To Our Stockholders:
April 10, 2009
We faced significant challenges in 2008 across both of our businesses, as reflected in our results. For all of
2008, our diluted earnings per share decreased to $0.98 on revenue of $1.08 billion — decreases of 22.2% and
6.9%, respectively, from 2007. Our 2008 free cash flow decreased to $82.8 million, compared to $105.4 million
for 2007.(1) Direct Marketing, comprising 68% of total 2008 revenue, had flat revenues in 2008 compared to
2007, while operating income declined by 5.2%. Our Shoppers revenue declined by 18.7%, while operating
income declined 63.4% from 2007 levels.
It is not surprising that 2008 was one of the most difficult periods our company has faced in recent times.
The global business climate has been hit hard by reduced consumer confidence, weakened demand and
disruption in the credit and financial markets. In Direct Marketing, what began in earlier quarters as caution with
spending plans became even more pronounced throughout the fourth quarter, resulting in significant reductions
and delays in spending by clients. Business trends decreased across all of our vertical markets. In Shoppers, the
negative trends and economic conditions we experienced throughout 2008 in the California and Florida
economies continued to deteriorate. All of this makes it difficult to predict when economic conditions will
improve.
As a result of the business climate, we took a number of actions across the company in 2008 to adjust our
expense base to reduced revenue levels. These actions included head count reductions, consolidating businesses
and closing facilities, reductions of marginal Shoppers circulation, wage freezes, wage reductions (including
salary reductions for all Harte-Hanks, Inc. officers and a reduction in compensation for our Board of Directors),
tighter management of capital spending, non-client travel restrictions and enhanced controls around accounts
receivables and collections. Looking ahead to 2009, we know that more actions will be required as we continue
to manage our cost base against the impact of the economic environment on our revenues and improve the
efficiency and performance of our businesses. Although we do not underestimate the challenges we face, I am
strongly encouraged for a number of reasons.
First, I believe there is a bright future for marketing solutions that deliver value and achieve results for
clients. We remain firm in our conviction that the targeted marketing business in which we operate has strong
growth opportunities and will benefit over the long term by positive, secular trends toward the use of measurable
media. Both of our businesses — Direct Marketing and Shoppers — provide services and products that are even
more necessary in this environment because we help our clients talk directly to their customers and to turn those
communications into revenue-generating opportunities.
Direct Marketing — Direct Marketing delivers world-class solutions that help our clients acquire new
customers and retain current customers, engage their customers more effectively and efficiently, and
optimize their value through data-driven marketing strategies and campaign execution. Among our clients
are Fortune 1000 companies in consumer and business-to-business markets across the Americas, Europe-
Middle East-Africa, and the Asia-Pacific region. Our clients gain insights about purchase behavior and
preferences so they can continuously refine marketing models and business decisions and improve
marketing ROI. With its vertical market approach, Direct Marketing 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, we have the breadth and depth of experience to provide a full compliment of
integrated, multi-channel direct marketing solutions to our clients — traditional mail, e-mail from our
Postfuture® platform, Web, mobile and other e-marketing, outbound and inbound contact centers and
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 2008, our net income was $62.7 million. Our January 30, 2009 earnings
release tables provide a reconciliation of 2008 free cash flow to 2008 net income.
customer care, fulfillment, logistics, Trillium Software System® for total data quality, the Allink® Solution
Suite for vertically aligned database marketing, agency and strategy, print on demand, retention and loyalty
programs, and market insight and lead generation from Ci Technology Database™, the largest and most
in-depth business technology database of its kind, and from Aberdeen Group®, which provides cutting edge
fact-based research reports detailing adoption and impact of best-in-class business practices across dozens
of key business areas.
Shoppers — Harte-Hanks Shoppers is North America’s largest owner, operator and distributor of shopper
publications, with shoppers that are zoned into more than 950 separate editions with more than 11.5 million
circulation each week in California and Florida. Harte-Hanks Shoppers brings buyers and sellers together at
a local level, helping businesses and individuals get results from targeted, local advertisements, both
through weekly printed publications with virtually 100% penetration in their targeted distribution zones and
online through the PennySaverUSA.com™ and TheFlyer.com™ websites. These sites are online advertising
portals, bringing buyers and sellers together through our online products, including local classifieds,
business listings, coupons, special offers and Power Sites™. Power Sites are templated web sites for our
customers, optimized to help small/medium sized business owners establish a web presence and improve
their lead generation. During 2008, Shoppers formally changed the names of its print publications to
PennySaverUSA.com (California) and TheFlyer.com (Florida) to emphasize the multi-channel nature of our
offering.
Second, we remain focused on conservatively managing our balance sheet and cash flows, and we are
committed to emerging from this recession as an even stronger company and leader in our industry with greater
opportunities for long-term success. At December 31, 2008, we had a net debt position of $240.4 million ($30.2
million in cash and cash equivalents and $270.6 million in debt), and $125.0 million of unused borrowing
capacity under our revolving credit facility, which matures in August 2010. We ended 2008 with $19.9 million in
capital spending, $8.3 million less than the $28.2 million spent in 2007. For 2009, we currently expect capital
spending to be in the $10-$15 million range.
Third, I am pleased and impressed with the way our leadership and all of our co-workers have responded to
this rapidly changing environment, which none of us have experienced before. They have responded with resolve
and dedication because our mission is clear – remain intensely focused on keeping our customers, reducing costs
and conserving cash.
Because of our people, I am confident we will succeed.
Please refer to the Cautionary Note Regarding Forward-Looking Statements in Item 1A. of the enclosed annual report on Form 10-K.
LARRY FRANKLIN
Chairman, President and 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 12, 2009
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’ 2009 annual meeting of stockholders. The annual meeting will be held at 200 Concord Plaza Drive,
First Floor Conference Center (Lobby Level), San Antonio, Texas 78216, on Tuesday, May 12, 2009, at 8:30 a.m.
Central Time, for the following purposes:
1.
2.
3.
4.
To elect two Class I directors, each for a three-year term;
To ratify the appointment of KPMG LLP as Harte-Hanks’ independent registered public accounting firm for fiscal 2009;
To approve an amendment to the Harte-Hanks, Inc. 2005 Omnibus Incentive Plan to increase the maximum number of
authorized shares that may be issued thereunder;
To approve the material terms of the current performance goal set forth within the Harte-Hanks, Inc. 2005 Omnibus
Incentive Plan, in accordance with the periodic re-approval requirements of Internal Revenue Code Section 162(m); and
5.
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 27, 2009 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 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, 2008 (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 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 materials 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 10, 2009
Bryan J. Pechersky
Senior Vice President, General Counsel and Secretary
PROXY STATEMENT TABLE OF CONTENTS
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 CEO Transitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview of 2008 Executive Compensation Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation Philosophy and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elements of 2008 Executive Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Participants in the Executive Compensation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Factors That Influenced 2008 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 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
1
2
5
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5
5
6
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12
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21
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24
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25
27
33
34
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35
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43
i
Pension Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined Benefit Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 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 I Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Recommendation on Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL II – RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS . . . . . . . .
Description of Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Recommendation on Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL III – APPROVAL AND ADOPTION OF AMENDMENT TO 2005 OMNIBUS INCENTIVE
PLAN TO INCREASE AUTHORIZED SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Recommendation on Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Existing 2005 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL IV – 162(m) RE-APPROVAL OF CURRENT PERFORMANCE GOAL UNDER 2005
OMNIBUS INCENTIVE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Recommendation on Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSALS FOR 2010 ANNUAL MEETING OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ANNEX A – PROPOSED FORM OF AMENDMENT TO 2005 OMNIBUS INCENTIVE PLAN TO
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49
49
49
55
55
56
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59
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61
61
61
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62
62
62
63
63
65
65
72
72
73
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73
INCREASE AUTHORIZED SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
ii
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 12, 2009
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 2009 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
2009 Annual Meeting Date and Location
Our 2009 annual meeting of stockholders will be held on Tuesday, May 12, 2009 at 8:30 a.m. (Central
Time) at 200 Concord Plaza Drive, First Floor Conference Center (Lobby Level), 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 10, 2009.
Important Notice Regarding Availability of Proxy Materials For Annual Meeting To Be Held On May 12,
2009
Pursuant to 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, 2008 (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 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.
1
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
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 annual report on
Form 10-K 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 27, 2009, at which time we
had issued and outstanding 63,718,336 shares of common stock, which were held by approximately 2,692
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 I directors;
2
•
•
•
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 2009;
Proposal III (Amendment of 2005 Omnibus Incentive Plan) — FOR the proposal to approve an
amendment to the Harte-Hanks, Inc. 2005 Omnibus Incentive Plan to increase the maximum number of
authorized shares that may be issued thereunder; and
Proposal IV (162(m) Re-Approval of Current Performance Goal Under 2005 Omnibus Incentive Plan)
— FOR the proposal to approve the material terms of the current performance goal set forth within the
Harte-Hanks,
in accordance with the periodic re-approval
requirements of Internal Revenue Code Section 162(m).
Inc. 2005 Omnibus Incentive Plan,
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 current 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, II
and IV to be voted on at our annual meeting, brokers will have discretionary authority in the absence of timely
instructions from their customers. For proposal III, brokers will not have discretionary authority in the absence of
timely instructions from their customers.
•
•
Proposal I (Election of Directors) — In accordance with our bylaws, to be elected, each nominee for
election as a Class I director must receive the affirmative vote of a plurality of the votes cast at the
annual meeting, in person or by proxy. 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.
Proposal II (Ratification of the Appointment of Independent Auditors) — In accordance with our
bylaws, ratification of the appointment of KPMG LLP as our independent auditors for fiscal 2009
requires the affirmative vote of the majority of the votes cast at the annual meeting, in person or by
proxy. Abstentions may be specified on this proposal and will have the same effect as a vote against this
proposal. Broker non-votes are not deemed to be votes cast and, therefore, will not affect the outcome.
3
•
•
Proposal III (Amendment of 2005 Omnibus Incentive Plan) — In accordance with rules of the NYSE,
approval of the proposal to amend the Harte-Hanks, Inc. 2005 Omnibus Incentive Plan to increase the
maximum number of authorized shares that may be issued thereunder requires the affirmative vote of a
majority of the votes cast, provided that the total votes cast on this proposal represent over 50% of all of
the common stock entitled to vote. Abstentions may be specified on this proposal and will have the
same effect as a vote against this proposal. Broker non-votes will not affect the outcome, so long as over
50% of the outstanding shares of the common stock are voted on this proposal.
Proposal IV (162(m) Re-Approval of Current Performance Goal Under 2005 Omnibus Incentive Plan)
— In accordance with our bylaws, approval of the proposal to approve the material terms of the current
performance goal set forth within the Harte-Hanks, Inc. 2005 Omnibus Incentive Plan, pursuant to the
periodic re-approval requirements of Internal Revenue Code Section 162(m), requires the affirmative
vote of the majority of the votes cast at the annual meeting, in person or by proxy. Abstentions may be
specified on this proposal and will have the same effect as a vote against this proposal. Broker non-votes
are not deemed to be votes cast and, therefore, will not affect the outcome.
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.
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;
4
•
•
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 11, 2009.
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 also have retained The Altman Group (Altman) for proxy
solicitation and related consulting services in connection with our annual meeting. Under the agreement, Altman
will receive a fee of $9,500 and we will reimburse Altman for reasonable and customary out-of-pocket expenses
incurred in performing such services. 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.
Copies of the Annual Report
A copy of our annual report on Form 10-K for the year ended December 31, 2008, 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, 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 2008, 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:
Name
Age
Position
David L. Copeland . . . . . . . . . . . . .
William F. Farley . . . . . . . . . . . . . .
Larry D. Franklin . . . . . . . . . . . . . .
William K. Gayden . . . . . . . . . . . . .
Christopher M. Harte . . . . . . . . . . .
Houston H. Harte . . . . . . . . . . . . . .
Judy C. Odom . . . . . . . . . . . . . . . . .
Karen A. Puckett
. . . . . . . . . . . . . .
Peter E. Gorman . . . . . . . . . . . . . . .
Douglas C. Shepard . . . . . . . . . . . .
Gary J. Skidmore . . . . . . . . . . . . . .
Bryan J. Pechersky . . . . . . . . . . . . .
Jessica M. Huff . . . . . . . . . . . . . . . .
53 Director Nominee (Class I)
65 Director (Class II)
66 Director (Class II); Chairman, President and Chief Executive Officer
67 Director (Class II)
61 Director Nominee (Class I)
82 Director (Class III); Vice Chairman
56 Director (Class III)
48 Director (Class III)
60 Executive Vice President and President, Shoppers
41 Executive Vice President and Chief Financial Officer
54 Executive Vice President and President, Direct Marketing
38
Senior Vice President, General Counsel and Secretary
48 Vice President – Finance, Controller and Chief Accounting Officer
Class I directors are to be elected at our 2009 annual meeting. Messrs. David Copeland and Christopher
Harte are nominees for election as Class I directors. The term of Class II directors expires at the 2010 annual
meeting of stockholders, and the term of Class III directors expires at the 2011 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 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 serves as Chairman of the Board and, since January 2009, also serves as our President
and Chief Executive Officer. Mr. Franklin joined Harte-Hanks in 1971, has been a director since 1974, and was
previously our Chief Executive Officer from 1991 until 2002 and executive Chairman until the end of 2005.
Mr. Franklin has also served in a variety of other management and leadership roles at Harte-Hanks.
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 currently serves as the chairman of Star Tribune Company and as chief executive 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.
6
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.
Judy C. Odom has served as a director of Harte-Hanks since 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.
Karen A. Puckett has served as a director of Harte-Hanks since 2009. Ms. Puckett is currently the president
and chief operating officer of CenturyTel, Inc., and has served as CenturyTel’s chief operating officer since
2000. CenturyTel is a leading provider of communications, high-speed Internet and entertainment services in
small-to-mid-size cities through its broadband and fiber transport networks.
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 at a publicly
traded restaurant company and served 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
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.
7
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 input from 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 three times during 2008. 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.
8
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 . . . . . . . . . . . . .
Judy C. Odom . . . . . . . . . . . . . . .
Karen A. Puckett . . . . . . . . . . . . .
Yes
Yes
—
Yes
Yes
—
Yes
Yes
Chair (2)
Member (2)
Member
Number of Meetings in 2008
Number of Written Consents in 2008
11
1
Compensation
Committee
Nominating and
Corporate
Governance
Committee
Member
Member
Chair
Member
5
2
Member
Chair
Member
3
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.”
A brief description of the principal functions of each of the Board’s three standing committees follows. 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
to CEO compensation, evaluate the CEO’s
and approve corporate goals and objectives relevant
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
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.
9
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 current
Board members, our management, 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 2008, the Governance Committee retained Spencer Stuart to assist it in identifying and evaluating
potential director nominees. In January 2009, the Board, based on the recommendation of the Governance
Committee, elected Ms. Karen Puckett to the Board. Ms. Puckett was initially brought to the attention of the
Board and the Governance Committee by Spencer Stuart.
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 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 2010 Annual Meeting” and in our bylaws.
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,
if applicable, 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, (5) Judy Odom, and (6) Karen Puckett, 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.
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
10
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 2008 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 its
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 2008 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. Our current Chairman,
Mr. Franklin, has also served as our President and Chief Executive Officer since January 2009.
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.
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
11
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 Chair 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 2008 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.
12
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.
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, 2008. 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 17, 2008.
13
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 six current and former 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 2, 2009. As of March 2, 2009, there were 63,567,734 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BlackRock, Inc. (Subsidiaries: BlackRock Advisors LLC, BlackRock Asset
Management U.K. Limited , BlackRock Investment Management, LLC and
BlackRock (Channel Island) Ltd.) (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shelton Family Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiduciary Management, Inc. (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cooke & Bieler, LP (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richard M. Hochhauser (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Christopher M. Harte (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gary J. Skidmore (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peter E. Gorman (11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William K. Gayden (12)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William F. Farley (13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Judy C. Odom (14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Douglas C. Shepard (15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bryan J. Pechersky (16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Karen A. Puckett (17)
Dean H. Blythe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . .
All Current Executive Officers and Directors as a Group (13 persons) (18)
*
Less than 1%.
Number of Shares
of Common Stock
Percent of
Class
9,669,473
9,013,910
6,226,592
5,454,576
4,503,675
3,543,940
3,506,821
1,046,343
869,147
397,252
297,920
91,130
39,735
33,960
16,688
16,250
13,278
10,000
26,733,640
15.2%
14.2%
9.8%
8.6%
7.1%
5.6%
5.5%
1.6%
1.4%
*
*
*
*
*
*
*
*
*
42.0%
(1) The address of (a) Cooke & Bieler, LP is 1700 Market Street, Suite 3222, Philadelphia, PA 19103, (b) the
Shelton Family Foundation is 273 Walnut Street, Abilene, Texas 79601, (c) BlackRock, Inc. is 40 East 52nd
Street, New York, NY 10022, (d) Fiduciary Management, Inc. is 100 East Wisconsin Avenue, Suite 2200,
Milwaukee, WI 53202, and (e) 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 10,250 shares that may be acquired upon the exercise of options exercisable within the next 60
days; 1,918 shares of stock subject to certain restrictions until February 2010; 3,144 shares of stock subject
to certain restrictions until February 2011; 8,278 shares of stock subject to certain restrictions until January
2012; and the following shares to which Mr. Copeland disclaims beneficial ownership: (a) 5,650 shares
owned by one of his adult children, (b) 33,100 shares held as custodian for unrelated minors, (c) 4,180,451
shares that are owned by 28 trusts for which he serves as trustee or co-trustee, (d) 200,500 shares held by a
14
limited partnership of which he is sole manager of the general partner, and (e) 4,503,675 shares owned by
the Shelton Family Foundation, of which he is one of nine directors and an employee.
(4)
Includes 225,000 shares that may be acquired upon the exercise of options exercisable within the next
60 days; 1,444,938 shares held in trust for Mr. Franklin’s children; and the following shares to which he
disclaims beneficial ownership: (a) 3,258,558 shares owned by eight trusts for which he serves as co-trustee
and holds shared voting and dispositive power, and (b) 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 BlackRock, Inc.’s (“BlackRock”) investment
advisory subsidiaries (Subsidiaries: BlackRock Advisors, LLC, BlackRock Asset Management U.K.
Limited, 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 5,454,576. Information relating to this stockholder is
based on the stockholder’s Schedule 13G, filed with the SEC on February 9, 2009.
(6) Represents shares held by investment advisory clients of Fiduciary Management, Inc. (“Fiduciary”), no one
of which to the knowledge of Fiduciary owns more than 5.0% of the class. Includes shares to which
Fiduciary has shared voting and dispositive power of 3,543,940 shares. Information relating to this
stockholder is based on the stockholder’s Schedule 13G, filed with the SEC on February 6, 2009.
(7) 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 2,187,978 shares and shared dispositive power of 3,471,521 shares. Information relating to this
stockholder is based on the stockholder’s Schedule 13G, filed with the SEC on February 9, 2009.
(8)
(9)
Includes 853,000 shares that may be acquired upon the exercise of options exercisable within the next
60 days; and 8,500 shares of stock subject to certain restrictions until February 2010.
Includes 484 shares held as custodian for Mr. Harte’s step-children and child; 283,723 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; 10,250 shares that may be acquired upon the exercise of
options exercisable within the next 60 days; 1,918 shares of stock subject to certain restrictions until
February 2010; 3,144 shares of stock subject to certain restrictions until February 2011; and 8,278 shares of
stock subject to certain restrictions until February 2012.
(10) Includes 353,000 shares that may be acquired upon the exercise of options exercisable within the next 60
days; 4,768 shares of stock subject to certain restrictions until February 2010; 4,668 shares of stock subject
to certain restrictions until February 2011; and 4,318 shares held in trusts for the benefit of Mr. Skidmore’s
adult children and for which his brother serves as trustee.
(11) Includes 266,875 shares that may be acquired upon the exercise of options exercisable within the next
60 days; 20,915 shares owned indirectly by the Gorman Family Trust; 2,755 shares of stock subject to
certain restrictions until February 2010; and 4,000 shares of stock subject to certain restrictions until
February 2011.
(12) Includes 10,250 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; 1,918 shares of stock subject to certain
restrictions until February 2010; 3,144 shares of stock subject to certain restrictions until February 2011;
and 8,278 shares of stock subject to certain restrictions until February 2012.
(13) Includes 10,250 shares that may be acquired upon the exercise of options exercisable within the next 60
days; 1,918 shares of stock subject to certain restrictions until February 2010; 3,144 shares of stock subject
to certain restrictions until February 2011; 8,278 shares of stock subject to certain restrictions until February
15
2012; and 124 shares owned indirectly by Mr. Farley’s spouse, as to which beneficial ownership is
disclaimed.
(14) Includes 10,250 shares that may be acquired upon the exercise of options exercisable within the next 60
days; 1,918 shares of stock subject to certain restrictions until February 2010; 3,144 shares of stock subject
to certain restrictions until February 2011; and 8,278 shares of stock subject to certain restrictions until
February 2012.
(15) Includes 7,500 shares of stock subject to certain restrictions until December 2010.
(16) Includes 6,250 shares that may be acquired upon the exercise of options exercisable within the next 60 days;
7,500 shares of stock subject to certain restrictions until March 2010; and 2,500 shares of stock subject to
certain restrictions until February 2011.
(17) Includes 13,278 shares of stock subject to certain restrictions until February 2012.
(18) Includes 942,375 shares that may be acquired upon the exercise of options exercisable within the next
60 days and 116,418 shares of stock subject to certain restrictions until various times in 2010, 2011 and
2012. Includes 15,576,225 shares to which the current executive officers and directors disclaim beneficial
ownership, as described in the preceding footnotes.
16
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
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 2008. This CD&A provides qualitative information concerning how 2008
compensation was awarded to and earned by our executives, identifies the most significant factors relevant to our
2008 executive compensation decisions and gives context to the data presented in the tables included below in
this proxy statement. Certain information regarding our 2007 and 2009 compensation determinations is also
included to the extent we believe it provides helpful context for our discussion of 2008 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 six current and former executive
officers named in the Summary Compensation Table and other compensation tables that follow. “Committee,”
within this CD&A, means the Compensation Committee of the Board.
2008 CEO Transitions
As we have previously announced, the following CEO transitions occurred during 2008:
•
February 2008 — Mr. Hochhauser, our former CEO and a member of the Board, retired as an officer
and employee of Harte-Hanks. Mr. Hochhauser joined Harte-Hanks in 1975. In connection with his
retirement, Mr. Blythe was promoted from Executive Vice President and Chief Financial Officer to
President and Chief Financial Officer (August 2007) and then to President and CEO (February 2008).
Pursuant to Mr. Hochhauser’s August 2007 transition and consulting agreement, he agreed to serve as a
consultant
information about
Mr. Hochhauser’s transition and consulting agreement is provided below in this CD&A.
for a three-year period beginning in February 2008. Additional
• May 2008 — In connection with Mr. Hochhauser’s retirement, he did not stand for re-election to the
Board at the 2008 annual meeting, when his then-current term expired. Mr. Blythe was nominated by
the Board for election at the 2008 annual meeting, filling the seat previously held by Mr. Hochhauser,
and was elected by our stockholders.
• December 2008 — We announced the departure at year-end 2008 of Mr. Blythe, our former President
and CEO, and that he would be succeeded by company veteran and current Chairman of the Board,
Larry Franklin. Mr. Franklin became President and CEO effective January 1, 2009 and was a
non-employee director throughout 2008.
Overview of 2008 Executive Compensation Developments
In 2008, the principal compensation developments for our named executive officers were as follows:
•
•
January 2008 — The Committee made its annual compensation determinations for our 2008 executive
compensation program. The determinations for Mr. Blythe took into consideration the planned February
2008 promotion from President
to assume the additional role of CEO upon Mr. Hochhauser’s
retirement. No compensation determinations or adjustments were made for Mr. Hochhauser. His
compensation as a consultant, beginning in February 2008, is governed by his transition and consulting
agreement, which was previously approved in 2007.
