officer pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*Filed or furnished herewith, as applicable
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dean Blythe, President and Chief Executive Officer of Harte-Hanks, Inc. (the “Company”), certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonable likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
February 29, 2008
Date
/s/ Dean Blythe
Dean Blythe
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Douglas Shepard, Executive Vice President and Chief Financial Officer of Harte-Hanks, Inc. (the
“Company”), certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonable likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
February 29, 2008
Date
/s/ Douglas Shepard
Douglas Shepard
Executive Vice President and
Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Dean Blythe, President and Chief Executive Officer of Harte-Hanks, Inc. (the “Company”), hereby certify that
the accompanying report on Form 10-K for the year ended December 31, 2007 and filed with the Securities and
Exchange Commission on the date hereof pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 (the “Report”) by the Company fully complies with the requirements of those sections.
I further certify that, based on my knowledge, the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the Company.
February 29, 2008
Date
/s/ Dean Blythe
Dean Blythe
President and Chief Executive Officer
Note: This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Douglas Shepard, Executive Vice President and Chief Financial Officer of Harte-Hanks, Inc. (the
“Company”), hereby certify that the accompanying report on Form 10-K for the year ended December 31, 2007
and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 (the “Report”) by the Company fully complies with the
requirements of those sections.
I further certify that, based on my knowledge, the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the Company.
February 29, 2008
Date
/s/ Douglas Shepard
Douglas Shepard
Executive Vice President
and Chief Financial Officer
Note: This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Cert no. SCS-COC-00648