June 2008 — We entered into amended and restated versions of certain of our existing compensatory
plans and agreements, including severance agreements with our named executive officers, to address the
requirements of Section 409A of the Internal Revenue Code of 1986, as amended (Section 409A), which
was added by the American Jobs Creation Act of 2004. Contemporaneously with these Section 409A
17
amendments, we made certain other amendments to these severance agreements to clarify that the
accelerated vesting of company equity awards would apply to all types of equity-based awards rather
than only to stock options. This change was intended to reflect that, beginning in 2006, we have made
equity grants to our executives in the form of restricted stock and performance restricted stock units, in
addition to stock options.
• December 2008 — As part of our cost management initiatives and related efforts to improve Harte-
Hanks’ results and offset the impact of the ongoing economic downturn in the United States and other
economies, the Committee approved a base salary reduction for all Harte-Hanks corporate officers,
including our named executive officers. Mr. Blythe’s salary was reduced by 20% and the salaries of
Messrs. Gorman, Shepard, Skidmore and Pechersky were reduced by 10%.
• December 2008 — We announced the departure of Mr. Blythe, our former President and CEO. In
connection with his departure at year-end 2008, we entered into a transition agreement with Mr. Blythe,
pursuant to which we agreed, subject to the terms and conditions of the agreement, to make four
quarterly payments to Mr. Blythe beginning in January 2009. Additional information about Mr. Blythe’s
transition agreement is provided below in this CD&A. Mr. Franklin’s compensation in his new role as
President and CEO, effective January 1, 2009, was determined in January 2009.
Executive Compensation Philosophy and Objectives
Our executive compensation program is designed to achieve a number of key objectives and thereby support
our overall efforts to create long-term value for our stockholders:
•
•
•
•
Attract and Retain Top Talent — Attract and retain high performing individuals who will significantly
contribute to our long-term success and the creation of long-term stockholder value by providing
competitive compensation compared to peer companies 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 example, annual bonuses and
performance restricted stock units) or our stock price appreciates (for example, stock options).
Require Significant Ongoing Executive Stock Ownership — Align executive and stockholder interests by
including a significant equity component in our total compensation awards and by requiring executives
to accumulate and maintain a sizeable equity position through our stock ownership guidelines.
As part of our compensation philosophy and objectives and our goal of creating long-term value for our
stockholders, we seek to design an executive compensation program that does not encourage inappropriate risks
that would threaten the long-term value of our company. We believe our compensation philosophy has assisted in
achieving our goals. The Committee reviews our compensation philosophy on a periodic basis to judge whether
the goals and objectives are being met, and what, if any, changes may be needed to the philosophy. The
Committee considered our compensation philosophy and objectives in establishing the elements and amounts of
2008 compensation for each of our named executive officers. Our 2008 compensation philosophy is consistent
for all of our executive officer positions, and is consistent with the philosophy for our 2007 and 2009
compensation programs.
18
Elements of 2008 Executive Compensation Program
The following table highlights the elements of our 2008 executive compensation program and the primary
purpose of each element. The overall 2008 compensation elements are consistent with our 2007 executive
compensation program, 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
Pension and
Retirement
Severance
Agreements
Enhance the competitiveness of our executive
compensation program through limited additional
benefits.
Automobile allowances and
supplemental life insurance
benefits
Provide our executives with a competitive retirement
income program to supplement savings through our
401(k) plan.
Participation and vesting in our
non-qualified pension
restoration plan
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.
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.
19
Cash severance, equity vesting,
COBRA reimbursement and, if
applicable, certain Section
280G “excess parachute
payment” tax gross-ups
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
In making 2009 annual executive compensation determinations in January 2009, the Committee approved
certain modifications to the compensation elements described above, principally: (1) for Mr. Skidmore, our
Executive Vice President and President, Direct Marketing, and other Direct Marketing personnel, up to 20% of
their maximum annual bonus potential could be earned and paid mid-year based on January 2009 to June 2009
actual performance against the pre-established six-month performance targets; the remaining 80% of bonus
potential would be based on full year performance against the pre-established annual performance targets; (2) for
Mr. Franklin’s bonus restricted stock election, Mr. Franklin was eligible to elect to receive up to 100% (versus
30% for other executives) of any 2009 cash bonus award in the form of restricted common stock, which would
vest 100% on the third anniversary of the date of grant, allowing Mr. Franklin to receive 100% (versus 125% for
other executives) of the value of the forgone cash portion of his bonus in such shares of restricted stock; (3) the
Committee designated all corporate officers as eligible to elect to participate in our existing non-qualified
deferred compensation plan, which is filed as Exhibit 10.3 to our Form 8-K dated June 27, 2008; and (4) 2009
long-term incentive awards consisted solely of stock options; no shares of restricted stock or performance
restricted stock units were granted. As discussed further below under the section, “Long-Term Incentive
Awards,” the Committee determined that this equity award structure would more effectively drive achievement
of our 2009 corporate mission of aggressively adjusting our cost structure to anticipated reduced revenue levels,
thereby better positioning Harte-Hanks for future growth opportunities and the creation of long-term stockholder
value.
Compensation Committee
The Committee currently consists of Judy Odom (Chair), William Farley, William Gayden and Karen
Puckett. 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
incentive and equity-based compensation,
taking into consideration our performance and relative
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 2008. 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. Mr. Franklin was a non-employee director during 2008. The Committee met in
executive session with other non-employee directors at its January 2008 regular meeting, which is the meeting
when the Committee made its annual 2008 executive compensation determinations. The Committee also met in
executive session with other non-employee directors at a meeting in December 2008, which is the meeting when
the Committee approved the previously discussed base salary reduction for our corporate officers. Messrs.
Blythe, Shepard and Pechersky were present during the Committee’s approval of the officer salary reduction. In a
subsequent December 2008 meeting, which was jointly held with the Board,
the Committee approved
Mr. Blythe’s previously discussed transition agreement in connection with his departure from the company.
Mr. Pechersky was in attendance at this subsequent December meeting.
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
Former CEO and director Mr. Hochhauser attended the Committee’s January 2008 meeting, prior to his
February 2008 retirement, and did not participate in any subsequent meetings. Former President, CEO and
director Mr. Blythe, whose departure was at year-end 2008, participated in the Committee’s executive
compensation processes throughout 2008 and assisted the Committee and regularly attended Committee
meetings, other than executive sessions. Mr. Blythe provided his perspective to the Committee regarding
executive compensation matters generally and the performance of the executive officers reporting to him. He 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.
Mr. Blythe did not make recommendations regarding his own compensation, except with respect to his base
salary reduction approved by the Committee in December 2008.
Mr. Franklin, who serves as Chairman of the Board and, since January 2009, also serves as our President
and CEO, assisted the Committee in making 2008 executive compensation determinations regarding Mr. Blythe
and other executives.
At the Committee’s January 2008 meeting, Mr. Blythe presented the Committee with specific 2008
compensation recommendations for the compensation amounts and elements of all executive officers other than
himself. Mr. Franklin, a non-employee Chairman of the Board at that time, presented the Committee with
specific 2008 compensation recommendations for Mr. Blythe and provided the Committee with his perspective
21
on the 2008 compensation recommendations for other executives. The Committee made final decisions about
each officer’s 2008 compensation without the applicable executive officer being present, taking into account
Mr. Blythe’s recommendations for executive officers, other than himself, and Mr. Franklin’s recommendations
for Mr. Blythe. At a December 2008 meeting, Mr. Blythe presented the Committee with specific
recommendations for corporate officer base salary reductions, including for himself, as part of our ongoing cost
management initiatives. These recommendations, which were approved by the Committee, included a 20%
reduction for Mr. Blythe’s salary and 7-10% reductions for other corporate officers. At a subsequent December
2008 meeting, Mr. Franklin provided the Committee with recommendations regarding the terms of Mr. Blythe’s
transition agreement.
Compensation Consultants
The Committee believes that engaging a consultant on a periodic basis is more appropriate than having
annual engagements. 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
did not engage an outside consulting firm during 2008 for the Committee’s 2009 executive compensation
determinations, and has not yet determined whether it will engage an outside consulting firm during 2009 for the
Committee’s 2010 executive compensation determinations.
Principal Factors That Influenced 2008 Executive Compensation
When making its 2008 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
22
will significantly contribute to our long-term success and the creation of long-term 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 into consideration in the Committee’s business judgment and that included a number of
subjective determinations. In establishing the individual elements and amounts of 2008 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 2008 market data provided by the
Committee’s compensation consultants,
the relative mix of
recommendations and input from non-Committee members of the Board, including our Chairman,
Mr. Franklin (who was a non-employee director during 2008 and has served as our President and CEO
since January 2009), and from Mr. Blythe, including with regard to proposed base salary increases in
January 2008, officer salary reductions in December 2008, 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,
•
•
•
•
•
•
providing competitive compensation to reflect new or expanded roles for some of our executives,
including the promotion of Mr. Blythe to CEO in February 2008 in connection with Mr. Hochhauser’s
retirement,
retention considerations in light of the relatively low bonus payouts, or no bonus payouts, to executive
officers based on recent company performance, and reduced historical equity compensation values
because of a reduced stock price and recent earnings per share performance,
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 relating to
non-qualified deferred compensation.
With respect to the December 2008 officer salary reductions, the primary factor underlying the Committee’s
decision was the ongoing and deteriorating economic environment in the United States and other economies. The
officer salary reductions served as a component of our overall cost management initiatives and related efforts to
respond to these adverse conditions and improve Harte-Hanks’ results.
23
Tally Sheets
To assist the Committee in making its 2008 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
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 2008 compensation for our named executive officers between equity and cash:
2008 Cash Versus Equity Compensation for Named Executive Officers (1) (2)
Named Executive Officer
Compensation
Equity
Compensation
40%
Cash
Compensation
60%
(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 2008 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 2008 equity compensation.
(2) For our individual named executive officers, their 2008 cash to equity compensation ratios (calculated as
described in footnote (1) above) were approximately as follows: Hochhauser — 100% cash / 0% equity;
Blythe — 51% cash / 49% equity; Gorman — 56% cash / 44% equity; Shepard — 78% cash / 22% equity;
Skidmore — 63% cash / 37% equity; and Pechersky – 62% cash / 38% equity. Individual circumstances and
other factors, such as mid-year promotions, start dates, departure dates and volatility in our stock price, may
24
cause significant fluctuations in these percentages from year to year, thereby affecting their year-to-year
comparability. For example, Mr. Hochhauser retired in February 2008, when he became a consultant to the
company. Pursuant to his transition and consulting agreement, Mr. Hochhauser was not eligible to receive
any equity awards in 2008.
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 2008, as shown below, over half of the potential cash compensation
(assuming a maximum bonus payout) for the named executive officers was “at risk.”
Percentage of 2008 Potential Cash Compensation for Named Executive Officers:
Fixed vs. Variable (or “At Risk”) (1)(2)
Named Executive Officers
Fixed
46%
Variable
54%
(1) This chart reflects the overall ratio of 2008 base salary (fixed) to 2008 potential annual
incentive
compensation (at risk or variable) assuming a maximum bonus payout for the named executive officers.
(2) For our individual named executive officers, their percentages of 2008 at risk or variable cash compensation
(calculated as described in footnote (1) above) were approximately as follows: Hochhauser — 0.0%; Blythe —
56%; Gorman — 50%; Shepard — 50%; Skidmore — 50%; and Pechersky — 51%. 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, Mr. Hochhauser retired in February 2008, when he became a
consultant to the company. Pursuant to his transition and consulting agreement, Mr. Hochhauser was not
eligible to participate in our 2008 executive bonus plan.
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 2007 Longnecker & Associates study, the broad survey data
was derived from published surveys, including printing and publishing industry segment data from those surveys.
25
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 modified and expanded the peer group used for 2008 executive compensation. The prior peer
group was based on the Committee’s previous engagement of a compensation consulting firm in 2004. No
changes were made to the compensation peer group for purposes of making annual executive compensation
determinations in January 2009.
2008 Compensation Peer Group
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 2008 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.
for
The Committee engaged a compensation consultant
its 2008 annual executive compensation
determinations. The market data provided by the consultant was incorporated into our former CEO’s
recommendations for other executive officers and our Chairman’s recommendations for the former CEO in
January 2008. This market data incorporated broad aggregated survey data and peer company data from the 2008
compensation peer group companies listed above. Based on the total potential direct compensation approved in
the Committee’s January 2008 meeting for our named executive officers (other than Mr. Hochhauser, who retired
in February 2008, when he became a consultant to the company pursuant to his transition and consulting
agreement) compared to the market data reviewed by the Committee at its January 2008 meeting, two of the
named executive officers were between the 50th and 75th percentiles and three were 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 $15.00 per share. Stock options were given a value based on a Black Scholes value of $4.65 per
option. All equity values assumed 100% vesting.
26
Additional Analysis of Executive Compensation Elements
The following discussion provides additional information and analysis regarding the specific elements of
our 2008 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 2008 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, 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 and
potential cash severance amounts, which are based on a percentage of base salary.
When reviewing each executive’s base salary in January 2008, the Committee considered, in addition to the
other factors discussed below, 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, 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.
As part of the annual executive compensation determinations in January 2008, the Committee made the base
salary determinations for our named executive officers set forth below. In December 2008, the Committee
approved officer salary reductions as a result of the deteriorating economic environment in the United States and
other economies. These salary reductions served as a component of our overall cost management initiatives and
related efforts to respond to the adverse economic conditions and improve Harte-Hanks’ results. Mr. Blythe’s
salary was reduced by 20% and the salaries of Messrs. Gorman, Shepard, Skidmore and Pechersky were reduced
by 10%.
• Hochhauser — No adjustments were made for Mr. Hochhauser in January 2008 in light of his February
2008 retirement. The terms of his compensation as a consultant beginning in February 2008 are
governed by his August 2007 transition and consulting agreement.
•
the planned promotion in February 2008 to assume the additional
Blythe — Mr. Blythe’s base salary was increased in January 2008 from $600,000 to $675,000 as a result
of
role of CEO upon
Mr. Hochhauser’s retirement. In setting the amount of Mr. Blythe’s increased salary, the Committee
took into consideration Mr. Hochhauser’s experience level, salary history and tenure as CEO and the
amount of the 2007 salary increase previously approved for Mr. Blythe in connection with his
promotion to President. In late 2008, Mr. Blythe’s salary was reduced to $540,000 as part of our cost
management initiatives.
• Gorman — Mr. Gorman’s base salary was increased in January 2008 from $374,300 to $394,000, which
restored Mr. Gorman’s salary to his 2006 level. Mr. Gorman’s 2006 salary was previously reduced due
to earlier cost management initiatives in our Shoppers business. In January 2009, Mr. Gorman’s salary
was reduced to $354,600 as part of our cost management initiatives.
•
Shepard — Mr. Shepard’s base salary was maintained in January 2008 at $350,000, which 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, Mr. Shepard’s
salary at his previous job and Mr. Shepard’s experience level. In late 2008, Mr. Shepard’s salary was
reduced to $315,000 as part of our cost management initiatives.
27
•
•
Skidmore — Mr. Skidmore’s base salary was maintained in January 2008 at $540,000, which reflected
the increase previously approved for Mr. Skidmore beginning with his August 2007 promotion. The
amount of the August 2007 increase 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 late 2008, Mr. Skidmore’s salary was reduced to $486,000 as part of our
cost management initiatives.
Pechersky — Mr. Pechersky’s base salary was increased in January 2008 from $260,000 to $300,000,
taking into account his performance and benchmark salary data provided as part of the Committee’s
engagement of Longnecker & Associates. In late 2008, Mr. Pechersky’s salary was reduced to $270,000
as part of our cost management initiatives.
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 2008 executive bonus plan, maximum bonus opportunity amounts were expressed
as a percentage of each executive’s base salary as follows:
2008 Named Executive Officer Bonus Opportunities
Named Executive Officer
Hochhauser . . . . . . .
Blythe . . . . . . . . . . .
Gorman . . . . . . . . . .
Shepard . . . . . . . . . .
Skidmore . . . . . . . . .
Pechersky . . . . . . . .
Maximum Bonus
Opportunity
(% of 2008 Base Salary)
—
125
100
100
100
85
Change From Prior Year
Not eligible for a 2008 bonus, pursuant to his
transition and consulting agreement.
Increased from 100% of his base salary as a result of
his promotion to CEO in February 2008.
No change.
No change.
No change.
No change.
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 2008 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 plan, the potential payouts based on achievement at different levels and whether the portion of
incremental earnings paid as bonuses rather than returned to stockholders or reinvested in our business is
appropriate. The Harte-Hanks 2005 Omnibus Incentive Plan (2005 Plan), a stockholder approved plan, forms the
basis of our annual incentive plan for Section 162(m) executives.
28
For 2008, 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:
2008 Bonus Performance Criteria for Named Executive Officers
Named
Executive
Officer
Harte-
Hanks
Earnings
Per Share
Harte-
Hanks
Operating
Income
Shoppers
Revenue
Shoppers
Operating
Income
Direct
Marketing
Revenue
Direct
Marketing
Operating
Income
Hochhauser (1) . . . . . . . . . . . . . . . . . . . . . . . .
Blythe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gorman . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shepard . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Skidmore . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pechersky . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
✓
✓
✓
—
✓
✓
✓
—
✓
✓
✓
✓
—
✓
✓
✓
✓
—
✓
✓
✓
✓
—
✓
✓
✓
✓
(1) Mr. Hochhauser was not eligible for a 2008 bonus, pursuant to his transition and consulting agreement.
The determination of any bonus amount ultimately payable to each executive for 2008 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 a Section 162(m) participant at a given level of performance 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 2008 bonus performance 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 and outlook for the company. To illustrate the degree of difficulty in achieving
bonus payouts, the following table shows the 2006 through 2008 actual bonus payouts, if any, as a percentage of
each named executive officer’s maximum bonus opportunity for the applicable year.
Historical Bonus Payout As A Percentage of Maximum Bonus Opportunity
Named Executive Officer
2006
Actual Bonus
Payout
2007
Actual Bonus
Payout
2008
Actual Bonus
Payout
Hochhauser (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Blythe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gorman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shepard (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Skidmore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pechersky (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.00%
14.00%
4.50%
—
11.25%
—
0.00%
0.00%
0.00%
0.00%
5.25%
0.00%
—
0.00%
0.00%
0.00%
0.00%
0.00%
(1) Mr. Hochhauser was not eligible for a 2008 bonus, pursuant to his transition and consulting agreement.
(2) Mr. Shepard joined Harte-Hanks in December 2007 and was not a participant in our 2006 executive annual
incentive plan.
(3) Mr. Pechersky joined Harte-Hanks in March 2007 and was not a participant in our 2006 executive annual
incentive plan.
29
Bonus Restricted Stock Elections
As part of our executive compensation program, our executive officers have been provided the opportunity
to elect to receive a portion of their bonus otherwise earned in the form of restricted stock. In that case, the
executive would typically 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 2008 executive bonuses,
which were potentially payable in early 2009. The Committee believes this election encourages the accumulation
of executive stock ownership, as required by our stock ownership guidelines. Because none of our named
executive officers received a 2008 bonus based on company performance, none of our named executive officers
received any bonus restricted stock awards in early 2009.
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 various equity securities
to directors, officers, key employees and consultants. 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 equal to the market value of
our common stock on the date of grant, as provided by the 2005 Plan. 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 market value on the first preceding trading day (for example, a Friday if
February 5 on a given year is a Saturday), as provided by the 2005 Plan. 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 2008, as in 2007, 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
determined in connection with its 2008 annual compensation awards that awarding a combination of these forms
of equity was more appropriate at that time to achieve the goals of our long-term incentive compensation
program than awarding only one form of equity. In general, 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 2008 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 three-year average annual earnings per share growth rates during the 2008-2010
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
30
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. None of the 2006 performance units vested. In addition, as
of December 31, 2008, none of the performance goals associated with outstanding 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 2008, 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, 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.
For 2009, the Committee awarded only stock options and did not award shares of restricted stock or
performance restricted stock units to our executives. The Committee determined that a focus on stock options for
the 2009 long-term incentive awards would more immediately and directly align our executive compensation
program with the needs of our company and our stockholders. As a result of the unprecedented economic
environment, tremendous market volatility and absence of visibility into the duration and future impact of the
recession, a key 2009 corporate mission is to aggressively adjust our cost structure to anticipated reduced
revenue levels and thereby better position Harte-Hanks for future growth opportunities and the creation of long-
term value for our stockholders. The Committee determined in its judgment that an award to our executives of an
increased number of options, which vest over a five-year period and require appreciation in our stock price to
have value, would be a more effective tool to drive achievement of our 2009 corporate mission than awarding a
combination of equity that includes a fewer number of options combined with restricted common stock, which
has time-based vesting and value even in the absence of stock price appreciation, and performance restricted
stock units, which have multi-year performance goals.
Perquisites
Consistent with previous years, our 2008 executive compensation program included limited executive
perquisites. The aggregate incremental cost of providing perquisites and other benefits to our named executive
officers is included in the amount shown in the All Other Compensation column of the Summary Compensation
table below and detailed in the subsequent All Other Compensation table. We believe the limited perquisites we
provide to our executives are representative of comparable benefits offered by companies with whom we
compete for executive talent, and therefore offering these benefits serves the objective of attracting and retaining
top executive talent by enhancing the competitiveness of our compensation program. 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 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 to CEO in
February 2008 and the desire to also provide comparable, increased life insurance benefits to our longer-
term Executive Vice Presidents, Messrs. Gorman and Skidmore. There was no change to Messrs.
Shepard’s or Pechersky’s life insurance benefits from 2007 to 2008, which remained at $70,000 per year
for ten years. Mr. Hochhauser’s supplemental life insurance benefits ceased upon his retirement in
February 2008.
•
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;
31
Executive Vice Presidents and Senior Vice Presidents — $975 per month; and Vice Presidents — $600
per month. 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 February 2008.
In establishing the elements and amounts of each executive’s 2008 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 initially became effective on
January 1, 1994 (Restoration Pension Plan). The Defined Benefit Plan was frozen as of December 31, 1998 (at
which time the benefits available under our 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
final average earnings (earnings during the highest five consecutive years within the last
ten years of
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 2008 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
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 2007 to 2008.
Severance Agreements
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. Shepard
(initially entered in 2007), Skidmore (initially entered in 2000) and Pechersky (initially entered in 2007). We also
have a severance agreement with Mr. Gorman (initially 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
32
and consulting agreement with Mr. Hochhauser in connection with his retirement in February 2008. That
agreement 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. In December 2008,
we entered into a transition agreement with Mr. Blythe in connection with his departure at year-end 2008. That
agreement replaced Mr. Blythe’s June 2008 severance agreement, which previously provided severance benefits
in certain change of control scenarios. The terms of Mr. Blythe’s transition agreement took into consideration
recommendations of our Chairman and the amount of Mr. Blythe’s salary as our CEO.
The payout
levels and triggering events in the severance agreements for Messrs. Gorman, Shepard,
Skidmore and Pechersky were initially structured a number of years ago based on the Committee’s review of
publicly available market data regarding severance agreements.
In June 2008, we entered into amended and restated versions of certain existing compensatory plans and
agreements, including severance agreements with our named executive officers, to address the requirements of
Section 409A. These severance agreements were amended by (1) clarifying that amounts earned and vested by
December 31, 2004 are “grandfathered” and subject to only pre-Section 409A rules, (2) clarifying that payments
will be made only if the executive’s termination of employment
is a “separation from service” under
Section 409A, (3) modifying certain circumstances under which the executive may voluntarily terminate
employment to require a material negative change in the employment relationship, notice from the executive, and
an opportunity for the company to cure, (4) clarifying the time and form of payment to the executive, and
(5) adding a 6-month delay in payment of deferred compensation otherwise payable to any “specified employee”
upon separation from service. Contemporaneously with these Section 409A amendments, we made certain other
amendments to these severance agreements to clarify that the accelerated vesting of company equity awards upon
a change of control and, for Mr. Gorman, upon the non-change of control triggering events in his agreement,
would apply to all types of equity-based awards rather than only to stock options. This change was intended to
reflect that, beginning in 2006, we have made equity grants to our executives in the form of 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 establishing the elements and amounts of each executive’s 2008
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 may have a significant amount of
unrealized value in the form of unvested equity and other forgone compensation opportunities. Sign-on bonuses
and special equity awards are an effective means of offsetting the compensation opportunities executives lose
when they leave a former company to join Harte-Hanks. For example, 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.
33
We may also grant discretionary cash and equity awards from time to time when appropriate to retain key
executives, to recognize expanded roles and responsibilities or for other reasons deemed appropriate by the
Committee in its business judgment. Discretionary equity awards have typically taken the form of stock options.
For example, Messrs. Blythe and Skidmore each received option awards in July 2007 in connection with their
promotions and expanded responsibilities.
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 2008 compensation for our named executive officers, the Committee viewed each named executive
officer’s compensation amounts and elements against
those of the other named executive officers. The
Committee did not establish any 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 2008
compensation we paid to each of our named executive officers was appropriate in relation to the other named
executive officers. Mr. Blythe’s 2008 salary was higher than the salaries for Messrs. Gorman, Shepard,
Skidmore, and Pechersky because of Mr. Blythe’s August 2007 promotion to President and his promotion to
CEO in February 2008. Mr. Skidmore’s 2008 salary was higher than the salaries for Messrs. Gorman, Shepard
and Pechersky 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. No
compensation determinations or adjustments were made for Mr. Hochhauser in 2008. The terms of his transition
and consulting agreement, which were previously approved by the Committee in 2007, govern his compensation
as a consultant beginning in February 2008.
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
34
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
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. As a result of the ongoing economic downturn in the United States and
other global economies and its adverse impact on overall business conditions and financial markets, the
Committee anticipates re-assessing whether the compliance implementation deadlines, previously established in
2005, remain appropriate.
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 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’ 2008
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.
35
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
Karen A. Puckett *
*Ms. Puckett joined the Board and the Compensation
Committee in January 2009 and, therefore, was not
a member of the Board or Compensation
Committee during any of the 2008 compensation
determinations.
Equity Compensation Plan Information at Year-End 2008
The following table provides information as of the end of 2008 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:
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)
Plan Category
Equity compensation plans
approved by security holders . . 6,813,040 (outstanding
options and performance
stock units)
$20.02 (outstanding
options) (1)
3,930,133 (2)
Equity compensation plans not
approved by security holders . .
—
—
Total
. . . . . . . . . . . . . . . . . . . . . . . 6,813,040 (outstanding
options and performance
stock units)
$20.02 (outstanding
options) (1)
—
3,930,133 (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)
Includes 1,989,924 shares under the 2005 Plan and 1,940,209 shares under our Employee Stock Purchase
Plan. Our Employee Stock Purchase Plan was terminated effective March 31, 2009. 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.
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., 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.,
36
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 2008, 2007 and 2006 by our
named executive officers: (1) Richard Hochhauser—our former CEO, who retired in February 2008, (2) Dean
Blythe—our former President and CEO during 2008, (3) Pete Gorman—our Executive Vice President and President,
Shoppers, and one of the next three most highly compensated executive officers for 2008 other than our CEO and
Chief Financial Officer, (4) Doug Shepard—our Executive Vice President and Chief Financial Officer as of the end
of 2008, (5) Gary Skidmore—our Executive Vice President and President, Direct Marketing, and one of the next three
most highly compensated executive officers for 2008 other than our CEO and Chief Financial Officer; and (6) Bryan
Pechersky—our Senior Vice President, General Counsel and Secretary and one of the next three most highly
compensated executive officers for 2008 other than our CEO and Chief Financial Officer. Mr. Franklin, our current
Chairman, President and CEO, was a non-employee director throughout 2008 and did not become President and CEO
until January 1, 2009.
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 . . . . . .2008 $ 68,333 $ — $ —
$ —
2007 $820,000 $ — $317,457(10) $ 759,195(10) $ —
$143,500
2006 $820,000 $ — $147,951
$ 979,363
—
$
Former Chief
Executive Officer
Dean Blythe . . . . . . . . . . . .2008 $652,500 $ — $ (86,757)(11) $(136,524)(11) $ —
$ —
Former President and
2007 $471,667 $ — $ 42,510
$ 42,245
Chief Executive Officer 2006 $355,000 $ — $ 44,247
$ 358,370
$ 322,788
Pete Gorman . . . . . . . . . . . .2008 $394,000 $ — $ 77,821
2007 $384,908 $ — $ 35,478
$ 295,321
$ 288,350
Executive Vice
President and President, 2006 $394,000 $ — $ 52,896(5) $ 376,104
Shoppers
$ —
$ —
$ 17,730
Doug Shepard (6) . . . . . . . .2008 $344,167 $ — $118,324
2007 $
1,346 $150,000(7)$ —
2006 $ — $ — $ —
Executive Vice
President and Chief
Financial Officer
$ 64,484
—
$
—
$
$ —
$ —
$ —
$ 333,280
Gary Skidmore . . . . . . . . . .2008 $531,000 $ — $ 85,595
2007 $426,962 $ — $ 46,256
$ 262,475
2006 $340,000 $ — $ 32,928(5) $ 287,383
Executive Vice
President and President,
Direct Marketing
$ —
$ 28,350
$ 32,513
Bryan Pechersky (8) . . . . . .2008 $295,000 $ — $ 81,721
2007 $205,833 $ 45,000(9)$ 56,030
2006 $ — $ — $ —
Senior Vice President,
General Counsel and
Secretary
$ 56,166
$ 30,304
$
—
$ —
$ —
$ —
$289,841
$590,847
$649,756
$ 72,337
$ 54,706
$ 28,221
$149,583
$175,189
$135,432
$ 18,149
$ —
$ —
$118,047
$ 93,701
$ 38,639
$
8,570
$ —
$ —
$640,576
$ 55,618
$ 51,435
$ 34,127
$ 24,770
$ 23,238
$ 32,746
$ 30,430
$ 23,419
$ 15,770
$ —
$ —
$ 28,099
$ 23,832
$ 22,571
$ 23,746
$ 32,328
$ —
$ 998,750
$2,543,117
$2,792,005
$ 535,683
$ 952,023
$ 815,739
$ 949,471
$ 914,355
$ 999,581
$ 560,894
$ 151,346
$
—
$1,096,021
$ 881,576
$ 754,034
$ 465,203
$ 369,495
$
—
(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, 2008, December 31, 2007 and December 31, 2006, in accordance with SFAS 123R, adjusted for actual forfeitures. As of
December 31, 2008, 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, 2008 included in our Annual Report on Form 10-K filed with the SEC (the “Form 10-K”).
37
(2) The amounts shown in column (g) are attributable to annual cash bonuses earned in the applicable fiscal year, although these bonuses, if
any, are paid early in the following year. Our executive bonus program is discussed further under the section “Annual Incentive
Compensation” included above in the CD&A.
(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. The 2008 amount shown for Mr. Hochhauser, who retired in February
2008, reflects the estimated actuarial increase in the present value of his benefits from December 31, 2007 to February 28, 2008.
(4) The amounts in column (i) are 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 vested 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 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.
(8) Mr. Pechersky joined Harte-Hanks in March 2007.
(9) Represents a one-time payment of $45,000 in cash to Mr. Pechersky related to his relocation upon joining Harte-Hanks in 2007.
(10) In light of Mr. Hochhauser’s retirement in early 2008, the then-remaining future expense related to Mr. Hochhauser’s outstanding equity
awards was accelerated and recognized in 2007.
(11) These amounts reflect deductions for previous compensation expense associated with certain of Mr. Blythe’s unvested equity awards. As
a result of Mr. Blythe’s departure at December 31, 2008, a forfeiture occurred at year-end 2008 of both stock options (unvested from the
2005 Plan and vested from the 1991 Plan) and all unvested restricted stock awards.
All Other Compensation
Name
Year
Insurance
Premiums (1)
Auto
Allowance
Company Contrib.
to 401(k) Plans (2)
Dividends on
Restricted Stock (3) Other (4)
Total
Richard Hochhauser . . . 2008
2007
2006
Dean Blythe . . . . . . . . . 2008
2007
2006
Pete Gorman . . . . . . . . . 2008
2007
2006
Doug Shepard . . . . . . . . 2008
2007
2006
Gary Skidmore . . . . . . . 2008
2007
2006
Bryan Pechersky . . . . . . 2008
2007
2006
$ —
$25,342
$24,167
$ 4,639
$ 1,970
$ 1,970
$ 8,041
$ 7,299
$ 1,496
$
519
$ —
$ —
$ 3,134
$
645
$ 1,083
323
$
$
323
$ —
$ 1,325
$15,900
$15,900
$15,900
$11,700
$11,700
$11,700
$11,700
$11,700
$11,700
$ —
$ —
$11,700
$11,700
$11,700
$11,700
$ 9,440
$ —
$4,323
$9,000
$8,800
$9,200
$9,000
$8,800
$9,200
$9,000
$8,800
$ —
$ —
$ —
$9,200
$9,000
$8,800
$8,723
$ —
$ —
$5,760
$5,376
$2,568
$4,388
$2,100
$ 768
$3,805
$2,431
$1,423
$3,551
$ —
$ —
$4,065
$2,487
$ 988
$3,000
$1,575
$ —
$629,168 $640,576
$ — $ 55,618
$ — $ 51,435
$ — $ 34,127
$ — $ 24,770
$ — $ 23,238
$ — $ 32,746
$ — $ 30,430
$ — $ 23,419
$ — $ 15,770
$ — $ —
$ — $ —
$ — $ 28,099
$ — $ 23,832
$ — $ 22,571
$ — $ 23,746
$ 20,990 $ 32,328
$ — $ —
(1) Reflects premiums paid annually by Harte-Hanks for life insurance policies obtained in connection with
providing supplemental life insurance benefits to each of the named executive officers. These life insurance
benefits are discussed further under the section “Perquisites” included above in the CD&A.
38
(2) Reflects matching contributions made by Harte-Hanks on behalf of each of the named executive officers
under our 401(k) plan.
(3) Reflects dividends paid by Harte-Hanks during the year on shares of restricted stock held by each of the
named executive officers.
(4) Amounts for Mr. Hochhauser reflect 2008 consulting payments pursuant to his transition and consulting
agreement. Amounts for Mr. Pechersky reflect transition and relocation payments and reimbursements in
connection with joining Harte-Hanks in March 2007.
Grants of Plan Based Awards
The following table sets forth information regarding grants of equity-based awards during 2008 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 2008 were granted at exercise prices equal to the market value 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 2008 were granted with no exercise price and vest
100% on the third anniversary of their date of grant. 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 2008 were granted with no
exercise price. The number of shares ultimately awarded, if any, 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 2008-
2010. The stock units do not receive dividends during the vesting period. As of December 31, 2008, none of the
performance goals associated with outstanding performance stock units are expected to be achieved, which
would result in no units vesting for any of our executives.
39
Estimated Future Payouts
Under Equity Incentive
Plan Awards (1) (2)
Threshold (#)
(f)
Target (#)
(g)
Maximum (#)
(h)
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)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,344
—
—
3,000
—
1,875
—
—
—
3,000
—
—
1,875
—
—
8,906
—
—
5,000
—
3,125
—
—
—
5,000
—
—
3,125
—
7,125
7,125
—
4,000
4,000
—
2,500
—
4,000
668(7)
4,000
—
2,500
2,500
100,000
—
—
$15.90
$408,370
— $113,288
— $106,733
45,000
—
—
15,000
—
45,000
—
—
—
25,000
—
—
$15.90
$183,767
— $ 63,600
— $ 59,920
$15.90
$ 61,256
— $ 37,450
$15.90
$183,767
— $ 63,600
— $ 10,621
— $ 59,920
$15.90
$102,093
— $ 39,750
— $ 37,450
Name
(a)
Richard Hochhauser (5)
Dean Blythe (6)
Grant
Date
(b)
—
Stock Options . . . . . . . . . . . . . . . . 2/5/2008
Restricted Stock . . . . . . . . . . . . . . 2/5/2008
Performance Stock Units . . . . . . . 2/5/2008
Pete Gorman
Stock Options . . . . . . . . . . . . . . . 2/5/2008
Restricted Stock . . . . . . . . . . . . . . 2/5/2008
Performance Stock Units . . . . . . . 2/5/2008
Doug Shepard
Stock Options . . . . . . . . . . . . . . . 2/5/2008
Performance Stock Units . . . . . . . 2/5/2008
Gary Skidmore
Stock Options . . . . . . . . . . . . . . . 2/5/2008
Restricted Stock . . . . . . . . . . . . . . 2/5/2008
Restricted Stock . . . . . . . . . . . . . . 2/5/2008
Performance Stock Units . . . . . . . 2/5/2008
Bryan Pechersky
Stock Options . . . . . . . . . . . . . . . 2/5/2008
Restricted Stock . . . . . . . . . . . . . . 2/5/2008
Performance Stock Units . . . . . . . 2/5/2008
(1) Other than the amounts reported in the Summary Compensation table above, there were no non-equity incentive plan awards granted or
outstanding in 2008.
(2) Column (f) reflects that 0% is the minimum payout level of the performance restricted stock units which are payable, if earned, 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.
The amount shown in column (h) is 125% of the number of units granted, which is the maximum payout level. As of December 31,
2008, none of the performance goals associated with outstanding performance restricted stock units were expected to be achieved, which
would result in no shares vesting for any of our named executive officers.
(3) The exercise price shown in column (k) is based upon the grant date market value of our common stock on the NYSE, as provided by the
2005 Plan.
(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,
2008 included in our Form 10-K.
(5) As a result of Mr. Hochhauser’s retirement in February 2008, he did not receive any equity awards in 2008.
(6) As a result of Mr. Blythe’s departure at year-end 2008, all of his previously awarded restricted common stock, performance restricted
stock units, 1991 Plan options and unvested 2005 Plan options were forfeited or lapsed upon the end of his employment term.
Mr. Blythe’s vested 2005 Plan options remained exercisable for 90 days after the end of his employment term, to the extent vested at the
end of his employment term.
(7) Mr. Skidmore elected to receive a portion of his bonus (earned in 2007) in the form of restricted stock. As a result of such election,
Mr. Skidmore 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.
40
Outstanding Equity Awards at Year End
The following table sets forth information regarding outstanding equity awards held at the end of 2008 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 various equity securities to directors, officers, key employees and consultants. 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 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. 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 became exercisable only on the business day following the vesting date of each option. All
remaining 1991 Plan performance options were exercised in January 2009.
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
(d)
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
(g)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($) (1)
(h)
Option
Exercise
Price ($)
(e)
Option
Expiration
Date
(f)
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)
—
—
—
—
—
—
—
—
—
—
$ 1.33
$16.33
$13.38
$14.67
$18.22
$19.85
$22.03
$25.63
$25.80
1/12/2009
1/12/2009
1/6/2010
1/9/2011
1/8/2012
9/3/2012
2/2/2014
1/27/2015
1/25/2016
10,700(3)
8,500(4)
—
—
—
—
—
—
—
$66,768
$53,040
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$25.80
3/30/2009
—
$ —
—
—
—
—
—
—
—
—
—
—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
Name (a)
Richard
Hochhauser
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(b)
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
(c)
3,000
75,000
112,500
150,000
225,000
100,000
93,750
75,000
18,750
—
—
—
—
—
—
31,250(10)
75,000(11)
56,250(12)
Dean Blythe
(18) . . . . .
5,625
—
41
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
(d)
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(b)
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
(c)
22,500
45,000
75,000
30,000
37,500
25,000
12,500
6,250
—
—
—
—
12,000
4,500
58,500
22,500
75,000
75,000
40,000
15,000
15,000
15,000
3,750
—
—
—
—
—
—
—
—
—
12,500(10)
25,000(11)
12,500(9)
18,750(12)
17,500(14)
45,000(17)
50,000(8)
15,000(17)
—
—
—
—
—
—
—
5,000(10)
5,000(13)
15,000(11)
11,250(12)
30,000(14)
75,000(15)
45,000(17)
25,000(16)
25,000(17)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
(g)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($) (1)
(h)
5,928(3)
2,755(4)
4,000(7)
—
—
—
—
—
—
—
$36,991
$17,191
$24,960
$ —
$ —
$ —
$ —
$ —
$ —
$ —
Option
Exercise
Price ($)
(e)
Option
Expiration
Date
(f)
$16.33
$14.67
$18.22
$19.85
$22.03
$25.63
$26.31
$25.80
$26.07
$15.90
1/12/2009
1/9/2011
1/8/2012
9/3/2012
2/2/2014
1/27/2015
9/21/2015
1/25/2016
2/5/2017
2/5/2018
$17.30 12/31/2017
2/5/2018
$15.90
7,500(5)
—
$46,800
$ —
$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
$15.90
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
2/5/2018
4,115(3)
4,768(4)
4,668(7)
—
—
—
—
—
—
—
—
—
—
—
$25,678
$29,752
$29,128
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$27.85
$15.90
3/12/2017
2/5/2018
7,500(6)
2,500(7)
$46,800
$15,600
Name (a)
Pete Gorman . .
Doug
Shepard . . . .
Gary
Skidmore . . .
Bryan
Pechersky . . .
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
($) (1)(2)
(j)
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares,
Units or Other
Rights
That Have Not
Vested (#)(2)
(i)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
(1) Based upon the closing market price of our common stock as of December 31, 2008 ($6.24), as reported on the NYSE.
(2)
In 2008, as in 2007 and 2006, our Compensation Committee awarded our executives performance-based restricted stock units. As of
December 31, 2008, none of the performance goals associated with any of the outstanding 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 units 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, 2008 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 2008 grants) and the Grants of Plan Based Awards tables in prior-year proxy statements
(with respect to the earlier grants).
(3) Restricted stock vested on January 25, 2009.
(4) Restricted stock vests on February 5, 2010.
(5) Restricted stock vests on December 31, 2010.
(6) Restricted stock vests on March 12, 2010.
(7) Restricted stock vests on February 5, 2011.
42
(8) These options vest annually in equal installments of 12,500 between December 31, 2009 and December 31, 2012.
(9) These options vest annually in equal installments of 6,250 between September 21, 2008 and September 21, 2010.
(10) These options vested on February 2, 2009.
(11) These options vest annually in equal installments (37,500 for Hochhauser, 12,500 for Gorman and 7,500 for Skidmore) between
January 27, 2009 and January 27, 2010.
(12) These options vest annually in equal installments (18,750 for Hochhauser, 6,250 for Gorman and 3,750 for Skidmore) between
January 25, 2009 and January 25, 2011.
(13) These options vest on April 23, 2009.
(14) These options vest annually in equal installments (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 of 18,750 between July 31, 2009 and July 31, 2012.
(16) These options vest annually in equal installments of 6,250 between March 12, 2009 and March 12, 2012.
(17) These options vest annually in equal installments (11,250 for Gorman, 3,750 for Shepard, 11,250 for Skidmore, and 6,250 for Pechersky)
between February 5, 2010 and February 5, 2013.
(18) As a result of Mr. Blythe’s departure at year-end 2008, all of his previously awarded restricted common stock, performance restricted
stock units, 1991 Plan options and unvested 2005 Plan options were forfeited or lapsed upon the end of his employment term.
Mr. Blythe’s vested 2005 Plan options remained exercisable for 90 days after the end of his employment term, to the extent vested at the
end of his employment term.
Option Exercises and Stock Vested
The following table sets forth information for our named executive officers regarding option exercises and
equity vestings during 2008.
Name (a)
Option Awards
Stock Awards
Number of Shares
Acquired on
Exercise (#)
(b)
Value Realized on
Exercise ($)
(c ) (1)
Number of Shares
Acquired on
Vesting (#)
(d)
Value Realized on
Vesting ($)
(e) (2)
Richard Hochhauser . . . . . . . . . . . . . . . . .
Dean Blythe . . . . . . . . . . . . . . . . . . . . . . .
Pete Gorman . . . . . . . . . . . . . . . . . . . . . . .
Doug Shepard . . . . . . . . . . . . . . . . . . . . . .
Gary Skidmore . . . . . . . . . . . . . . . . . . . . .
Bryan Pechersky . . . . . . . . . . . . . . . . . . . .
4,500
—
1,800
—
1,800
—
$55,785
—
$22,314
—
$22,314
—
—
—
—
4,335
—
—
—
—
—
$27,050
—
—
(1) Calculated as the aggregate market value of the shares underlying the exercised options on the date of
exercise minus the aggregate exercise price.
(2) Calculated as the aggregate market value of the vested shares based on the closing price of our common
stock on the vesting date (December 31, 2008).
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
our Defined Benefit Plan and Restoration Pension Plan.
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
43
of December 31, 1998. All participants are 100% vested as of December 31, 1998. Death benefits are provided to
beneficiaries on behalf of participants as specified in the plan. 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 (subject to certain exclusions) 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.
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 and had benefit accruals under the Defined Benefit Plan not been
frozen at December 31, 1998. 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.
Benefits accrued and vested after December 31, 2004 are subject to non-qualified deferred compensation rules
under Section 409A of the Code. 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 (subject to certain exclusions)
plus any compensation deferred under a Section 125 or Section 401(k) plan, but only recognizes up to 100% of
44
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.
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,
2008 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
Bryan Pechersky . . . . . . . . . Defined Benefit Plan
Restoration Benefit Plan
32.417
32.417
7.167
7.167
27.500
27.500
1.000
1.000
14.250
14.250
1.800
1.800
$ 577,851
$4,471,231
—
$
$ 226,698
$ 303,544
$1,314,579
$
$
—
18,149
—
$
$ 531,242
$
$
—
14,074
$ 45,489
$351,964
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
(1) The accumulated benefit is based on service and earnings, as described above, considered by the plans for
the period through December 31, 2008. 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
45
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 retired in February 2008. Present value shown is as of February 28, 2008.
(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 $334,151 and $1,442,800, respectively.
Nonqualified Deferred Compensation
None of our named executive officers receive nonqualified deferred compensation as defined under SEC
rules. In January 2009, the Compensation Committee designated all corporate officers as eligible to participate in
our existing non-qualified deferred compensation plan, which is filed as Exhibit 10.3 to our Form 8-K, dated
June 27, 2008. During 2008, our Chairman, Mr. Franklin, who was a non-employee director during 2008 and
became our President and CEO on January 1, 2009, received deferred compensation payments arising out of
pre-existing compensation arrangements based on his former service as an executive officer of Harte-Hanks.
Potential Payments Upon Termination or Change of Control
Payments Pursuant to Severance Agreements
The following descriptions of our executive severance and transition 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. Refer to our 2008 Form 10-K exhibit list for the location of each of these agreements.
Hochhauser
On July 31, 2007, we announced the planned retirement in early 2008 of our former CEO, Richard
Hochhauser, after which Mr. Hochhauser 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.
Pursuant to the transition and consulting agreement, Mr. Hochhauser remained employed as the CEO
through February 4, 2008 and did 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 (which ended in February
2008), 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 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. Mr. Hochhauser also received 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) were enrolled for a period of 18 months following the end of the month in which his
employment term ended. The consulting period will end on February 4, 2011, unless terminated sooner in
accordance with the agreement.
46
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.
Blythe
On December 15, 2008, we announced the departure of our former President and CEO, Dean Blythe. In
connection with Mr. Blythe’s departure at year-end 2008, Harte-Hanks and Mr. Blythe entered into a transition
agreement, which superseded Mr. Blythe’s previous change of control severance agreement dated June 27, 2008.
Pursuant to the agreement, Mr. Blythe remained employed through December 31, 2008 and resigned from
the Board as of the effective date of the agreement in December 2008.
During his remaining employment term, Mr. Blythe 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’ 2008 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.
Subject to the terms and conditions of the agreement, Harte-Hanks agreed to pay Mr. Blythe the following
four quarterly payments: (1) $143,000 on or around January 1, 2009; (2) $125,000 on or around April 1, 2009;
(3) $125,000 on or around July 1, 2009; and (4) $125,000 on or around October 1, 2009.
Mr. Blythe remains bound by his current confidentiality/nondisclosure agreement and non-compete
agreement.
The transition 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. Blythe, (2) a release of claims
against Harte-Hanks and its affiliated parties by Mr. Blythe, and (3) other terms and provisions described in the
actual agreement.
Gorman
In December 2000, we entered into a severance agreement with Pete Gorman. In June 2008, we amended
Mr. Gorman’s agreement to address the requirements of Section 409A and make other changes, as described
above in the CD&A. Pursuant to Mr. Gorman’s agreement, 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
47
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, performance units and any other equity-
based awards 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
if applicable, a tax gross-up for “excess parachute payments” within the meaning of Section 280G of the
Code if the total amounts due to the executive would have to be reduced by more than ten percent to
avoid the excess parachute payment.
•
•
•
As used in the severance agreement, “cause” means that
the Board determines in good faith 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 the Board determines in good faith that 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 – Shepard, Skidmore and Pechersky
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. Shepard in December 2007, with Mr. Skidmore in
December 2000 and with Mr. Pechersky in March 2007. In June 2008, we amended these agreements to address
the requirements of Section 409A and make other changes, as described above in the CD&A. 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, performance units and any other equity-
based awards 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
if applicable, a tax gross-up for “excess parachute payments” within the meaning of Section 280G of the
Code if the total amounts due to the executive would have to be reduced by more than ten percent to
avoid the excess parachute payment.
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.
48
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, 2008.
Payments Made Upon Death or Disability
For a discussion of the supplemental life insurance benefits for the named executive officers, see the section
above entitled “Perquisites” and the All Other Compensation table above. The tables below provide the amounts the
beneficiaries of each named executive officer would have received had such officer died on December 31, 2008.
Potential Termination and Change in Control Benefits Tables
The tables below under this heading illustrate an estimated amount of compensation potentially payable to
each named executive officer upon termination of such executive’s employment under various scenarios. Any
amount ultimately received will vary based on a variety of factors, including the reason for such executive’s
termination of employment, the date of such executive’s termination of employment, and the executive’s age
upon termination of employment. The amounts shown assume that such termination was effective as of
December 31, 2008, 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
Cash Severance . . . . . . . . . . $
Unvested Equity . . . . . . . . .
Options . . . . . . . . . . . . . . $
Restricted Stock . . . . . . . $
Performance Stock
—
—
—
$ —
$
$ — $
$ — $
Units . . . . . . . . . . . . . . $
Bonus Stock Awards . . . . $
—
—
Retirement Benefits (2) . . . . $5,049,082
Health and Welfare
$ — $
$ — $
$
$5,049,082(4)
—
—
—
—
—
Termination
Without
Cause or for
Good Reason
Termination
Without
Cause or for
Good Reason
For Cause
Termination
Death
Disability
$
$
$
— $
— $
— $
—
—
—
$
$
$
— $
— $
— $
— $
— $
— $
—
—
—
— $
— $
$
$
$5,049,082 $5,049,082(4) $5,049,082 $5,049,082 $5,049,082
— $
— $
— $
— $
—
—
—
—
$
$
Benefits . . . . . . . . . . . . . . $
Disability Income (3) . . . . . $
Life Insurance
—
—
$ — $
$ — $
—
—
$
$
— $
— $
—
—
$
$
— $
— $
— $
— $
—
—
—
Benefits (3) . . . . . . . . . . . $
Excise Tax Gross-up . . . . . . $
—
ESTIMATED TOTAL . . . $5,049,082
$ — $
$ — $
$ — $
—
—
5,049,082
— $
$
$
— $
$5,049,082 $
—
—
— $
— $
5,049,082 $5,049,082 $5,049,082 $5,049,082
— $
— $
—
—
$
$
(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) Reflects the estimated single sum present value of qualified and non-qualified retirement plans accumulated as of December 31, 2008,
which Mr. Hochhauser would be entitled to receive starting upon reaching age 65. Actual payments are made over time, not in a lump
sum. 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, 2008, Mr. Hochhauser had
not attained our normal retirement age of 65.
(3) Mr. Hochhauser retired in February 2008 and, therefore, was not eligible for company disability benefits or supplemental life insurance
benefits at year-end 2008.
(4)
In the event of a “for cause” termination related to dishonest conduct, the Compensation Committee may deny vested retirement benefits
to Mr. Hochhauser.
49
DEAN BLYTHE(1)
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
$ —
$ —
$ —
$ —
$ —
$226,698
$ —
$ —
$ —
$ —
$226,698
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$ —
$ —
$ —
$ — $ — $ —
$ —
$ —
$ —
$ —
$226,698(4)
$ —
$ —
$ —
$ —
$226,698
$ —
$ —
$ —
$ —
$226,698
$ —
$ —
$ —
$ —
$226,698
$ —
$ —
$ —
$ —
$226,698(4)
$ — $ — $ —
$ — $ — $ —
$ — $ — $ —
$ — $ — $ —
$226,698
$226,698 $226,698
$ —
$ —
$ —
$ —
$226,698
$ — $ — $ —
$ — $ — $ —
$ — $ — $ —
$ — $ — $ —
$226,698
$226,698 $226,698
Benefit
Cash Severance . . . . . . . . . . .
Unvested Equity . . . . . . . . . . .
Options . . . . . . . . . . . . . . . .
Restricted Stock . . . . . . . . .
Performance Stock Units . .
Bonus Stock Awards . . . . .
Retirement Benefits (2) . . . . .
Health and Welfare
Benefits . . . . . . . . . . . . . . .
Disability Income (3) . . . . . . .
Life Insurance Benefits (3) . . .
Excise Tax Gross-up . . . . . . .
ESTIMATED TOTAL . . . . .
(1) On December 15, 2008, Harte-Hanks and Mr. Blythe entered into a transition agreement, which superseded Mr. Blythe’s previous
change of control severance agreement dated June 27, 2008. Please refer to the section above entitled, “Payments Pursuant to Severance
Agreements” for a description of the benefits provided to Mr. Blythe under his transition agreement.
(2) Reflects the estimated single sum present value of qualified and non-qualified retirement plans accumulated as of December 31, 2008,
which Mr. Blythe would be entitled to receive starting upon reaching age 65. Actual payments are made over time, not in a lump sum.
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, 2008, Mr. Blythe had not attained our normal
retirement age of 65.
(3) Mr. Blythe’s employment term ended on December 31, 2008 and, therefore, he was no longer eligible for company disability benefits or
supplemental life insurance benefits upon the end of his employment term.
(4)
In the event of a “for cause” termination related to dishonest conduct, the Compensation Committee may deny vested retirement benefits
to Mr. Blythe.
50
PETE GORMAN
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) . . . . . . . .
— $
— $
—
$ 805,730 $
—
$ 805,730 $
— $
—
Options . . . . . . . . . . . . . . . . $
Restricted Stock . . . . . . . . . $
Performance Stock Units . . $
Bonus Stock Awards (2) . . . $
—
—
—
16,430
Retirement Benefits (3) . . . . . . $1,618,123 $1,776,951(7) $1,618,123(8) $1,618,123 $1,618,123(8) $1,618,123 $1,618,123 $1,618,123
Health and Welfare
— $
62,712 $
62,712 $
16,430 $
— $
62,712 $
62,712 $
16,430 $
— $
— $
— $
16,430 $
— $
— $
— $
16,430 $
— $
— $
— $
$
—
62,712
62,712
16,430
—
—
—
—
16,430
$
$
$
$
$
$
$
$
Benefits (4) . . . . . . . . . . . . . $
Disability Income (5) . . . . . . . $
Life Insurance Benefits (6) . . . $
Excise Tax Gross-up . . . . . . . . $
ESTIMATED TOTAL . . . . . $1,634,553 $1,793,381
— $
— $
— $
— $
— $
— $
— $
— $
—
—
—
—
$1,618,123
19,427 $
— $
— $
— $
$
$
$
$
$2,585,134 $1,759,977
—
—
—
—
19,427 $
— $
— $ 900,000 $
— $
— $
$
$
$
$
$2,585,134 $2,534,553 $2,368,631
— $
—
— $ 734,078
—
—
(1) Values are calculated based on the closing price of our common stock of $6.24 on December 31, 2008. Pursuant to the executive’s
previously described severance agreement, all unvested equity-based awards vest upon a change in control (as defined) without regard to
termination of the executive’s employment. Mr. Gorman’s agreement also provides that his unvested equity-based awards vest upon his
termination prior to a change of control either (a) by Harte-Hanks without justification, or (b) by Mr. Gorman for good reason, as defined
in his agreement.
(2)
In addition to the accelerated vesting described in note (1) above, unvested bonus stock awards also vest upon termination of
employment by (a) death, (b) disability, (c) retirement, or (d) at such other time as determined by the Board of Directors or
Compensation Committee. 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, 2008, which Mr. Gorman would be entitled to receive starting upon reaching age 65. Actual payments are made over
time, not in a lump sum. 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, 2008, 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 $90,000 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, 2008.
(8)
In the event of a “for cause” termination related to dishonest conduct, the Compensation Committee may deny vested retirement benefits
to Mr. Gorman.
51
DOUG SHEPARD
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
$ —
$ —
$ —
$ —
$ —
$18,149
$ —
$ —
$ —
$ —
$18,149
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$ —
$ —
$ —
$630,000
$ — $
—
$ —
$ —
$ —
$ —
$18,149
$ —
$ —
$ —
$ —
$18,149
$ —
$ —
$ —
$ —
$18,149
$ —
$ —
$ —
$ —
$18,149
$ —
$46,800
$15,600
$ —
$18,149
$ —
$ —
$ —
$ —
$80,549
$ — $ — $
$ — $
$ 46,800
$ 15,600
$ — $
$ — $ — $
$ 18,149 $
$ 18,149
—
—
—
—
18,149
—
$ — $
$ 28,126
$ — $ — $3,661,093
—
$ — $700,000 $
$ — $ — $
—
$738,675
$718,149 $3,679,242
Benefit
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 . . . . .
(1) Values are calculated based on the closing price of our common stock of $6.24 on December 31, 2008. Pursuant to the executive’s
previously described severance agreement, all unvested equity-based awards vest upon a change in control (as defined) without regard to
termination of the executive’s employment.
(2) Reflects the estimated single sum present value of qualified and non-qualified retirement plans accumulated as of December 31, 2008,
which Mr. Shepard would be entitled to receive starting upon reaching age 65. Actual payments are made over time, not in a lump sum.
Acceleration of vesting occurs in the event of a change of control. However, since Mr. Shepard 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, 2008, Mr. Shepard had not attained our
normal retirement age of 65.
(3) Reflects the lump-sum payment to be paid by us to Mr. Shepard 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. Shepard would be entitled to receive under our disability
program. Mr. Shepard 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. Shepard’s life insurance benefits, payable over the 10
year period following death.
52
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
$ —
$ —
$ —
$ —
$ —
$1,032,863
$
— $
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ 65,052
$
$
— $
$
65,052
— $
— $
—
—
—
Benefit
Cash Severance . . . . . . . . . . .
Unvested Equity (1)
Options . . . . . . . . . . . . . . .
Restricted Stock . . . . . . . .
Performance Stock
Bonus Stock Awards (2)
Units . . . . . . . . . . . . . . .
. .
. . . .
Retirement Benefits (3)
Health and Welfare
Benefits (4) . . . . . . . . . . . .
Disability Income (5) . . . . . .
Life Insurance Benefits (6) . .
Excise Tax Gross-up . . . . . . .
ESTIMATED TOTAL . . . .
$ —
$ 19,506
$531,242
$ —
$ —
$ —
$ —
$550,748
$ —
$19,506
$ —
$ —
$ —
$ —
$ —
$19,506
$ —
$ —
$531,242(7)
$ —
$ —
$531,242
65,052
$ 65,052
$ 19,506
19,506
$531,242(7) $ 531,242
$
$
— $
19,506 $
—
$
$
19,506
$ 531,242 $ 531,242
$ —
$ —
$ —
$ —
$531,242
$ —
$ —
$ —
$ —
$531,242
$ —
$ —
$ —
$ —
$680,852
— $
— $1,817,618
—
$
— $
— $ 900,000 $
— $
— $
15,823
$
$
$
$
$1,729,538
$1,450,748 $2,368,366
—
—
(1) Values are calculated based on the closing price of our common stock of $6.24 on December 31, 2008. Pursuant to the executive’s
previously described severance agreement, all unvested equity-based awards vest upon a change in control (as defined) without regard to
termination of the executive’s employment.
(2)
In addition to the accelerated vesting described in note (1) above, unvested bonus stock awards also vest upon termination of
employment by (a) death, (b) disability, (c) retirement, or (d) at such other time as determined by the Board of Directors or
Compensation Committee. 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, 2008,
which Mr. Skidmore would be entitled to receive starting upon reaching age 65. Actual payments are made over time, not in a lump sum.
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, 2008, 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 $90,000 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.
53
BRYAN PECHERSKY
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
$ —
$ —
$ —
$ —
$ —
$14,074
$ —
$ —
$ —
$ —
$14,074
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$ —
$ —
$ —
$540,000
$ — $
—
$ —
$ —
$ —
$ —
$14,074(6)
$ —
$ —
$ —
$ —
$14,074
$ —
$ —
$ —
$ —
$14,074
$ —
$ —
$ —
$ —
$14,074
$ —
$ 62,400
$ 31,200
$ —
$ 14,074(6)
$ — $ — $
$ — $
$ 62,400
$ 31,200
$ — $
$ — $ — $
$ 14,074 $
$ 14,074
—
—
—
—
14,074
$ —
$ —
$ —
$ —
$107,674
—
$ — $
$ 28,475
$ — $ — $3,559,435
—
$ — $700,000 $
$ — $ — $
—
$676,149
$714,074 $3,573,509
Benefit
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 . . . . .
(1) Values are calculated based on the closing price of our common stock of $6.24 on December 31, 2008. Pursuant to the executive’s
previously described severance agreement, all unvested equity-based awards vest upon a change in control (as defined) without regard to
termination of the executive’s employment.
(2) Reflects the estimated single sum present value of qualified and non-qualified retirement plans accumulated as of December 31, 2008,
which Mr. Pechersky would be entitled to receive starting upon reaching age 65. Actual payments are made over time, not in a lump
sum. Acceleration of vesting occurs in the event of a change of control. However, since Mr. Pechersky 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, 2008, Mr. Pechersky had
not attained our normal retirement age of 65.
(3) Reflects the lump-sum payment to be paid by us to Mr. Pechersky 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. Pechersky would be entitled to receive under our disability
program. Mr. Pechersky 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. Pechersky’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. Pechersky.
54
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. In November 2008, in light of the ongoing economic
downturn in the United States and other economies, the Board approved a 10% reduction to the annual retainer
for Board service and the Chairman’s fee. The Chairman’s fee was subsequently eliminated because our current
Chairman, Mr. Franklin, has served as our President and CEO since January 2009.
Element
Annual Cash
Retainer for Board
Service
Annual Cash
Retainer for
Committee Chairs
Cash Meeting Fees
Annual Equity
Election In Lieu of
Cash Fees
2009 Annual Equity
Awards
•
•
•
•
•
•
•
•
•
•
Description
Payable to “independent” Board members, as determined by the
Board in accordance with applicable rules.
Audit Committee Chair
Compensation Committee Chair
Nominating and Corporate Governance Committee Chair
Per in-person Board meeting attended (payable to independent
directors)
Amount
$45,000
$10,000
$5,000
$2,000
$2,000
in-person Committee meeting attended (payable
Per
applicable Committee members)
to
$1,000
Per telephonic Board meeting attended (payable to independent
directors)
telephonic Committee meeting attended (payable to
Per
applicable Committee members)
Each independent director may elect, annually or in connection
with such director’s appointment to the Board, to receive all or a
portion of such director’s cash compensation otherwise payable
for such director’s services in shares of the company’s common
stock.
These shares of common stock are granted as soon as
administratively practicable following the end of each of the
company’s fiscal quarters. The number of shares delivered is
based on the market value of one share of the company’s
common stock on the NYSE as of
the
immediately preceding quarter, in accordance with the 2005
Plan.
the last day of
For the calendar year 2009, each independent director, including
new director Karen Puckett,
restricted
common stock, with a grant date of February 5, 2009 (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.
received shares of
$750
$750
Up to 100% of a
director’s cash
compensation
Shares equal to
$50,000
55
Element
Description
Amount
Initial Equity Award
for New Director
Karen Puckett
Other
•
•
•
•
•
•
The number of shares of restricted stock delivered was based on
the market value of one share of the company’s common stock on
the NYSE on the grant date, in accordance with the 2005 Plan.
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.
In connection with Ms. Puckett’s appointment to the Board as an
independent director in January 2009, she received (in addition to
the annual award specified above) a one-time initial equity award
of shares of restricted common stock, with a grant date of February
5, 2009 and which vest 100% on the third anniversary of their
grant date.
5,000 shares
of
restricted
common
stock
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.
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 2008.
The Compensation Committee has the sole authority to retain or terminate a consulting firm engaged to
assist in the evaluation of director compensation. From time to time, the Compensation Committee reviews
surveys and other information provided by outside consultants to provide insights on director compensation
matters. Our director compensation is structured predominantly based upon the results of such reviews 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.
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’ then-current director compensation program and
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 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:
56
(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 then-current annual equity grant practices for directors.
In November 2008, in light of the current ongoing economic downturn in the United States and other
economies, the Board reduced the annual cash retainer for Board service from $50,000 to $45,000, and reduced
the annual cash Chairman’s fee from $200,000 to $180,000.
In January 2009, based on the recommendation of the Compensation Committee, the Board decided to
maintain the same director compensation levels in 2009 as the reduced compensation levels in 2008. The
Chairman’s fee was eliminated because our current Chairman, Mr. Franklin, has served as our President and
CEO since January 2009. The Compensation Committee did not engage an outside consulting firm during 2008
for the Committee’s 2009 director compensation recommendations to the Board, and the Compensation
Committee has not yet determined whether it will engage an outside consulting firm during 2009 for its 2010
director compensation recommendations.
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, based on the current annual retainer, stock valued at $90,000). As of
December 31, 2008, each director (other than Ms. Puckett, who joined the Board in January 2009) owned at least
this amount of Harte-Hanks stock.
2008 Director Compensation for Non-Employee Directors
The following table shows 2008 compensation recognized for financial statement reporting purposes of our
non-employee directors. Consequently, the amounts reflected in the “Stock Awards” and “Options Awards”
columns below also include compensation expense amounts from awards granted in prior years.
Name
(a)
David L. Copeland . . . . . . . . . . . . . . . .
William F. Farley . . . . . . . . . . . . . . . . .
Larry D. Franklin (7) . . . . . . . . . . . . . .
William K. Gayden . . . . . . . . . . . . . . .
Christopher M. Harte . . . . . . . . . . . . . .
Houston H. Harte . . . . . . . . . . . . . . . . .
Judy C. Odom . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
Karen A. Puckett (9)
Fees
Earned or
Paid in
Cash ($)
(1)
(b )
$ 77,917
$ 70,667 (6)
$200,833
$ 64,667 (8)
$ 73,917 (8)
$ —
$ 71,167
$ —
Stock
Awards
($) (2) (3)
(c)
$48,798
$48,798
$ —
$48,798
$48,798
$ —
$48,798
$ —
Option
Awards
($) (2) (4)
(d)
$14,509
$18,119
$ —
$14,509
$14,509
$ —
$17,970
$ —
All Other
Compensation
($) (5)
(e)
$2,100
$2,100
$ —
$2,100
$2,100
$ —
$2,100
$ —
Total ($)
(f)
$143,324
$139,684
$200,833
$130,074
$139,324
$ —
$140,035
$ —
(1) Fees were paid in cash, unless otherwise designated.
(2) These amounts in columns (c) and (d) reflect the aggregate compensation expense for financial statement
reporting purposes for fiscal 2008 under SFAS 123R, for restricted stock and stock option grants in 2008
and prior years. These amounts do not reflect amounts paid to or realized by the director for fiscal 2008.
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, 2008 included in our Form 10-K.
57
(3) Each of the independent directors was granted 3,144 shares of restricted stock in 2008 with grant date fair
values, computed in accordance with SFAS 123R, of $49,990. 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 2008. Other than Ms. Puckett, each of
our independent directors had 13,400 option awards outstanding as of December 31, 2008 based on grants in
previous years. While each of these independent directors holds 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.
(6) Fees totaling $35,333 were paid in cash and the remaining $35,334 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. In November 2008, in light of
the current ongoing economic downturn in the United States and other economies, the Board reduced the
annual cash Chairman’s fee from $200,000 to $180,000. During 2008, 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. Since January 1, 2009, Mr. Franklin has
served as our President and CEO, in addition to remaining Chairman.
(8) All fees were paid in the form of company stock at the director’s election.
(9) Ms. Puckett joined the Board in January 2009.
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, 2008.
Name
Number of
Outstanding
Shares of
Restricted
Stock (#)
Number of
Outstanding
Stock
Options (#)
Total (#)
David L. Copeland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William F. Farley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Larry D. Franklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William K. Gayden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Christopher M. Harte . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Houston H. Harte . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Judy C. Odom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Karen A. Puckett (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,999
6,999
—
6,999
6,999
—
6,999
—
20,399
13,400
13,400
20,399
303,000 (1) 303,000
20,399
20,399
—
20,399
—
13,400
13,400
—
13,400
—
(1) As of December 31, 2008, Mr. Franklin had 303,000 option awards outstanding, all of which were awarded
during Mr. Franklin’s former service as an executive officer of the Company.
(2) Ms. Puckett joined the Board in January 2009.
58
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. “Committee”, within
this Report of the Audit Committee, means the Audit Committee.
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.
The Committee acts 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.
The Committee meets with management periodically to consider the scope and adequacy of the company’s
internal controls and the objectivity of its financial reporting and discusses these matters with the company’s
the company’s internal auditors and appropriate company financial personnel. The
independent auditors,
Committee also meets 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 the Committee upon request.
In addition, the Committee reviews the company’s financial statements and reports its 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, the Committee has relied, without
independent verification, on management’s representations that the financial statements have been prepared in
conformity with U.S. generally accepted accounting principles (GAAP) and on representations of the company’s
independent auditors included in their report on the company’s financial statements. The Committee’s
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,
the Committee’s
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 U.S. 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
59
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
reporting. The Committee’s
responsibility is to oversee and review the financial reporting process and to review and discuss management’s
report on the company’s internal control over financial reporting.
financial
The Committee held 11 meetings during 2008. The meetings were designed, among other things, to
facilitate and encourage communication among the Committee, management, the internal auditors and KPMG.
The Committee discussed with the company’s internal auditors and KPMG the overall scope and plans for their
respective audits. In addition, the Committee reviewed the audited consolidated financial statements for the 2008
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.
The Committee reviewed and discussed (i) the company’s compliance with Section 404 of the Sarbanes-
Oxley Act of 2002, including the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard
No. 5 regarding the audit of internal control over financial reporting, (ii) the company’s guidelines, policies and
procedures for financial risk assessment and management and the major financial risk exposures of the company
and its business units, as appropriate, (iii) the audited consolidated financial statements for the fiscal year ended
December 31, 2008 with management, the internal auditors and KPMG, and (iv) 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.
The Committee 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, the
Committee discussed with management, the internal auditors and KPMG the processes supporting management’s
annual report on the company’s internal controls over financial reporting. The Committee 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.
The Committee discussed with KPMG matters that independent accounting firms must discuss with audit
committees. The Committee’s discussions included U.S. 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 provided by applicable requirements of
the PCAOB and represented that it is independent from the company. The Committee discussed with KPMG its
independence from the company. When considering KPMG’s independence, the Committee reviewed the services
KPMG provided to the company that were not in connection with its audit of the company’s consolidated financial
statements. These services included reviews of the company’s interim condensed consolidated financial statements
included in its Quarterly Reports on Form 10-Q. The Committee 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, the Committee considered any fees received by the company from KPMG.
Based on these activities,
the company’s audited
consolidated financial statements for the fiscal year ended December 31, 2008 be included in the company’s
Annual Report on Form 10-K. The Committee also has selected KPMG as the company’s independent auditors
for the fiscal year ended December 31, 2009.
the Committee recommended to the Board that
Audit Committee
David L. Copeland, Chairman
William F. Farley
Christopher M. Harte
60
Independent Auditors
Representatives of KPMG LLP, who were our independent auditors for the year 2008, are expected to be
present at the 2009 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, 2009.
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 2007 and 2008.
Audit Fees (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit Related Fees (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Fees (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,067,815
$ 103,660
33,565
$
—
$ 926,250
90,865
$
33,570
$
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,205,040
$1,050,685
2007
2008
(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 2008 and 2007.
(3) Fees for tax services and matters principally relating to the company’s foreign operations.
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 I 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 Class I directors will expire at the 2009 annual meeting. The Class I
directors elected in 2009 will serve for a term of three years, which expires at the annual meeting of stockholders
in 2012 or when their successors are duly elected and qualified.
The nominees for Class I directors are (1) David Copeland and (2) Christopher Harte, each of whom is a
current member of our Board. Each of the nominees has indicated his willingness to serve as a member of the
Board if 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
61
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 intend to vote their shares FOR
each of the Class I director nominees.
Board Recommendation on Proposal
The Board of Directors unanimously recommends a vote FOR the election of each of the Class I director
nominees 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 2009 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.
We believe that our directors and officers intend to vote their shares FOR this proposal.
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 2009. The management proxy holders will vote all duly
submitted proxies FOR ratification unless duly instructed otherwise.
62
APPROVAL AND ADOPTION OF AMENDMENT TO 2005 OMNIBUS INCENTIVE PLAN
TO INCREASE AUTHORIZED SHARES
PROPOSAL III
Description of Proposal
In May 2005, we adopted the 2005 Plan, a stockholder approved plan, pursuant to which we may issue
various equity securities to employees, directors and consultants selected for participation. The 2005 Plan forms
the basis of our long-term incentive plan. 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. The 2005 Plan also forms the basis for our
annual cash incentive plan for Section 162(m) executives.
In January 2009, our Board, based on the recommendation of our Compensation Committee, determined
that it is in the best interests of Harte-Hanks to amend the 2005 Plan, subject to stockholder approval, to increase
the number of shares of common stock available under the 2005 Plan by an additional 4,600,000 shares.
Accordingly, this Proposal III seeks approval of an amendment (Amendment) to the 2005 Plan to increase the
maximum total number of shares of common stock that we may issue by 4,600,000 from 4,570,000 to 9,170,000
shares. The proposed form of Amendment to the 2005 Plan is included as Annex A to this proxy statement. The
Amendment will not become effective unless approved by our stockholders.
The following table illustrates the impact of the Amendment on the number of shares available for future
awards under the 2005 Plan, as of March 2, 2009:
Shares Available for Future Awards Under 2005 Plan (1)
Shares Originally Authorized for
Issuance Under 2005 Plan
Remaining Shares Available Prior to
Approval of Amendment
(As of March 2, 2009)
Remaining Shares Available Assuming
Approval of Amendment
(As of March 2, 2009)
4,570,000
200,162
4,800,162
(1) Number of shares is subject to adjustment and calculation as provided by the 2005 Plan.
The purpose of the increase in authorized shares is to secure adequate shares to fund expected awards under
our long-term incentive program through approximately the annual award in early 2012, after which we currently
expect to need to seek stockholder approval for additional shares. Our equity compensation practices and
amounts are reviewed regularly by our Compensation Committee and Board, and may change over time based on
a variety of factors, including the market value of our common stock. Accordingly, we may need to seek
stockholder approval of additional shares prior to the 2012 annual stockholders meeting, or we may not need to
seek such stockholder approval until a subsequent year.
63
The Board believes that the requested additional authorized shares represent a reasonable amount of
potential equity dilution over time and will allow Harte-Hanks to continue awarding equity incentives, which are
a significant component of our overall compensation program. The following two tables illustrate (1) as of
March 2, 2009, the potential impact of the additional shares provided by the Amendment on equity dilution and
equity overhang, as defined in the first table, and (2) historical annual burn rate information for 2008, 2007 and
2006, as defined in the second table:
Potential Equity Impact of Amendment
(As of March 2, 2009)
Row
Equity Data
Before Amendment
After Amendment
A # Shares Available for Future Awards Under Equity
Compensation Plan (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200,162 shares
4,800,162 shares
B # Shares Issuable Upon Exercise of Outstanding Options and
Vesting of Outstanding Restricted Stock and Performance
Restricted Stock Units (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,951,811 shares(3) 7,951,811 shares(3)
C Total # Shares (A + B)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,151,973 shares
12,751,973 shares
D # Basic Common Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . .
63,568,000 shares
63,568,000 shares
E Equity Dilution: Row A as % of Row D . . . . . . . . . . . . . . . . . . . . .
0.31%
F Equity Overhang: Row C as % of (Row D + Row C) . . . . . . . . . . .
11.37%
7.55%
16.71%
(1) We currently have one equity compensation plan pursuant to which future awards or shares of common
stock may be issued — the 2005 Plan. The 1994 Employee Stock Purchase Plan was terminated effective
March 31, 2009. At March 2, 2009, we had 1,855,651 shares available for future awards under our
Employee Stock Purchase Plan. Because the Employee Stock Purchase Plan has been terminated, those
shares are not reflected in this table. 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.
(2)
Includes awards outstanding as of March 2, 2009 under the 2005 Plan (stock options, restricted common
stock and performance restricted stock units) and 1991 Plan (stock options).
(3) Approximately 46% of these shares are from prior 1991 Plan options, which have a weighted average
exercise price of $19.80 per share. On March 2, 2009, the closing price of our common stock on the NYSE
was $5.20 per share. No additional options will be granted under the 1991 Plan.
3-Year Historical Burn Rate
Fiscal Year
(A)
Options Granted
(B)
2008 . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . .
1,083,550
1,028,125
808,875
Full Value Awards Granted
(Restricted Stock and
Performance Restricted
Stock Units)
(C)
Weighted Average
Common Shares
Outstanding
(D)
Burn Rate (1)
(E)
96,605
130,484
130,799
Average 3-Year Burn Rate . . . . . .
63,933,000
72,524,000
79,049,000
1.85%
1.60%
1.19%
1.55%
(1) Calculated as the sum of columns (B) + (C), as a percentage of column (D).
We believe that our directors and officers intend to vote their shares FOR this proposal.
64
Board Recommendation on Proposal
The Board of Directors unanimously recommends a vote FOR the adoption and approval of the Amendment
to the 2005 Plan. The management proxy holders will vote all duly submitted proxies FOR adoption and
approval of the Amendment unless duly instructed otherwise. All members of the Board are eligible for awards
under the 2005 Plan and thus have a personal interest in the approval of the Amendment.
Description of Existing 2005 Plan
The following is a description of the principal features of the existing 2005 Plan and does not reflect
approval of the Amendment. This description is qualified in its entirety by reference to the full text of the 2005
Plan, as amended and restated effective February 13, 2009, which can be found by reference to Exhibit 10.1 to
Harte-Hanks’ Form 8-K, dated February 13, 2009, and is incorporated by reference herein. Capitalized terms
used in this description, but not otherwise defined, have the meanings given to them in the 2005 Plan.
General
Purposes. The principal purposes of the 2005 Plan include creating a plan that allows the Board or its
designee to:
•
•
•
provide employees, directors and consultants selected for participation (Participants) with added
incentives to continue in service to Harte-Hanks,
create in Participants a more direct interest in the future success of the operations of Harte-Hanks by
relating incentive compensation to the achievement of long-term corporate economic objectives, and
attract, retain and motivate Participants by providing them an equity investment in Harte-Hanks.
Types of Awards. Under the 2005 Plan, several
types of awards (Awards) can be made including:
non-qualified stock options and incentive stock options (collectively, Stock Options), stock appreciation rights
(SARs), restricted stock, restricted stock units, Common Stock, performance-based grants payable in cash or any
of the above-listed equity Awards, or any other Award established pursuant to the 2005 Plan that may be granted
under the 2005 Plan.
•
•
Stock Options: rights to purchase a specified number of shares of Common Stock at a specified
price for a given term. Stock Options may be: (a) incentive stock options (ISOs), which are intended
to meet the requirements of Section 422 of the Code, and as such, offer certain beneficial tax
treatment to Participants as described below; and (b) non-qualified stock options, which do not meet
the requirements of Section 422 of the Code.
Stock Appreciation Rights: rights to receive payment from Harte-Hanks equal to the difference
between the Fair Market Value of one or more shares of Common Stock and the exercise price of
the SAR. If awarded, SARs will be paid out in shares of Common Stock.
• Restricted Stock: grants of Common Stock that are subject to substantial risk of forfeiture until
certain conditions or restrictions on vesting or transferability lapse.
• Restricted Stock Units: rights to receive payment on a future date from Harte-Hanks for the value of
Common Stock in the form of Common Stock or cash.
• Director Common Stock: grants of Common Stock to non-employee directors in lieu of cash
compensation.
65
• Dividend Equivalents: rights to receive the equivalent value (in cash or Common Stock) of
dividends paid on Common Stock.
•
Performance Award: grants payable in cash, Common Stock or another form of Award based upon
the achievement of specified performance targets.
• Common Stock: grants of Common Stock that are not subject to transfer or forfeiture restrictions.
Administration. The 2005 Plan may be administered by the Board or a committee of the Board. The
Compensation Committee, comprised entirely of non-employee directors, administers the 2005 Plan. The
Compensation Committee has broad powers to administer and interpret the 2005 Plan, including the authority to
select the Participants, determine the amount and type of Awards to Participants, prescribe terms and conditions
not otherwise specified by the 2005 Plan for each Award, and amend or modify the terms and conditions of any
Award, including accelerating vesting and waiving forfeiture restrictions. The Board must administer the 2005
Plan with respect to any Awards to non-employee directors. The Compensation Committee may delegate some of
its authority to one or more members of the Compensation Committee or officers of Harte-Hanks, Inc. The
Compensation Committee has delegated to our President and CEO limited Stock Option grant authority for
non-officer new hires and promotions. This delegation does not apply to any of our executive officers.
Additionally, the Board has the right to terminate the 2005 Plan before its termination date. However, none of the
above actions may adversely affect the rights or obligations of any Participant’s outstanding Awards without that
particular Participant’s consent.
No Repricing. Neither the Compensation Committee nor the Board has the authority to take any action that
would constitute a repricing of Stock Options.
its discretion,
Eligibility and Participation. At
the Compensation Committee may grant Awards to
employees, non-employee directors and consultants of Harte-Hanks,
Inc. and its subsidiaries. As of
December 31, 2008, we employed approximately 5,900 full-time employees and 400 part-time employees, and
had seven members on our Board of Directors. In connection with the February 2009 annual grants under the
2005 Plan, the Compensation Committee awarded Stock Options to 229 employees and shares of Restricted
Stock to each of our six current independent directors. Because future grants of Awards under the 2005 Plan are
subject to the discretion of the Board or Compensation Committee or to the discretion of our President and CEO
for Awards included within his limited delegation, the amount and terms of future Awards to particular
participants or groups of participants are not determinable at this time. No Awards have been previously granted
that are contingent on the approval of the proposed Amendment to the 2005 Plan.
66
The following table shows Awards during 2008 under our 2005 Plan to (1) each of our named executive
officers, (2) all of our current executive officers as a group, (3) all of our current non-employee directors as a
group, and (4) all of our current non-executive officer employees as a group. The proposed Amendment to the
2005 Plan would not have impacted these amounts had the Amendment been in place during fiscal 2008, because
there were sufficient remaining authorized shares already available in 2008 for these Awards prior to the
Amendment.
Individual or Group (1)
Hochhauser (Former CEO) (3)
. . . . . . . . . . . . . .
Blythe (Former President & CEO) (4) . . . . . . . . .
Shepard (Executive Vice President and
Number of
Options
Awarded in 2008
—
100,000
Grant Date
Fair Value of
Options
($) (2)
—
$ 408,370
Numbers of
Shares of
Restricted Stock
Awarded in 2008
Grant Date
Fair Value of
Restricted Stock
($) (2)
—
7,125
—
$113,288
Chief Financial Officer) . . . . . . . . . . . . . . . . . .
15,000
$
61,256
—
—
Gorman (Executive Vice President and
President, Shoppers) . . . . . . . . . . . . . . . . . . . . .
45,000
$ 183,767
4,000
$ 63,600
Skidmore (Executive Vice President and
President, Direct Marketing) . . . . . . . . . . . . . .
45,000
$ 183,767
4,000
$ 63,600
Pechersky (Senior Vice President,
General Counsel and Secretary) . . . . . . . . . . . .
. . . . . . .
Current Executive Officers (as a group)
Current Non-Employee Directors (as a group) . .
Current Non-Executive Employees
25,000
145,000
—
$ 102,093
$ 592,137
—
2,500
11,750
15,720
$ 39,750
$186,825
$249,948
(as a group) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
753,550
$3,077,272
58,242
$926,048
(1)
In addition to Stock Options and shares of Restricted Stock, the Committee also awarded shares of
performance-based Restricted Stock Units to our executives in 2008. However, as of December 31, 2008,
none of the performance goals associated with any outstanding performance-based Restricted Stock Units
are expected to be achieved, which would result in no shares vesting. Accordingly, these Restricted Stock
Units are not reflected in this table.
(2) The amounts shown represent the full grant date fair value of the Stock Options and Restricted Stock
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, 2008 included in our Form 10-K.
(3) As a result of Mr. Hochhauser’s retirement in February 2008, he did not receive any Awards under the 2005
Plan during 2008.
(4) As a result of Mr. Blythe’s departure at year-end 2008, all of his previously awarded Restricted Stock,
performance-based Restricted Stock Units, and unvested 2005 Plan Options were forfeited or lapsed upon
the end of his employment term. Mr. Blythe’s vested 2005 Plan Options remained exercisable for 90 days
after the end of his employment term, to the extent vested at the end of his employment term.
For additional information about previous Awards under the 2005 Plan, including Awards to our named
executive officers and our directors, please refer to (1) the sections above in this proxy statement entitled,
“Executive Compensation,” and “Director Compensation,” and (2) note I (Stock-Based Compensation) of our
audited financial statements for the fiscal year ended December 31, 2008 included in our Form 10-K.
Calculation of Shares Granted and Available for Grant. Shares of Common Stock that are issued pursuant
to the grant or exercise of Awards will reduce the number of shares remaining available for future issuance under
the 2005 Plan. If an Award granted under the 2005 Plan expires or is terminated or forfeited, the shares
underlying the Award will again be available for grant under the 2005 Plan. In addition, to the extent shares of
Common Stock are used to pay the exercise price of any Stock Options or to satisfy tax withholding obligations,
67
an equal number of shares will become available for issuance under the 2005 Plan. Prior to the increase in
authorized shares provided by the proposed Amendment to the 2005 Plan, the 2005 Plan has reserved 4,570,000
shares of Common Stock for issuance. The maximum number of shares of Common Stock reserved for issuance
under the 2005 Plan may be increased by approval of the Board and the stockholders.
Fair Market Value. For purposes of the 2005 Plan, the Fair Market Value of a share of Common Stock is
equal to the closing price on the NYSE of a share of Common Stock on the last trading day prior to the date in
question, except that for same-day sales of Stock Options, the Fair Market Value of the Common Stock at the
time of exercise will be the price at which the Common Stock is sold. The closing price of the Common Stock on
the NYSE on March 2, 2009 was $5.20 per share.
Term, Amendment and Termination of the 2005 Plan. The 2005 Plan will expire 10 years from the date it
was approved by our stockholders at the 2005 annual meeting, unless terminated by the Board before that date.
Any Awards outstanding on that date will continue to remain outstanding in accordance with their respective
terms. The 2005 Plan may be amended or discontinued by the Board at any time, unless stockholder approval is
required or desirable under applicable law or regulation.
Transferability. Except as otherwise approved by the Compensation Committee or under a qualified
domestic relations order from a court, no Award is assignable or transferable during the lifetime of the
Participant, either voluntarily or involuntarily. In the event of a Participant’s death, his or her rights and interests
in an Award will be transferable by testamentary will or the laws of descent or distribution.
Stock Options and Stock Appreciation Rights
Grants. The Compensation Committee establishes the number of shares and the terms, including any
applicable vesting periods, underlying Stock Options and SARs. The term of Stock Options may not exceed 10
years, and in certain circumstances for ISOs, the term may be limited to five years. The exercise price for Stock
Options and SARs cannot be less than the Fair Market Value on the date of grant, but the Compensation
Committee may establish an exercise price higher than the Fair Market Value.
Payment of Exercise Price. Payment for shares purchased upon exercise of a Stock Option must be made in
full at the time of purchase. Payment may be made in cash, check, or other shares of Common Stock (with some
restrictions). With the approval of Harte-Hanks, payment may also be made by broker-assisted same-day sales or
by Harte-Hanks withholding enough Common Stock otherwise deliverable upon exercise to pay the exercise
price (the value of the Common Stock being determined on the date of exercise). Upon exercising a Stock
Option, a Participant must also pay any required tax withholding. Such tax withholding may be satisfied in cash
or shares of Common Stock, as determined by Harte-Hanks.
Termination of Service. The vesting of Stock Options and SARs ends on the date service to Harte-Hanks
ends. Generally, Participants have 90 days after termination to exercise vested Stock Options and vested SARs. If
the termination is due to death or disability, the exercise period is typically extended to one year. If the
Participant is terminated for cause or is in material breach of a legal obligation to Harte-Hanks, the exercise
period for Stock Options and SARs ends on the date of termination. Different vesting and exercise periods may
apply if approved by the Compensation Committee or are provided for in a written agreement between the
Participant and Harte-Hanks.
Restricted Stock and Restricted Stock Units
Grants. The Compensation Committee establishes the number of shares and the terms, including any
applicable vesting schedule, for Restricted Stock Awards and Restricted Stock Units. A Restricted Stock Award
is issued as Common Stock that has voting and dividend rights, but is subject to forfeiture and transfer
68
restrictions. Restricted Stock Units do not have voting or dividend rights, are not considered Common Stock
issued and outstanding, and upon vesting may be paid out in Common Stock or cash as determined by the
Compensation Committee.
Termination of Service. Generally, a Participant forfeits all unvested Restricted Stock Awards and Restricted
Stock Units on the day of termination. Different forfeiture terms may apply if approved by the Compensation
Committee or are provided for in a written agreement between the Participant and Harte-Hanks.
Performance Awards
A Performance Award entitles the Participant to a payout based upon achievement of certain performance
criteria. The Compensation Committee establishes the exact performance criteria and the performance period
applicable to the Performance Award. The Compensation Committee also determines whether the payout will be
in cash, an equity-based Award or some combination of cash and equity Awards. Performance criteria include a
number of measurable criteria that can be tied to the success of Harte-Hanks, including, but not limited to, net
order dollars, net profit dollars, net profit growth, net revenue dollars, revenue growth, total stockholder return,
cash flow, earnings or earnings per share, growth in earnings or earnings per share, return on equity or average
stockholders’ equity, stock price, return on capital, return on assets or net assets, return on investment, revenue,
income or net income, operating income or net operating income, operating profit or net operating profit,
operating margin, return on operating revenue, market share, overhead or other expense reduction, credit rating,
strategic plan development and implementation, succession plan development and implementation, customer
satisfaction indicators, and/or employee metrics. These criteria may be measured on an absolute basis or relative
to a peer group or index and can be measured at the corporate or business unit level.
Director Common Stock
Under the 2005 Plan, non-employee directors may elect to receive all or a portion of their annual retainer
and meeting fees in shares of Common Stock. The number of shares is determined by dividing: (a) the dollar
amount of the portion of the retainer and meeting fees for the fiscal quarter that is to be paid in shares by (b) the
Fair Market Value of one share of Common Stock as of the last day of such fiscal quarter, rounded up to the next
full number of shares. Directors may elect to receive their compensation in Common Stock for a fiscal year
period.
Other Awards
The Compensation Committee may also, under the 2005 Plan, grant equity-based Awards in lieu of cash
bonus payments to Participants. The determination of the number of shares of Common Stock or other Awards
that would be issued as a bonus payment will be determined using a reasonable valuation method selected by the
Compensation Committee. The Compensation Committee may choose to grant Dividend Equivalents in
conjunction with the grants of Awards. Dividend Equivalents on these Awards will be converted to cash or
additional shares at such time and by such formula as the Compensation Committee determines. Participants
holding Restricted Stock, Common Stock equivalents, and Common Stock grants have the same dividend rights
as other holders of Common Stock. The Compensation Committee, in its sole discretion, may establish other
incentive compensation arrangements under the 2005 Plan pursuant to which Participants may acquire shares of
Common Stock.
Certain Federal Income Tax Consequences
The following description of U.S. federal income tax consequences to U.S. Participants and Harte-Hanks is
based upon current statutes, regulations and interpretations and is subject to change. The description is not
intended to be exhaustive and does not include foreign, state or local income tax consequences.
69
Incentive Stock Options. A Participant who receives an ISO will not recognize any taxable income at the
time of grant of the ISO. The exercise of an ISO will not result in any federal income tax consequences to the
Participant, except that a certain amount will be an adjustment item for alternative minimum tax purposes. In the
event of a disposition of stock acquired upon the exercise of an ISO, the federal income tax consequences depend
upon how long the Participant has held the shares. If the Participant does not dispose of the shares until the later
of two years following the date of grant or one year following the date of exercise, the Participant will recognize
a long-term capital gain or loss upon subsequent disposition of the stock. The amount of the long-term capital
gain or loss will be equal to the difference between: (a) the amount realized on the disposition of the shares, and
(b) the exercise price at which shares were acquired. If the Participant does not satisfy the foregoing holding-
period requirements, the Participant will be required to report as ordinary income, in the year of disposition, an
amount equal to the excess of: (a) the Fair Market Value of the shares at the time of exercise of the ISO or, if
less, the amount realized on the disposition of such shares, over (b) the exercise price for the shares.
Non-Qualified Stock Options. A Participant who receives non-qualified stock options will not recognize any
taxable income at the time of grant. Upon exercise of the non-qualified stock options, a Participant will recognize
ordinary income in an amount equal to the excess of: (a) the Fair Market Value of the shares at the time of
exercise over (b) the exercise price for the shares. In the case of Participants who are employees of Harte-Hanks,
any ordinary income so recognized will be considered wages subject to applicable tax withholding.
to the extent
that deferrals of these Awards fail
Other Awards; Section 409A. Awards of SARs, Restricted Stock Units, certain other Awards and Dividend
Equivalents may, in some cases, result in the deferral of compensation that is subject to the requirements of
Section 409A of the Code. Generally,
to meet certain
requirements under Section 409A, such Awards will be subject to immediate taxation and tax penalties in the
year they vest unless the requirements of Section 409A are met. It is the intent of Harte-Hanks that Awards under
the 2005 Plan will be structured and administered in a manner that complies with the requirements of
Section 409A. Unless provided otherwise by the Award Agreement, Awards subject to Section 409A will be paid
in a lump sum as soon as practical, but, at Harte-Hanks discretion, not later than March 15 of the year following
the calendar year in which they are no longer subject to a “substantial risk of forfeiture” (as defined in
Section 409A) (Applicable Period). To the extent that an Award is not paid within the Applicable Period but is
paid by December 31 of the calendar year which includes the Applicable Period, then it is intended that such
payment shall be treated as made at a “specified time” for purposes of complying with Section 409A. To the
extent that Harte-Hanks desires to grant an Award which constitutes deferred compensation, the time and form of
payment for such Award shall be governed by the Award Agreement. Notwithstanding anything to the contrary
in the 2005 Plan, if a Participant constitutes a “specified employee” (as defined in Section 409A), to the extent
any payment under the 2005 Plan constitutes deferred compensation (after taking into account any applicable
exemptions from Section 409A), and to the extent required by Section 409A, no payments due under the 2005
Plan as a result of the Participant’s “separation from service” (as defined in Section 409A) may be made until the
earlier of: (i) the first day following the sixth month anniversary of the Participant’s separation from service, or
(ii) the Participant’s date of death; provided, however, that any payments delayed during this six-month period
shall be paid in the aggregate in a lump sum as soon as administratively practicable following the sixth month
anniversary of the Participant’s separation from service. For purposes of Section 409A, each “payment” (as
defined by Section 409A) made under the 2005 Plan shall be considered a “separate payment.”
Deductions for Harte-Hanks. Subject to the deduction limitation under Section 162(m) of the Code, Harte-
Hanks generally will be entitled to a compensation expense deduction in the same amount as any ordinary
income recognized by a Participant in connection with the grant, vesting, exercise or payout of Stock Options.
THE FOREGOING SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES UPON
THE PARTICIPANTS IN THE 2005 PLAN CONTAINED IN THIS PROXY STATEMENT
DOES NOT PURPORT TO BE COMPLETE.
70
Section 162(m) Limitations
Section 162(m) generally disallows a tax deduction to public companies for compensation in excess of
$1,000,000 paid to certain senior executive officers. Certain performance-based compensation is exempt from the
deduction limit if it meets the requirements of Section 162(m). One of these requirements is that there is a limit
to the number of shares granted to any one individual in a given fiscal year. Accordingly, the 2005 Plan has a
limit of 1,500,000 shares subject to equity Awards that can be granted to any individual per fiscal year. The
maximum amount payable for a performance-based cash award in any fiscal year may not exceed $2,500,000 or
200% of annual base salary. As a stockholder approved plan, any Awards granted under the 2005 Plan may
qualify for deductibility to the extent that the compensation is recognized by the Participant as ordinary income
and provided that the Awards meet the Section 162(m) performance-based requirements.
Change in Capital Structure; Change in Control
As is common in plans of this nature, if Harte-Hanks declares a stock split or dividend, or if there is another
change in Harte-Hanks capital structure that would result in the increase or decrease of the benefits under the
2005 Plan, then the Board shall direct the Compensation Committee to, in such a manner as it determines is
equitable, proportionally adjust: (a) the number of shares then available for grant; (b) the number of shares
subject to outstanding Awards; and (c) the exercise prices of outstanding Awards. No adjustment may be made if
it results in a repricing of a Stock Option or SAR.
Except to the extent otherwise provided in any agreement between Harte-Hanks and a Participant, upon a
Change of Control, the Board, in its discretion and on terms it deems appropriate, with respect to any Award,
may:
•
•
•
•
cancel the Award in exchange for an amount of cash equal to the amount that could have been
attained upon the exercise of such Award or realization of the Participant’s rights had such Award
been currently exercisable or payable or fully vested (including an amount equal to zero for Awards
with respect to which no cash could have been so attained or realized);
provide that the Award cannot vest, be exercised or become payable after such event;
provide that such Award shall be vested, exercisable and nonforfeitable as to all shares covered
thereby, and that all restrictions with respect thereto shall lapse, notwithstanding anything to the
contrary in the 2005 Plan or an Award Agreement;
provide that such Award be assumed by the successor or survivor corporation, or a parent or
subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock
of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices; and
• make adjustments in the number and type of shares of Common Stock (or other securities or
property) subject to outstanding Awards, and in the number and kind of outstanding Restricted
Stock, Restricted Stock Units, and in the terms and conditions of (including the grant or exercise
price), and the criteria included in, outstanding options, rights and awards and options, rights and
awards that may be granted in the future; provided that no such adjustment shall be effected if it
results in a repricing of a Stock Option or SAR.
71
PROPOSAL IV
162(m) RE-APPROVAL OF CURRENT PERFORMANCE GOAL
UNDER 2005 OMNIBUS INCENTIVE PLAN
Description of Proposal
from the deduction limit
Section 162(m) of the Code prevents public companies 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. Certain
it meets the requirements of
performance-based compensation is exempt
Section 162(m). The 2005 Plan is intended to permit awards granted thereunder to qualify for deductibility to the
extent that the compensation is recognized by the Participant as ordinary income and provided that the awards
meet the Section 162(m) performance-based requirements. One of these requirements under Section 162(m) is
that the material terms of the performance goal under which the compensation is to be paid must be re-approved
by our stockholders no later than the first stockholders meeting that occurs in the fifth year following the year in
which stockholders previously approved the performance goal. For purposes of Section 162(m), the material
terms include the employees eligible to receive compensation, a description of the business criteria on which the
performance goal is based, and either the maximum amount of compensation that could be paid to any employee
or the formula used to calculate the amount of compensation to be paid to the employee if the performance goal
is attained.
if
Our stockholders previously approved and adopted the 2005 Plan, including the material terms of the
performance goal contained within the 2005 Plan, at our May 2005 annual meeting. This Proposal IV does not
seek any amendment of the existing performance goal contained within the 2005 Plan. Rather, this Proposal IV is
being presented to stockholders solely to comply with the periodic re-approval requirements of Section 162(m)
described above.
The following discussion is qualified in its entirety by reference to the full text of the 2005 Plan, as amended
and restated effective February 13, 2009, which can be found by reference to Exhibit 10.1 to Harte-Hanks’ Form
8-K, dated February 13, 2009, and is incorporated by reference herein. Under the 2005 Plan, we may issue to
Participants performance-based awards, which entitle the Participant to a cash and/or equity payout based upon
achievement of certain performance criteria. The Compensation Committee establishes the exact performance
criteria and the performance period applicable to a performance-based award. The Compensation Committee also
determines whether the payout will be in cash, an equity-based award or some combination of cash and equity
awards. Performance criteria under the 2005 Plan include a number of measurable criteria that can be tied to the
success of Harte-Hanks, including, but not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
net order dollars,
net profit dollars,
net profit growth,
net revenue dollars,
revenue growth,
total stockholder return,
cash flow,
earnings or earnings per share,
growth in earnings or earnings per share,
return on equity or average stockholder’s equity,
stock price,
return on capital,
return on assets or net assets,
72
•
•
•
•
•
•
•
• market share,
•
•
•
•
•
•
return on investment,
revenue,
income or net income,
operating income or net operating income,
operating profit or net operating profit,
operating margin,
return on operating revenue,
overhead or other expense reduction,
credit rating,
strategic plan development and implementation,
succession plan development and implementation,
customer satisfaction indicators, and/or
employee metrics.
These criteria may be measured on an absolute basis or relative to a peer group or index and can be
measured at the corporate or business unit level. Under the 2005 Plan, our Compensation Committee is
authorized to make adjustments in the method of calculating attainment of performance criteria in recognition of:
(a) extraordinary or non-recurring items, (b) changes in tax laws, (c) changes in generally accepted accounting
principles or changes in accounting policies, (d) charges related to restructured or discontinued operations,
(e) restatement of prior period financial results, and (f) any other unusual, non-recurring gain or loss that is
separately identified and quantified in our financial statements.
The section above in this proxy statement under Proposal III entitled, “Description of Existing 2005 Plan,”
is incorporated in this Proposal IV by reference and provides additional information about the 2005 Plan,
including employees eligible to receive awards under the 2005 Plan, a description of the business criteria that
may be applied to performance-based awards and the maximum equity and cash awards that could be paid to an
employee.
If our stockholders do not approve this Proposal IV, we may be required to seek approval again at our 2010
annual stockholders meeting and, if not obtained at that meeting, future awards under the 2005 Plan may no
longer satisfy the requirements of Section 162(m) and may no longer be eligible for deductibility by our
company.
We believe that our directors and officers intend to vote their shares FOR this proposal.
Board Recommendation on Proposal
The Board of Directors unanimously recommends a vote FOR approval by our stockholders of the material
terms of the current performance goal set forth within the Harte-Hanks, Inc. 2005 Omnibus Incentive Plan, in
accordance with the periodic re-approval requirements of Internal Revenue Code Section 162(m). The
management proxy holders will vote all duly submitted proxies FOR approval by our stockholders of this
proposal unless duly instructed otherwise. All members of the Board are eligible for awards under the 2005 Plan
and thus have a personal interest in the approval.
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.
PROPOSALS FOR 2010 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 2010 annual meeting must be
received by us at our principal executive offices on or before December 11, 2009. 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 2010 annual meeting must be received at our principal executive offices no
earlier than February 11, 2010 and no later than March 12, 2010. Such proposals when submitted must be in full
compliance with applicable law and our bylaws.
73
ANNEX A
PROPOSED FORM OF AMENDMENT TO 2005 OMNIBUS INCENTIVE PLAN
TO INCREASE AUTHORIZED SHARES
(SEE PROPOSAL III)
PROPOSED FORM OF AMENDMENT TO HARTE-HANKS, INC.
2005 OMNIBUS INCENTIVE PLAN
This Amendment (this “Amendment”) to the Harte-Hanks, Inc. (the “Company”) 2005 Omnibus Incentive
Plan, as amended and restated (the “Plan”), is entered into and effective as of May 12, 2009.
WHEREAS, the Company adopted the Plan in May 2005;
WHEREAS, effective January 1, 2008, the Company amended and restated the Plan to incorporate the
requirements of Internal Revenue Code Section 409A and related regulations, and effective February 13, 2009,
the Company amended and restated the Plan to delete the references in Article XVII (Change in Capital
Structure; Change of Control) to a “Potential Change of Control,” including deleting the definition of a Potential
Change of Control in former Section 17.5;
WHEREAS, on January 29, 2009, the Company’s Board of Directors determined that it is in the best
interests of the Company to amend the Plan to increase the number of shares of Company common stock
available under the Plan by an additional 4,600,000 shares and the Board recommended stockholder approval of
an amendment to the Plan reflecting this change;
WHEREAS, 4,570,000 shares were originally available under the Plan, which amount when added to the
4,600,000 additional shares in this Amendment will result in 9,170,000 total shares of Company common stock
being available under the Plan (subject to adjustment, as provided by the Plan); and
WHEREAS, on May 12, 2009, the stockholders of the Company approved this Amendment;
NOW, THEREFORE, BE IT RESOLVED, that the Plan is hereby amended as follows:
1.
Each capitalized term or phrase used but not otherwise defined herein has the meaning given to it in the
Plan.
2.
Existing Section 4.1 is hereby amended and restated in its entirety as follows, effective May 12, 2009:
“4.1. Number of Shares. The aggregate number of shares of Common Stock that may be issued under
this Plan shall be 9,170,000 (subject to adjustment in connection with changes in capital structure in
accordance with Article XVII). The authorization may be increased with the approval of the Board and
the stockholders of the Company.”
3.
Except as modified by this Amendment, all other terms and provisions of the Plan shall continue in full
force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to be duly executed on its behalf by a
duly authorized officer of the Company effective as of the date first written above.
HARTE-HANKS, INC.
By:
Name:
Title:
A-1
2008 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, 2008
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 _ No X
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 definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the
Exchange Act
Large accelerated filer ___
Non-accelerated filer ___ (Do not check if a smaller reporting company)
Accelerated filer _X_
Smaller reporting company ___
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 ($11.45) as of the last business day of the registrant’s most recently completed second fiscal quarter (June
30, 2008), was approximately $457,882,000.
The number of shares outstanding of each of the registrant’s classes of common stock as of January 31, 2009 was
63,483,176 shares of common stock, all of one class.
Documents incorporated by reference:
Portions of the Proxy Statement to be filed for the Company’s 2009 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.
2
Harte-Hanks, Inc. and Subsidiaries
Table of Contents
Form 10-K Report
December 31, 2008
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
3
Page
4
13
21
21
21
21
21
24
25
40
41
41
41
42
42
43
43
43
43
44
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 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 68% of our total revenues in
2008, is a leader in the movement toward highly targeted marketing. Our Shoppers business applies geographic
targeting principles.
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. These documents are provided
as soon as practical after they are filed with the SEC and may also be found at the SEC’s website at
http://www.sec.gov. Additionally, we have adopted and posted on our website a code of ethics that applies to
our principal executive officer, principal financial officer and principal accounting officer. Our website also
includes our corporate governance guidelines and the charters for each of our audit, compensation, and
nominating and corporate governance committees. We will provide a printed copy of any of the aforementioned
documents to any requesting stockholder.
DIRECT MARKETING
General
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.
In 2008, 2007 and 2006, Harte-Hanks Direct Marketing had revenues of $732.7 million, $732.5 million, and
$709.7 million, respectively, which accounted for approximately 68%, 63%, and 60% of our total revenues,
respectively.
4
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. With these data, we can help our
clients identify, reach, influence and nurture their customers. We focus both on business-to-business and
business-to-consumer environments, developing data-driven strategies for customer acquisition and retention,
and execute on those strategies in an integrated fashion across media channels (direct mail, email, digital, and
call center). Further, we help our clients measure their marketing and customer care campaigns, providing them
with knowledge that can be applied now to refine campaigns, and delivering continuous improvement and
innovation.
We help our clients understand their customers and prospects better through data-driven marketing so they can
better grow these relationships to achieve lifetime value of each and increase ROI on marketing investments.
Insight gained through this approach helps companies make more effective targeting decisions. Specifically, we
help companies:
• gain insight into target markets;
• build better information about customers and prospects;
•
turn customer information into marketing strategy;
• design effective communications;
• deliver communications and manage contacts; and
• provide data analysis, profiling, quality and reporting software and services.
Depending on client needs, we do this through specific offerings or by combining a number of our offerings
from across our portfolio of businesses.
We offer a full complement of capabilities and resources to provide a broad range of marketing services and
data management software, in media from direct mail to e-mail.
• Agency & Creative Services. We help companies develop their marketing and communications materials
with a growing body of creative executions in the retail, insurance and healthcare, pharmaceutical, banking,
financial services, telecommunications, automotive, and other business sectors in both business and
consumer markets. We can design and manage programs that measurably build customer loyalty, improve
customer retention and drive sales.
• Database Marketing Solutions. We have successfully delivered marketing database solutions for 35 years
across various industries. We start with database design and development, move through the analytical and
modeling stages and ultimately to recommendations for marketing programs. As a leader in the marketplace
since 1968, Harte-Hanks provides a wide range of database marketing solutions to help a client see its
customers in a single, comprehensive view, identify best customers, facilitate the execution of marketing
programs, improve the ability to cross-sell and upsell, and receive reliable, ongoing measurement for easier
evaluation of results.
• Data Quality Software and Services with Trillium Software®. Our software has helped global
customers more effectively analyze, enrich, cleanse and report on their product, financial and customer data
as part of master data management, data governance, CRM, data warehousing and integration initiatives.
With industry-leading Trillium Software System®, Global Locator™ geocoding product, and associated
data governance services, business users can optimize data-based business processes and transactions,
realize efficiencies, and enhance the accuracy of their master set of data - improving program results.
• Digital Marketing. Our digital solutions integrate online services within the marketing mix and include:
site development and design, e-mail marketing through our Postfuture® e-mail marketing solutions, e-
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commerce and interactive relationship management and a host of other services that support our core
businesses.
• Fulfillment and Contact Centers. We deliver teleservices and fulfillment operations in both consumer and
business-to-business markets. We maintain teleservice workstations around the globe equipped for both
inbound and outbound calls and e-mail and we are an experienced outsource partner for call and contact
center operations. We also maintain fulfillment centers strategically located throughout the United States.
• Mail Engineering and Logistics. These services include advanced mail optimization, logistics and
transportation optimization, tracking, commingling, shrink wrapping and specialized mailings. We are the
first provider of mail services to be certified by the United States Postal Service's Mail Processing Total
Quality Management program.
• Personalized and Targeted Mail. As a full-service direct marketing provider and one of the largest
mailing partners of the United States Postal Service (USPS®), our operational mandate is to ensure
creativity and quality, provide an understanding of the options available in technologies and segmentation
strategies and to capitalize on economies of scale with our variety of execution options. With facilities
strategically placed nationwide, we are among the largest solo mailers in the country other than the U.S.
government.
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. The largest Direct Marketing client, measured in revenue, comprised
8% of total Direct Marketing revenues in 2008 and 5% of our total revenues in 2008. The largest 25 clients,
measured in revenue, comprised 41% of total Direct Marketing revenues in 2008 and 28% of our total revenues
in 2008.
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.
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Direct Marketing Facilities
Direct marketing services are provided at the following facilities, all of which are leased except as otherwise
noted:
National Offices
Austin, Texas
Baltimore, Maryland
Billerica, Massachusetts
Bloomfield, Connecticut
Boston, Massachusetts
Cincinnati, Ohio
Deerfield Beach, Florida
East Bridgewater, Massachusetts
Fort Worth, Texas
Fullerton, California
Glen Burnie, Maryland
Grand Prairie, Texas
Jacksonville, Florida
Lake Mary, Florida
Langhorne, Pennsylvania
New York, New York
Ontario, California
Richardson, Texas
San Diego, California
Shawnee, Kansas
Texarkana, Texas
For more information please refer to Item 2, “ Properties”.
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 – owned site
Iasi, Romania
Les Ulis, France
Madrid, Spain
Manila, Philippines
Melbourne, Australia
São Paulo, Brazil
Theale, United Kingdom
Uxbridge, United Kingdom
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Competition
Our Direct Marketing business faces competition in all of its offerings and within each of its vertical markets.
Direct marketing is a dynamic business, subject to 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 distributed 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, PennySaverUSA.com™ and TheFlyer.com™. These sites are online advertising portals,
bringing buyers and sellers together through our online products, including local classifieds, business listings,
coupons, special offers and Power Sites™. Power Sites are templated web sites for our customers, optimized to
help small / medium sized business owners establish a web presence and improve their lead generation. During
2008, Shoppers formally changed the names of its print publications to PennySaverUSA.com (California) and
TheFlyer.com (Florida).
As of December 31, 2008, Shoppers delivered over 12 million shopper packages in five major markets each
week covering the greater Los Angeles market, the greater San Diego market, Northern California, South
Florida and the greater Tampa market. Two editions of the shopper publication are delivered to approximately
230,000 households and businesses in South Orange County where both an “early” and “late” edition
PennySaverUSA.com are published each week. Our California publications account for approximately 82% of
Shoppers weekly circulation.
At December 31, 2008 Harte-Hanks published more than 1,000 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 distribution 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
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and target areas in a number of ways including geographic, demographic, lifestyle, behavioral and language
allowing our advertisers to effectively target their customers.
In 2008, 2007, and 2006, Harte-Hanks Shoppers had revenues of $350.1 million, $430.4 million, and $475.0
million, respectively, accounting for approximately 32%, 37%, and 40% of our total revenues, respectively.
As a result of the difficult economic environment in California and Florida, we curtailed more than 1.4 million
of circulation from July 2008 to February of 2009. This consisted of approximately 850,000 of circulation in
California and approximately 550,000 of circulation in Florida. After the February circulation curtailment, our
Shoppers circulation will still reach approximately 11.5 million addresses each week. We continue to evaluate
all of our circulation performance and may make further circulation reductions in the future as part of our efforts
to address the difficult economic conditions in California and Florida.
Publications
The following table sets forth certain information with respect to Shoppers publications:
Market
Greater Los Angeles
Publication Name
PennySaverUSA.com
December 31, 2008
Number of
Circulation Zones
504
5,653,000
Northern California
PennySaverUSA.com
2,390,000
Greater San Diego
PennySaverUSA.com
1,867,500
South Florida
TheFlyer.com
1,176,500
Greater Tampa
TheFlyer.com
1,057,000
Total
12,144,000
194
157
93
72
1,020
Our shopper publications contain classified and display advertising and are delivered by Standard Mail
saturation. The typical shopper publication contains approximately 38 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.
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 direct-to-plate in a fully digital
environment. Automating the production process saves on labor, newsprint, and overweight postage. This
software also allows for better ad tracking, immediate checks on individual zone and ad status, and more on-
time press starts with less manpower.
Customers
Shoppers serves both business and individual advertisers in a wide range of industries, including real estate,
employment, automotive, retail, high-tech/telecom, financial services, and a number of other industries. The
largest client, measured in revenue, comprised 2% of total Shoppers revenue in 2008 and 1% of our total
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revenue in 2008. The top 25 clients in terms of revenue comprised 17% of Shoppers revenues in 2008 and 5%
of our total revenues in 2008.
Sales and Marketing
We maintain local Shoppers sales offices throughout our geographic markets and employ more than 500
commissioned sales representatives who develop both targeted and saturation advertising programs, both in print
and online, for clients. The sales organization provides service to national, regional and local advertisers
through its telemarketing departments and field sales representatives. Shoppers clients vary from individuals
with a single item for sale to local neighborhood advertisers to large multi-location advertisers. The weekly
number of ads is primarily driven by residential customers whereas revenues are primarily driven by small and
midsize businesses. We also focus our marketing efforts on larger national accounts by emphasizing our ability
to deliver saturation advertising in defined zones, or even partial zones for inserts, in combination with
advertising in the shopper publication.
Additional focus is placed on particular industries/categories through the use of sales specialists. These sales
specialists are primarily used to target automotive, real estate and employment advertisers.
We utilize proprietary sales and marketing systems to enter client orders directly from the field, instantly
checking space availability, ad costs and other pertinent information. These systems efficiently facilitate the
placement of advertising into multiple-zoned editions and include built-in error-reducing safeguards that aid in
minimizing costly sales adjustments. In addition to allowing advertising information to be entered for
immediate publication, these systems feed a relational client database enabling sales personnel to access client
history by designated variables to facilitate the identification of similar potential clients and to assist with timely
follow-up on existing clients.
Shoppers Facilities
Our shoppers are produced at owned or leased facilities in the markets they serve. At December 31, 2008. we
had six production facilities – three in Southern California, one in Northern California, one in Southern Florida
and one in Tampa, Florida – and approximately 30 sales offices. As a result of the Florida circulation reductions
we will consolidate the Southern Florida production facility into the Tampa facility. We expect this
consolidation to be completed by the end of the first quarter of 2009.
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, our local ad
content, and our integrated online offering, allow us to compete effectively, particularly in large markets with
high media fragmentation. However, our business results may be adversely impacted by competition. Please
refer to Item 1A, “Risk Factors” for additional information regarding risks related to competition.
Seasonality
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
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businesses and individuals after the holidays. In general the second and third quarters are the highest revenue
quarters for our Shoppers business. As a result of the ongoing economic difficulties in California and Florida,
Shoppers revenues did not follow this general historical pattern in 2008 and 2007.
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 significant number of states in the U.S. have passed versions of security breach notification laws,
which generally require timely notifications to affected persons in the event of data security breaches or
other unauthorized access to certain types of protected personal data.
• The Fair Credit Reporting Act (FCRA), which governs among other things, the sharing of consumer
report information, access to credit scores, and requirements for users of consumer report information.
• The 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.
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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
retention of personal data and may require consent from consumers and grant consumers other rights, such as
the ability to access their personal data and to correct information in the possession of data controllers. We and
many of our clients also belong to trade associations that impose guidelines that regulate direct marketing
activities, such as the Direct Marketing Association’s Commitment to Consumer Choice.
As a result of increasing public awareness and interest in individual privacy rights and data security and
environmental and other concerns regarding unsolicited marketing communications, federal, state and foreign
governmental and industry organizations continue to consider new legislative and regulatory proposals that
would impose additional restrictions on direct marketing services and products. Examples include data
encryption standards, data breach notification requirements, consumer choice and consent restrictions and
increased penalties against offending parties, among others. We anticipate that additional proposals will
continue to be introduced in the future, some of which may be adopted. In addition, our business may be
affected by the impact of these restrictions on our clients and their marketing activities. These additional
regulations could increase compliance requirements and restrict or prevent the collection, management,
aggregation, transfer, use or dissemination of information or data that is currently legally available. Additional
regulations may also restrict or prevent current practices regarding unsolicited marketing communications. For
example, many states have considered implementing do-not-mail legislation that could impact our Direct
Marketing and Shoppers businesses and the businesses of our clients and customers. In addition, continued
public interest in individual privacy rights and data security may result in the adoption of further voluntary
industry guidelines that could impact our direct marketing activities and business practices.
We cannot predict the scope of any new legislation, regulations or industry guidelines or how courts may
interpret existing and new laws. Additionally, enforcement priorities by governmental authorities may change
and also impact our business. Compliance with regulations is costly and time-consuming, and we may
encounter difficulties, delays or significant expenses in connection with our compliance and we may be exposed
to significant penalties, liabilities, reputational harm and loss of business in the event that we fail to comply.
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, and domain name registrations and enforcement procedures. We also
enter into confidentiality agreements with many of our employees, vendors and clients and seek to limit access
to and distribution of intellectual property and other proprietary information. We pursue the protection of our
trademarks and other intellectual property in the United States and internationally.
Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy or otherwise
obtain and use our proprietary information and technology. Monitoring unauthorized use of our intellectual
property is difficult and unauthorized use of our intellectual property may occur. We cannot be certain that
patents or trademark registrations will be issued, nor can we be certain that any issued patents or trademark
registrations will give us adequate protection from competing products. For example, issued patents may be
circumvented or challenged and declared invalid or unenforceable. In addition, others may develop competing
12
technologies or databases on their own. Moreover, there is no assurance that our confidentiality agreements with
our employees or third parties will be sufficient to protect our intellectual property and proprietary information.
We may also be subject to infringement claims against us by third parties and may incur substantial costs and
devote significant management resources in responding to such claims. We are obligated under some
agreements to indemnify our clients as a result of claims that we infringe on the proprietary rights of third
parties. These costs and diversions could cause our business to suffer. If any party asserts an infringement claim,
we may need to obtain licenses to the disputed intellectual property. We cannot assure you, however, that we
will be able to obtain these licenses on commercially reasonable terms or that we will be able to obtain any
licenses at all. The failure to obtain necessary licenses or other rights may have an adverse affect on our ability
to provide our products and services.
EMPLOYEES
As of December 31, 2008, Harte-Hanks employed approximately 5,900 full-time employees and 400 part-time
employees. Approximately 4,100 full-time and 200 part-time employees were in the Direct Marketing segment
and 1,800 full-time and 200 part-time employees were in the Shoppers segment. A portion of our work force is
provided to us through staffing companies. 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 Securities Exchange
Act of 1934 (1934 Act). Forward-looking statements may also be included in our other public filings, press
releases, our website and oral and written presentations by management. Statements other than historical facts
are forward-looking and may be identified by words such as “may,” “will,” “expects,” “believes,” “anticipates,”
“plans,” “estimates,” “seeks,” “could,” “intends,” or words of similar meaning. Examples include statements
regarding (1) our strategies and initiatives, (2) adjustments to our cost structure and other actions designed to
respond to market conditions and improve our performance, and the anticipated effectiveness and expenses
associated with these actions, (3) our financial outlook for revenues, earnings per share, operating income,
expense related to equity-based compensation, capital resources and other financial items, (4) expectations for
our businesses and for the industries in which we operate, including with regard to the negative performance
trends in our Shoppers business and the adverse impact of the ongoing economic downturn in the United States
and other economies on the marketing expenditures and activities of our Direct Marketing clients and prospects,
(5) competitive factors, (6) acquisition and development plans, (7) our stock repurchase program, (8)
expectations regarding legal proceedings and other contingent liabilities, and (9) other statements regarding
future events, conditions or outcomes.
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.
13
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
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. Competitive pricing pressures tend to
increase during an economic downturn, such as the current downturn in the United States and other economies,
due to reduced marketing expenditures of many of our clients and prospects and the resulting impact on the
competitive business environment for marketing service providers such as our company.
We must maintain technological competitiveness, continually improve our processes and develop and
introduce new products and services in a timely and cost-effective manner.
We believe that our success depends on, among other things, maintaining technological competitiveness in our
Direct Marketing and Shoppers products, processing functionality and software systems and services.
Technology changes rapidly and there are continuous improvements in computer hardware, network operating
systems, programming tools, programming languages, operating systems, database technology and the use of the
Internet. Advances in information technology may result in changing client preferences for products and product
14
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
contingencies and events outside of our control may also impact our ability to provide our products and services.
Our failure to effectively and timely staff, coordinate and execute our client engagements may adversely impact
existing client relationships, the amount or timing of payments from our clients, our reputation in the
marketplace and ability to secure additional business and our resulting financial performance. In addition, our
contractual arrangements with our Direct Marketing clients and other customers may not provide us with
sufficient protections against claims for lost profits or other claims for damages.
If 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. 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 recently experienced, and may experience in the future, reduced demand for our products and
services and increased bad debt expense because of general economic conditions, the financial conditions
and marketing budgets of our clients and other factors that may impact the industry verticals that we serve.
Economic downturns often severely affect the marketing services industry. Recently, and in other previous
economic downturns, 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, such as the current recession,
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, client bankruptcies or other collection
difficulties and bankruptcy preference actions to recover certain amounts previously paid to us by our clients.
We may also experience reduced demand as a result of consolidation of clients and prospective clients in the
industry verticals that we serve. See “Management's Discussion and Analysis of Financial Condition and
Results of Operations” in this Form 10-K for additional information about the adverse impact on our financial
performance of the ongoing economic downturn in the United States and other economies.
15
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, such as the current downturn, or a large disaster, such as a flood, hurricane, earthquake or other
disaster or condition that disables our facilities, immobilizes the USPS or causes a significant negative change in
the 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 in any economic climate and even
more so during a prolonged recession, such as the ongoing economic downturn in the United States and other
economies.
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 some of these regulations.
including
those
As a result of increasing public awareness and interest in individual privacy rights and data security and
environmental and other concerns regarding unsolicited marketing communications, federal, state and foreign
governmental and industry organizations continue to consider new legislative and regulatory proposals that
would impose additional restrictions on direct marketing services and products. Examples include data
encryption standards, data breach notification requirements, consumer choice and consent restrictions and
increased penalties against offending parties, among others. We anticipate that additional proposals will
continue to be introduced in the future, some of which may be adopted. In addition, our business may be
affected by the impact of these restrictions on our clients and their marketing activities. These additional
regulations could increase compliance requirements and restrict or prevent the collection, management,
aggregation, transfer, use or dissemination of information or data that is currently legally available. Additional
regulations may also restrict or prevent current practices regarding unsolicited marketing communications. For
example, many states have considered implementing do-not-mail legislation that could impact our Direct
Marketing and Shoppers businesses and the businesses of our clients and customers. In addition, continued
public interest in individual privacy rights and data security may result in the adoption of further voluntary
industry guidelines that could impact our direct marketing activities and business practices.
We cannot predict the scope of any new legislation, regulations or industry guidelines or how courts may
interpret existing and new laws. Additionally, enforcement priorities by governmental authorities may change
and also impact our business. Compliance with regulations is costly and time-consuming, and we may
encounter difficulties, delays or significant expenses in connection with our compliance and we may be exposed
to significant penalties, liabilities, reputational harm and loss of business in the event that we fail to comply.
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.
16
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.
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.
17
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.
Newsprint prices have fluctuated in recent years. We maintain, on average, less than 45 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 USPS to deliver products. Our shoppers are
delivered by Standard Mail, and postage is the second largest expense, behind labor, in our Shoppers business.
Standard postage rates increased in 2006 and 2008 and we expect them to increase again in May of 2009. Under
the Postal Accountability and Enhancement Act of 2006, the USPS will file for a rate increase in February of
each year, and this increase will take effect the following May. This increase will be capped at the average of
the consumer price index from the previous December. The May 2009 increase will be capped at 3.8%. Overall
Shoppers postage costs will be affected by these increases in postage rates. Postage rates also influence the
demand for our Direct Marketing services even though the cost of mailings is typically borne by our clients and
is not directly reflected in our revenues or expenses. Accordingly, future postal increases or disruptions in the
operations of the USPS may have an adverse impact on us.
Our financial results could be negatively impacted by impairments of goodwill or other intangible assets with
indefinite useful lives required by SFAS 142.
As of December 31, 2008, our goodwill and other intangibles, net, represented approximately $570.9 million out
of our total assets of $913.6 million. In accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS 142), we test goodwill and other intangible assets with indefinite
useful lives for impairment as of November 30 of each year and on an interim date should factors or indicators
become apparent that would require an interim test. A downward revision in the fair value of either of our
reporting units or any of the other intangible assets could result in impairments under SFAS 142 and additional
non-cash charges. Any charge resulting from the application of SFAS 142 could have a significant negative
effect on our reported net income. In addition, our financial results could be negatively impacted by the
application of existing and future accounting policies or interpretations of existing accounting policies.
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
18
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, 2008, we had $270.6 million of debt outstanding, all of which was at variable
interest rates. We manage a portion of our interest rate exposure by entering into an interest rate swap for a total
notional amount of $150.0 million, resulting in a net amount of $120.6 million of variable-rate debt at December
31, 2008. The interest rate swap matures on September 30, 2009. 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, trademarks and domain name registrations and enforcement procedures. 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.
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 2008, approximately 9.5%
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;
•
•
19
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 and other factors may impact the volatility of our stock
price.
The price at which our common stock has traded in recent years has fluctuated greatly and has declined
significantly over that period of time. The price may continue to be volatile due to a number of factors including
the following, some of which are beyond our control:
•
the impact and duration of the ongoing economic downturn, overall strength of the United States and
other economies and general market volatility;
• variations in our operating results from period to period and variations between our actual operating
results and the expectations of securities analysts, investors and the financial community;
• unanticipated developments with client engagements or client demand, such as variations in the size,
budget, or progress toward the completion of engagements, variability in the market demand for our
services, client consolidations and the unanticipated termination of several major client engagements;
•
announcements of developments affecting our businesses;
•
competition and the operating results of our competitors; and
• other factors discussed elsewhere in this Item 1A. “Risk Factors.”
As a result of these and other factors, investors in our common stock may not be able to resell their shares at or
above their original purchase price.
20
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 3.7 million square feet. Approximately 3.5 million square feet are held under leases, which
expire at dates through 2017. The balance of the properties, used in our Southern California Shoppers
operations and Hasselt, Belgium Direct Marketing operations, are owned.
ITEM 3.
LEGAL PROCEEDINGS
Information regarding legal proceedings is set forth in Note K, “Commitments and Contingencies”, of the
“Notes to Consolidated Financial Statements,” which information is incorporated herein by reference.
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 2008.
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 2008 and 2007 were as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2008
2007
High
17.96
14.33
13.12
10.32
Low
13.06
11.15
9.93
4.43
High
28.78
27.85
26.67
20.52
Low
25.81
25.07
19.62
15.50
In 2008, quarterly dividends were paid at the rate of 7.5 cents per share. In 2007, quarterly dividends were paid
at the rate of 7.0 cents per share.
We currently plan to pay a quarterly dividend of 7.5 cents per common share in each of the quarters in 2009,
although any actual dividend declaration can be made only upon approval of our Board of Directors, based on
its business judgment.
As of February 1, 2009 there are approximately 2,700 holders of record.
21
Issuer Purchases of Equity Securities
The following table contains information about our purchases of equity securities during the fourth quarter of
2008:
Total
Number of
Shares
Purchased(2)
–
–
1,147
1,147
Average
Price
Paid per
Share
$
$
$
$
–
–
6.24
6.24
Total Number
of Shares
Purchased
as Part of
a Publicly
Announced Plan(1)
Maximum
Number of
Shares that
May Yet Be
Purchased Under
the Plan
–
–
–
–
10,475,491
10,475,491
10,475,491
Period
October 1 – 31, 2008
November 1 – 30, 2008
December 1 – 31, 2008
Total
(1) During the fourth quarter of 2008, we did not purchase any shares of our stock through our stock
repurchase program that was publicly announced in January 1997. Under this program, from which shares
can be purchased in the open market or through privately negotiated transactions, our Board of Directors has
authorized the repurchase of up to 74,400,000 shares of our outstanding common stock. As of December 31,
2008, we had repurchased a total of 63,924,509 shares at an average price of $18.83 per share under this
program.
(2) Total number of shares purchased includes shares, if any, purchased as part of our publicly announced
stock repurchase program, plus shares withheld to pay applicable withholding taxes and the exercise price
related to stock options, and shares withheld to pay applicable withholding taxes related to the vesting of
nonvested shares, pursuant to the Harte-Hanks, Inc. 2005 Omnibus Incentive Plan.
22
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,
2003 to December 31, 2008 with the Standard & Poor’s 500 Stock Index (S&P 500 Index) and with a peer
group including 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.
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, 2003, and assumes the reinvestment of dividends.
Comparison of Cumulative Five Year Total Return
$150
$100
$50
$0
2003
2004
2005
2006
2007
2008
Harte-Hanks, Inc.
S&P 500 Index
Peer Group
Harte-Hanks, Inc. .......................................
S&P 500 Index ...........................................
New Peer Group.........................................
Base
Period
Dec-03
100
100
100
Dec-04
120.25
110.88
118.32
Dec-05
123.05
116.33
117.67
Years Ending
Dec-06
130.34
134.70
137.09
Dec-07
82.43
142.10
115.70
Dec-08
30.61
89.53
66.70
23
ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth our summary historical financial information for the periods ended and as of the dates
indicated. You should read the following historical financial information along with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” contained in this Form 10-K. The fiscal year financial
information included in the table below for the years ended December 31, 2008, 2007, and 2006, respectively, is derived
from audited financial statements contained in this Form 10-K. Information for the years ended December 31, 2005 and
2004 can be found in our previously filed Annual Reports on Form 10-K.
In thousands, except per share amounts
Statement of Operations Data
Revenues ...................................................................................
Operating expenses
2008
2007
2006
2005
2004
$1,082,821
$1,162,886
$1,184,688
$1,134,993
$1,030,461
Labor, production and distribution .........................................
Advertising, selling, general and administrative ....................
Depreciation ............................................................................
Intangible amortization ...........................................................
Total operating expenses ...............................................................
Operating income...........................................................................
Interest expense, net.......................................................................
847,470
81,655
33,429
2,950
965,504
117,317
13,823
Net Income ..................................................................................... $ 62,741
0.98
Earnings per common share—diluted............................................ $
Cash dividends per common share ................................................ $
0.30
Weighted-average common and common
871,468
89,787
33,195
3,509
997,959
164,927
12,453
$ 92,640
1.26
$
0.28
$
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
$
equivalent shares outstanding—diluted ..................................
64,104
73,703
80,646
85,406
87,806
Segment Data
Revenues
Direct Marketing ..................................................................... $ 732,740
Shoppers ..................................................................................
350,081
Total revenues ......................................................................... $1,082,821
Operating income
Direct Marketing ..................................................................... $ 103,121
25,884
Shoppers ..................................................................................
General corporate ....................................................................
(11,688)
Total operating income ........................................................... $ 117,317
Capital expenditures ........................................................................... $ 19,947
Balance sheet data (at end of period)
Current assets ................................................................................. $ 241,203
97,433
Property, plant and equipment, net ................................................
570,866
Goodwill and other intangibles, net...............................................
913,566
Total assets .....................................................................................
Total long-term debt.......................................................................
239,687
Total stockholders’ equity ............................................................. $ 356,372
$ 732,461
430,425
$1,162,886
$ 108,796
70,784
(14,653)
$ 164,927
$ 28,217
$ 265,680
112,354
564,522
951,926
259,125
$ 408,512
$ 709,728
474,960
$1,184,688
$ 109,458
88,814
(12,220)
$ 186,052
$ 33,708
$ 279,975
116,591
568,795
969,285
205,000
$ 493,476
$ 694,558
440,435
$1,134,993
$ 641,214
389,247
$1,030,461
$ 108,095
94,231
(12,313)
$ 190,013
$ 28,215
$ 90,856
85,857
(11,418)
$ 165,295
$ 35,146
$ 253,704
112,911
519,419
889,663
62,000
$ 561,346
$ 250,497
113,770
460,238
828,353
-
$ 571,799
24
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 2008, Harte-Hanks Direct Marketing had revenues of $732.7 million, which accounted for 68% 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 capture, analyze and disseminate customer and prospect data across all
points of customer contact. Specifically, we help companies:
• gain insight into target markets;
• build better information about customers and prospects;
•
turn customer information into marketing strategy;
• design effective communications;
• deliver communications and manage contacts; and
• provide data analysis, profiling, quality and reporting software and services.
We offer a full complement of capabilities and resources, including:
•
agency and creative services;
• database marketing solutions;
• data quality software and services with Trillium Software;
• digital marketing;
•
fulfillment and contact centers;
• mail engineering and logistics; and
• personalized and targeted mail.
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
25
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, PennySaverUSA.com and TheFlyer.com. These sites are online advertising portals,
bringing buyers and sellers together through our online products, including local classifieds, business listings,
coupons, special offers and Power Sites. Power Sites are templated web sites for our customers, optimized to
help small / medium sized business owners establish a web presence and improve their lead generation. During
2008, Shoppers formally changed the names of its print publications to PennySaverUSA.com (California) and
TheFlyer.com (Florida). In 2008, our Shoppers segment had revenues of $350.1 million, which represented
32% of our total revenue.
At December 31, 2008, our Shoppers were zoned into more than 1,000 separate editions with total circulation of
over 12 million in California and Florida each week. As a result of the difficult economic environment in
California and Florida, we curtailed more than 1.4 million of unprofitable or marginal circulation from July
2008 to February of 2009. This consisted of approximately 850,000 of circulation in California and 550,000 of
circulation in Florida. After the February circulation curtailment, our Shoppers circulation will still reach
approximately 11.5 million addresses each week. We continue to evaluate all of our circulation performance
and may make further circulation reductions in the future as part of our efforts to address the difficult economic
conditions in California and Florida.
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. Direct Marketing
revenues are also affected by economic fundamentals of each industry that we serve, various market factors,
including the demand for services by our clients, and the financial condition of and budgets available to specific
clients, among other factors. Our Shoppers operate in regional markets in California and Florida and are largely
affected by the strength of the local economies.
Our principal operating expense items are labor, postage and transportation.
During the fourth quarter of 2008, our businesses continued to face challenging economic environments, which
negatively impacted our financial performance. Marketing budgets are often more discretionary in nature and
easier to reduce in the short-term than other expenses in response to weak economic conditions. Difficult
economic conditions may also result in reduced demand for our products and services due to consolidation or, in
some cases, bankruptcies of customers and prospective customers in the industry verticals that we serve, and
these economic conditions may result in collection difficulties and bankruptcy preference actions to recover
certain amounts previously paid to us by our clients.
Revenues from our Shoppers business are largely dependent on local advertising expenditures in the California
and Florida geographies in which we operate. Such expenditures are substantially affected by the strength of the
local economies in those markets. During the fourth quarter of 2008, the negative trends and economic
conditions that we have seen throughout 2008 in California and Florida continued and deteriorated. These
conditions were initially created by weakness in the real estate and associated financing markets and have spread
across virtually all categories.
Direct Marketing revenues are dependent on, among other things, national, regional and international economies
and business conditions. During the fourth quarter of 2008, the ongoing economic downturn in the United
States and other economies continued to adversely impact the marketing expenditures and activities of our
customers. What began in prior quarters as caution with spending plans became even more pronounced
throughout the fourth quarter, resulting in significant reductions and delays in spending by clients in the face of
extreme economic uncertainty.
26
Given the external environment, we face an uncertain revenue outlook for 2009, and believe that our financial
performance will continue to be negatively impacted. As a result, we have taken actions, and plan to take
further actions, designed to align our expense base and structure to the external economic environment facing
our businesses. These actions have included further head count reductions, consolidating businesses and closing
facilities, reductions of marginal Shoppers circulation, wage freezes, wage reductions (including salary
reductions for all Harte-Hanks, Inc. officers), tighter management of capital spending, non-client travel
restrictions and enhanced controls around accounts receivable and collections. Nevertheless, we cannot predict
the impact of future economic conditions or the ultimate effectiveness and expenses associated with our efforts
to address those economic conditions.
Results of Operations
Operating results were as follows:
In thousands except
per share amounts
Revenues
Operating expenses
Operating income
2008
$ 1,082,821
965,504
$ 117,317
% Change
-6.9
-3.3
-28.9
2007
$ 1,162,886
997,959
$ 164,927
% Change
-1.8
-0.1
-11.4
2006
$ 1,184,688
998,636
$ 186,052
Net income
$
62,741
Diluted earnings per share $
0.98
-32.3
-22.2
$
$
92,640
-17.1
$ 111,792
1.26
-9.4
$
1.39
Year ended December 31, 2008 vs. Year ended December 31, 2007
Revenues
Consolidated revenues decreased 6.9%, to $1,082.8 million, in 2008 when compared to 2007. Our overall
results reflect decreased revenues of 18.7% from our Shoppers segment, partially offset by a slight increase in
revenues from our Direct Marketing segment. In Shoppers, the negative trends and economic conditions in
California and Florida we saw in 2007 continued and deteriorated throughout 2008. In Direct Marketing, the
overall economic climate in the second half of 2008, and more specifically, the financial market events that
occurred in the fourth quarter of 2008, dramatically influenced business and consumer confidence and resulted
in an immediate adverse impact on our Direct Marketing revenue.
Operating Expenses
Overall operating expenses decreased 3.3%, to $965.5 million, in 2008 compared to 2007. This year-over-year
change includes $10.4 million of expense recognized in 2008 and $9.0 million of expense recognized in 2007
related to cost management actions described above, designed to align our expense base with reduced revenue
levels. The overall decrease in operating expenses was driven by the $35.4 million, or 9.9%, decrease in
Shoppers operating expenses. Shoppers results were impacted by cost cutting measures and the decline in
Shoppers revenues, and included declines in labor, production costs and general and administrative costs. Direct
Marketing operating expenses increased $6.0 million, or 1.0%, and general corporate expense decreased $3.0
million or 20.2%.
Net Income/Earnings Per Share
Net income decreased 32.3%, to $62.7 million, while diluted earnings per share were down 22.2%, to $0.98 per
share, in 2008 when compared to 2007. The decrease in net income was a result of decreased operating income,
primarily at Shoppers, and increased interest expense, partially offset by lower general corporate expense and a
lower effective tax rate in 2008 when compared to 2007.
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
27
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 $9.0 million of restructuring and transition costs, including compensation costs recognized
during the third quarter of 2007 associated with the retirement of former President and Chief Executive Officer
Richard Hochhauser, 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.
Direct Marketing
Direct Marketing operating results were as follows:
In thousands
Revenues
Operating expenses
Operating income
2008
$ 732,740
629,619
$ 103,121
% Change
0.0
1.0
-5.2
2007
$ 732,461
623,665
$ 108,796
% Change
3.2
3.9
-0.6
2006
$ 709,728
600,270
$ 109,458
Year ended December 31, 2008 vs. Year ended December 31, 2007
Revenues
Direct Marketing revenues increased $0.3 million, or less than 0.1%, in 2008 compared to 2007. Revenues
increased 3.2% during the first nine months of 2008 and decreased 8.1% during the fourth quarter of 2008,
compared to the same periods in 2007. The financial market events of the fourth quarter resulted in many of our
clients reducing or canceling marketing projects.
In 2008, our high tech/telecom and select markets verticals both experienced double-digit revenue growth. High
tech/telecom results were primarily driven by the acquisition of Mason Zimbler in January of 2008 and increases
in various services to an existing high tech client. The select markets increase was due to increased revenues
from the automotive segment. Our retail vertical decreased in the low-single digits as a result of general
economic conditions causing reduced consumer spending and the bankruptcy of several clients. The financial
vertical was down in the high-single digits from decreases in retail banking and consumer finance businesses.
Our pharma/healthcare vertical decreased double-digits primarily as the result of the healthcare segment within
the vertical.
28
The acquisition of Mason Zimbler positively affected our revenues by approximately 1.0% in 2008 compared to
2007.
2009 revenues will depend on, among other factors, the impact and duration of the ongoing economic downturn
and overall strength of the national and international economy and how successful we are at maintaining and
growing business with existing clients, acquiring new clients and meeting client demands. We believe that in
the long term an increasing portion of overall marketing and advertising expenditures will be moved from other
advertising media to the targeted media space, the results of which can be more effectively tracked, enabling
measurement of the return on marketing investment, and that our business will benefit as a result. Standard
postage rates increased in 2006 and 2008 and we expect them to increase again in May of 2009. 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 $6.0 million, or 1.0%, in 2008 compared to 2007. The results were affected by
approximately $5.8 million and $4.2 million of costs, primarily severance and lease termination costs,
recognized in 2008 and 2007, respectively, as part of the restructuring and cost-cutting initiatives discussed
above. Labor costs decreased $3.6 million, or 1.1%, in 2008 compared to 2007 due to headcount reductions and
lower incentive compensation. This decrease was partially offset by a $2.1 million increase in severance.
Production and distribution costs increased $11.1 million, or 5.2%, due to higher logistics-related transportation
costs resulting from increased volumes and higher fuel costs for much of 2008. General and administrative
expense decreased $0.9 million, or 1.7%, due primarily to decreased travel, recruiting and training costs. This
decrease was partially offset by increased outside sales commissions and higher bad debt expense due to several
customers experiencing financial difficulties. Depreciation and amortization expense decreased $0.7 million, or
2.4%, due to certain intangible assets and software becoming fully amortized.
The acquisition of Mason Zimbler also contributed to the increase in operating expenses in 2008 compared to
2007.
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. As a result of the
negative economic trends in the second half of 2008, we have taken actions to adjust our expense base to
reduced revenue levels. These actions, which will continue into the first quarter of 2009, include headcount
reductions, wage freezes and wage reductions. We anticipate recording approximately $1.6 million in severance
costs in the first quarter of 2009 associated with these actions, and expect to realize a positive impact on our
2009 labor costs as a result of these actions. Fuel costs have increased significantly in the last few years and
were at historically high levels throughout much of 2008 before decreasing significantly in the fourth quarter of
2008. Future changes in fuel costs will continue to impact Direct Marketing’s total production costs and total
operating expenses.
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.
29
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.
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.
Shoppers
Shoppers operating results were as follows:
In thousands
Revenues
Operating expenses
Operating income
2008
$ 350,081
324,197
$ 25,884
% Change
-18.7
-9.9
-63.4
2007
$ 430,425
359,641
$ 70,784
% Change
-9.4
-6.9
-20.3
2006
$ 474,960
386,146
$ 88,814
Year ended December 31, 2008 vs. Year ended December 31, 2007
Revenues
Shoppers revenues decreased $80.3 million, or 18.7%, in 2008 compared to 2007. These results reflect the
continued impact that the difficult economic environments in California and Florida are having on our Shoppers
business. The decrease in revenues was the result of decreased sales in established markets, including declines
in virtually every revenue category, and curtailment of unprofitable circulation of approximately 600,000 that
were initiated in June of 2007 and 250,000 that were initiated in July of 2008. The circulation that was curtailed
in June of 2007 was in Northern and Southern California and represented approximately $3.0 million of revenue
in 2007. The circulation that was curtailed in July of 2008 was in Northern California and South Florida and
represented approximately $1.9 million of revenue in 2008 and $4.1 million of revenue in 2007. In response to
the continued difficult economic environments in California and Florida we curtailed an additional 500,000
circulation in South and Central Florida towards the end of December of 2008 and 700,000 circulation in
Northern and Southern California in February of 2009. These December of 2008 and February of 2009
circulation curtailments represented $14.6 million in revenue in 2008. At December 31, 2008 our Shoppers
circulation reached more than 12 million addresses in California and Florida each week. After the February
circulation shut down our Shoppers circulation will still reach approximately 11.5 million addresses each week.
We continue to evaluate all of our circulation performance and may make further circulation reductions in the
future as part of our efforts to address the difficult economic conditions in California and Florida.
Shoppers revenue decrease was slightly offset by the once every five to six year occurrence of one extra
publication week in the fourth quarter of 2008. The 53rd week has historically been marginally profitable and in
2008 we believe it generated a small loss.
30
Operating Expenses
Operating expenses decreased $35.4 million, or 9.9%, in 2008 compared to 2007. This decrease was partially
offset by approximately $4.1 million and $2.4 million of costs recognized in 2008 and 2007 related to the
restructuring, consolidation and circulation shut downs described below. Total labor costs decreased $14.2
million, or 11.0%, as a result of reductions in our Shoppers workforce due to restructuring, consolidations and
circulation curtailments. This decline was partially offset by increased severance costs of $1.9 million. Total
production costs decreased $15.1 million, or 8.0%, due primarily to decreased paper costs resulting from
circulation curtailments, a decline in ad placements and lower newsprint rates, decreased postage due to
circulation curtailments and decreased distribution volumes, and decreased offload printing costs due to
decreased print-and-deliver volumes. Total general and administrative costs decreased $6.5 million, or 20.0%,
due primarily to lower promotion-related expense. Partially offsetting this decrease was a $1.8 million increase
in bad debt expense due to several customers experiencing financial difficulties. Depreciation and amortization
expense increased $0.3 million, or 3.8%, due to the acceleration of depreciation of assets related to the
circulation curtailments and plant consolidation. The overall decline in operating expenses was slightly offset
by incremental expenses associated with the 53rd week of publication in 2008.
Responding to the worsening economic environment, we have taken action to reduce costs in our Shoppers
business. In 2008 and into the first quarter of 2009 we have curtailed over 1.4 million of unprofitable or
marginal Shoppers circulation, representing $16.5 million of revenues and an operating loss of $2.3 million in
2008. The Florida circulation curtailment will allow us to consolidate two production facilities into one facility,
which we expect to complete by the end of the first quarter of 2009. In addition, we implemented wage freezes
in 2008 and wage reductions at the beginning of 2009. We anticipate recording approximately $2.3 million in
additional costs related to these actions in the first quarter of 2009, primarily as a result of the Florida
production consolidation.
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. We expect to realize a positive
impact on our 2009 labor costs as a result of the headcount reductions and wage reductions described above.
Standard postage rates increased in 2006 and 2008 and we expect them to increase again in May of 2009. This
postage increase is expected to affect Shoppers postage costs in 2009. Paper prices were down for much of
2008 before increasing in the second half. We expect paper prices to increase approximately 10% in 2009 over
our average 2008 prices, which will affect Shoppers production costs.
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
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.
Operating Expenses
Operating expenses decreased $26.5 million, or 6.9%, in 2007 compared to 2006. This decrease was partially
offset by approximately $2.4 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
31
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 accelerated
depreciation of assets related to the circulation shut down.
General Corporate Expense
Year ended December 31, 2008 vs. Year ended December 31, 2007
General corporate expense decreased $3.0 million, or 20.2%, during 2008 compared to 2007. The decrease was
primarily due to a $2.4 million decrease in labor due to $2.5 million of compensation costs recognized during
the third quarter of 2007 associated with the retirement of former President and Chief Executive Officer Richard
Hochhauser. The decrease in labor was partially offset by $0.5 million of severance costs recognized in 2008.
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 retirement of former President and Chief Executive Officer Richard Hochhauser.
Interest Expense
Interest expense increased $1.2 million, or 9.3%, in 2008 compared to 2007, and $6.7 million, or 105.1%, in
2007 compared to 2006. These increases were due to higher outstanding debt levels, primarily due to the
repurchases of our common stock, than in the previous years. Our debt at December 31, 2008 and 2007 is
described in Note C, “Long-Term Debt,” of the “Notes to Consolidated Financial Statements,” included herein.
Interest Income
Interest income decreased $0.2 million, or 29.9%, in 2008 compared to 2007 due to normal variances in cash
levels and lower interest rates on investments. Interest income increased $0.3 million, or 133.3%, in 2007
compared to 2006 due to normal variances in cash levels and higher interest rates on investments.
Other Income and Expense
Other net expense for 2008 and 2007 primarily consists of currency transaction gains and losses, balance-based
bank charges and stockholders’ expenses.
Income Taxes
Year ended December 31, 2008 vs. Year ended December 31, 2007
Income taxes decreased $19.7 million in 2008 compared to 2007 due to lower pretax income levels. The
effective income tax rate for 2008 was 38.2% compared to 38.7% in 2007. The decrease in the effective tax rate
from 2007 to 2008 was primarily the result of the recognition of certain tax benefits in the first quarter of 2008.
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, 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.
32
Liquidity and Capital Resources
Sources and Uses of Cash
As of December 31, 2008, cash and cash equivalents were $30.2 million, increasing $7.3 million from cash and
cash equivalents at December 31, 2007. This net increase was a result of net cash provided by operating
activities of $116.7 million, offset by net cash used in investing activities of $28.3 million and net cash used in
financing activities of $79.7 million.
Operating Activities
Net cash provided by operating activities in 2008 was $116.7 million, compared to $143.2 million in 2007. The
$26.5 million year-over-year decrease was attributable to lower net income and changes within working capital
assets and liabilities.
In 2008, our principal working capital changes, which directly affected net cash provided by operating activities,
were as follows:
• A decrease in accounts receivable attributable to lower revenues in the fourth quarter of 2008 than in the
fourth quarter of 2007. Days sales outstanding of approximately 58 days at December 31, 2008
compared to 60 days at December 31, 2007;
• An increase in inventory due to timing and increasing prices in the fourth quarter of 2008;
• A decrease in prepaid expenses and other current assets due to timing of payments;
• A decrease in accounts payable due to overall lower operating expenses in the fourth quarter of 2008
than in the fourth quarter of 2007, lower insurance reserves at December 31, 2008 than at December 31,
2007, and a net overdraft cash balance of $8.4 million at December 31, 2007;
• A decrease in accrued payroll and related expenses due to a payment of 2007 bonuses and lower
accruals for bonus and commissions at December 31, 2008 than at December 31, 2007 due to 2008
revenue performance;
• A decrease in customer deposits and unearned revenue due to timing of receipts; and
• A decrease in income taxes payable due to the timing of quarterly estimated federal and state taxes
payments and lower pretax income levels in 2008 than 2007.
Investing Activities
Net cash used in investing activities was $28.3 million in 2008, compared to $28.1 million in 2007. The
difference is the result of the January 2008 acquisition of Mason Zimbler, offset by a $8.3 million decline in
capital spending in 2008 compared to 2007.
Financing Activities
Net cash used in financing activities was $79.7 million in 2008 compared to net cash outflows of $130.8 million
in 2007. The difference is attributable primarily to $107.2 million less spent on the repurchase of our common
stock. This difference was partially offset by $42.6 million less net borrowing in 2008 than in 2007 and $12.5
million less proceeds related to the issuance of common stock in 2008 than in 2007.
33
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 Facility) rate plus a
spread. The spread is determined based on our total debt-to-EBITDA (as defined in the Revolving Credit
Facility) 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 $200 million term loan facility (2006 Term Loan Facility)
with Wells Fargo Bank, N.A., as Administrative Agent. 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 2006 Term Loan Facility matures on September 6, 2011. For each borrowing under the 2006 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 2006 Term Loan Facility) rate, plus a spread which is determined based on our
total debt-to-EBITDA ratio (as defined in the 2006 Term Loan Facility) 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 2006
Term Loan Facility that is based on a facility fee rate applied to the outstanding principal balance owed under
the 2006 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.
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 had a maturity date of July
18, 2008 and would have allowed us to obtain revolving credit loans up to that date if it had not been terminated
in March 2008.
On March 7, 2008, we terminated the Bridge Loan Facility and entered into a new four-year $100 million term
loan facility (2008 Term Loan Facility) with Wells Fargo Bank, N.A., as Administrative Agent. On March 31,
2009, we will begin making the scheduled quarterly principal payments as follows:
Quarterly
Installments
1 – 4
5 – 8
9 – 12
Maturity Date
Percentage of
Drawn Amount
2.25% each
3.75% each
4.00% each
Remaining Principal Balance
34
The 2008 Term Loan Facility matures on March 7, 2012. For each borrowing under the 2008 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 2008 Term Loan Facility) rate, plus a spread which is determined based on our
total debt-to-EBITDA ratio (as defined in the 2008 Term Loan Facility) 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 2008
Term Loan Facility that is based on a rate applied to the outstanding principal balance owed under the 2008
Term Loan Facility. The facility fee rate ranges from .10% to .25% per annum, depending on our total debt-to-
EBITDA ratio then in effect. We may elect to prepay the 2008 Term Loan Facility at any time. Once an
amount has been prepaid, it may not be reborrowed.
Under all of our credit facilities we are required to maintain an interest coverage ratio of not less than 2.75 to 1
and a total debt-to-EBITDA ratio of not more than 3.0 to 1. The credit facilities also contain 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, 2008, 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, 2008 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...............................
Total
2010
$ 270,625 $ 30,938 $ 46,688 $ 133,000 $ 60,000 $
2009
2012
2011
5,295
86,757
4,565
17,662
4,055
–
20,117
702
1,243
1,443
$ 388,959 $ 64,488 $ 70,193 $ 149,801 $ 72,512 $
5,295
25,159
702
841
1,553
–
13,839
702
1,274
986
–
10,351
702
1,387
72
2013
Thereafter
–
–
9,501
1,055
11,445
–
9,966 $ 22,001
– $
–
7,790
702
1,472
2
At December 31, 2008, we had letters of credit in the amount of $17.6 million. No amounts were drawn against
these letters of credit at December 31, 2008. These letters of credit renew annually and exist to support
insurance programs relating to workers’ compensation, automobile and general liability, and leases. We had no
other off-balance sheet arrangements at December 31, 2008.
Dividends
We paid a quarterly dividend of 7.5 cents per common share and 7.0 cents per common share in each of the
quarters in the years ended December 31, 2008 and 2007, respectively. We currently plan to pay a quarterly
dividend of 7.5 cents per common share in each of the quarters in 2009, although any actual dividend
declaration can be made only upon approval of our Board of Directors, based on its business judgment.
35
Share Repurchase
During 2008, we repurchased 4.9 million shares of our common stock for $76.6 million under our stock
repurchase program, all of which was purchased during the first quarter of 2008. As of December 31, 2008, we
have repurchased 63.9 million shares since the beginning of our January 1997 stock repurchase program. 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. Under this program, we had authorization to
repurchase approximately 10.5 million additional shares at December 31, 2008.
Outlook
We consider such factors as current assets, current liabilities, total debt, revenues, operating income and cash
flows from operations, investing activities and financing activities when assessing our liquidity. Our primary
sources of liquidity have been cash and cash equivalents on hand and cash generated from operating activities.
Our management of cash is designed to optimize returns on cash balances and to ensure that it is readily
available to meet our operating, investing and financing requirements as they arise. Capital resources are also
available from and provided through our Revolving Credit Facility, subject to the terms and conditions of that
facility.
The amount of cash on hand and borrowings available under our Revolving Credit Facility are influenced by a
number of factors, including fluctuations in our operating results, revenue growth, accounts receivable
collections, working capital changes, capital expenditures, tax payments, share repurchases, acquisitions and
dividends.
Recent developments in the financial markets have increased our exposure to the possible liquidity and credit
risks of counterparties to our Revolving Credit Facility. As of December 31, 2008, we had $125.0 million of
unused borrowing capacity under our Revolving Credit Facility and we have not experienced any limitations to
date on our ability to access this source of liquidity. Based on our current operational plans, we believe that our
Revolving Credit Facility, together with cash provided by operating activities, will be sufficient to fund
operations, anticipated capital expenditures, contributions to our pension plans, payments of principal and
interest on our borrowings, and dividends on our common stock for at least the next twelve months.
Nevertheless, we cannot predict the impact on our business performance of the ongoing economic downturn in
the United States and other economies. A lasting economic downturn or recession in the United States and other
economies could have a material adverse effect on our business, financial position or operating results.
Our Revolving Credit Facility matures in August 2010. If the ongoing disruptions in the credit markets continue
for an extended period of time, we may be unable to obtain a replacement facility on acceptable terms or at all,
or we may be unable to access funds under our Revolving Credit Facility because of counterparty risk or other
factors. In that event, depending on our ability to generate sufficient cash flow from operations, our overall
liquidity and ability to make payments on our indebtedness under our 2006 Term Loan Facility (which matures
in September 2011) and our 2008 Term Loan Facility (which matures in March 2012) may be adversely
impacted, and we may be required to seek one or more alternatives, such as refinancing or restructuring our
indebtedness, selling material assets or operations or seeking to raise debt or equity capital. We cannot assure
you that any of these actions could be affected on a timely basis or on satisfactory terms or at all. In addition,
our existing debt agreements contain restrictive covenants which may prohibit us from adopting one or more of
these alternatives.
Critical Accounting Policies
Critical accounting policies are defined as those that, in our judgment, are most important to the portrayal of our
company’s financial condition and results of operations and which require complex or subjective judgments or
estimates. The areas that we believe involve the most significant management estimates and assumptions are
detailed below. Actual results could differ materially from those estimates under different assumptions and
conditions. Historically, actual results have not differed significantly from our estimates.
36
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. In
most cases, proportional performance is based on the ratio of direct costs incurred to total estimated costs where
the costs incurred, primarily labor hours and outsourced services, represent a reasonable surrogate for output
measures or contract performance. 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. For fixed fee market research
revenue streams, revenue is recognized in proportion to the value of service provided based on output criteria.
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, 2008, 2007 and
2006.
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
elements. This means we defer revenue from the software sale equal to the fair value of the undelivered
37
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 objective and reliable evidence of the fair value of the undelivered element(s) exist(s). When we are
able to unbundle the arrangement into separate units of accounting, 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 USPS.
Taxes collected from customers and remitted to governmental authorities are not reflected in our revenues or
expenses.
Allowance for Doubtful Accounts
We maintain our allowance for doubtful accounts at a balance adequate to reduce accounts receivable to the
amount of cash expected to be realized upon collection. The methodology used to determine the minimum
allowance balance is based on our prior collection experience and is generally related to the accounts receivable
balance in various aging categories. The balance is also influenced by specific clients’ financial strength and
circumstance. Accounts that are determined to be uncollectible are written off in the period in which they are
determined to be uncollectible. Periodic changes to the allowance balance are recorded as increases or decreases
to bad debt expense, which is included in the “Advertising, selling, general and administrative” line of our
Consolidated Statements of Operations. We recorded bad debt expense of $5.8 million, $3.5 million and $2.5
million for the years ended December 31, 2008, 2007 and 2006, respectively. While we believe our reserve
38
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. Current economic conditions increase the difficulty and level of
management judgement in setting the reserve. Given the significance of accounts receivable to the consolidated
financial statements, the determination of net realizable values is considered to be a critical accounting estimate.
Reserve for Healthcare, Workers’ Compensation, Automobile and General Liability
We are self-insured for our workers’ compensation, automobile, general liability and a portion of our healthcare
insurance. We make various subjective judgments about a number of factors in determining our reserve for
healthcare, workers’ compensation, automobile and general liability insurance, and the related expense. Our
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. If ultimate losses were 10% higher than our estimate at December 31, 2008, net income would be
impacted by approximately $0.8 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 “Labor” line of our Consolidated Statement of Operations.
Goodwill
Goodwill is recorded to the extent that the purchase price exceeds the fair value of the identifiable net 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 is 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. As quoted market prices are not available for
our reporting units, estimated fair value is determined using projected discounted future cash flows based on
historical performance and management’s estimate of future performance, giving consideration to existing and
anticipated competitive and economic conditions. Cash flow multiple models and our overall market
capitalization are also considered when evaluating the fair value of our reporting units. 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, 2008.
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, 2008 and 2007, our goodwill balance was $552.9 million and $543.6 million, respectively.
Based upon our analysis, the estimated fair values of our reporting units as of December 31, 2008 were in excess
of the reporting units’ carrying values.
39
Stock-based Compensation
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. 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, 2008, 2007 and 2006, we
recorded total stock-based compensation expense of $5.8 million, $7.1 million and $7.4 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, 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 30 – day rate of 0.46% at December 31, 2008). The five-year $125
million Revolving Credit Facility has a maturity date of August 12, 2010. At December 31, 2008, we did not
have any debt outstanding under the Revolving Credit Facility. The five-year $200 million 2006 Term Loan
Facility has a maturity date of September 6, 2011. At December 31, 2008, our debt balance related to the 2006
Term Loan Facility was $170.6 million. The four-year 2008 Term Loan Facility has a maturity date of March 7,
2012. At December 31, 2008, our debt balance related to the 2008 Term Loan Facility was $100.0 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.
Assuming the actual level of borrowing throughout 2008, and assuming a one percentage point change in the
year’s average interest rates, it is estimated that our 2008 net income would have changed by approximately
$0.9 million. Due to our interest rate swap, overall debt level at December 31, 2008, 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.
Our earnings are also affected by fluctuations in foreign currency exchange rates as a result of our operations in
foreign countries. Our primary exchange rate exposure is to the Euro, British pound sterling, Australian dollar,
Philippine peso and Brazilian real. We monitor these risks throughout the normal course of business. The
majority of the transactions of our U.S. and foreign operations are denominated in the respective local
currencies. Changes in exchange rates related to these types of transactions are reflected in the applicable line
items making up operating income in our Statement of Operations. Due to the current level of operations
40
conducted in foreign currencies, we do not believe that the impact of fluctuations in foreign exchange rates on
these types of transactions is significant to our overall annual earnings. A smaller portion of our transactions are
denominated in currencies other than the respective local currencies. For example, inter-company transactions
that are expected to be settled in the near-term are denominated in U.S. dollars. Since the accounting records of
our foreign operations are kept in the respective local currency, any transactions denominated in other currencies
are accounted for in the respective local currency at the time of the transaction. Upon settlement of such a
transaction, any foreign currency gain or loss results in an adjustment to income, which is recorded in “Other,
net” in our Statement of Operations. Transactions such as these amounted to $0.6 million in pre-tax currency
transaction losses in 2008. At this time 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.
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 2008 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.
41
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial Reporting are set forth in the Consolidated Financial
Statements beginning on page F-1.
ITEM 9B.
OTHER INFORMATION
None.
PART III
Some of the information required by Items 10 through 14 of this Part III is incorporated by reference from our
definitive proxy statement to be filed for our 2009 annual meeting of stockholders (2009 Proxy Statement), as
indicated below. Our 2009 Proxy Statement will be filed with the SEC not later than 120 days after December
31, 2008. Because the 2009 Proxy Statement has not yet been finalized and filed, there may be certain
discrepancies between the currently anticipated section headings specified below and the final section headings
contained in the 2009 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 2009
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 2009 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 2009 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 17, 2008.
42
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 2009 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 2009 Proxy Statement
under the caption “Compensation Committee Report” is not deemed to be “filed” with the SEC or subject to the
liabilities of the 1934 Act.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Beneficial Ownership Tables
The information required by this item regarding security ownership of certain beneficial owners, management
and directors will be set forth in our 2009 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 2009 Proxy Statement under the caption “Executive Compensation - Equity
Compensation Plan Information at Year-End 2008,” 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 2009 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 2009 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 2009 Proxy Statement
under the caption “Audit Committee and Independent Registered Public Accounting Firm,” which information
is incorporated herein by reference.
43
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.
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/ Larry Franklin
Larry Franklin
President and Chief Executive Officer
Date: March 2, 2009
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/ Larry Franklin
Larry Franklin
Chairman, President and Chief Executive Officer
Date:
March 2, 2009
/s/ Jessica Huff
Jessica Huff
Vice President, Finance and
Chief Accounting Officer
Date:
March 2, 2009
/s/ Houston H. Harte
Houston H. Harte, Vice Chairman
Date:
March 2, 2009
/s/ David L. Copeland
David L. Copeland, Director
Date:
March 2, 2009
/s/ William F. Farley
William F. Farley, Director
March 2, 2009
Date:
/s/ Douglas Shepard
Douglas Shepard
Executive Vice President and
Chief Financial Officer
Date:
March 2, 2009
/s/ William K. Gayden
William K. Gayden, Director
Date:
March 2, 2009
/s/ Christopher M. Harte
Christopher M. Harte, Director
Date:
March 2, 2009
/s/ Judy C. Odom
Judy C. Odom, Director
Date:
March 2, 2009
/s/ Karen A. Puckett
Karen A. Puckett, Director
March 2, 2009
Date:
45
Harte-Hanks, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2008
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2008
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for each of the years in the three-
year period ended December 31, 2008
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, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in
conformity with U.S. generally accepted accounting principles.
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, 2008, 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 27, 2009, expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
San Antonio, Texas
February 27, 2009
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 control over financial reporting. We
maintain a system of internal control 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 control over financial reporting. It sets the
tone of our organization and includes factors such as integrity and ethical values. Our internal control over
financial reporting is 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 control 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, 2008.
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.
March 2, 2009
/s/ Larry Franklin
Larry Franklin
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, 2008, 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, 2008, 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, 2008
and 2007, 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, 2008, and our report
dated February 27, 2009 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
San Antonio, Texas
February 27, 2009
F-4
Harte-Hanks, Inc. and Subsidiaries Consolidated Balance Sheets
In thousands, except per share and share amounts
ASSETS
Current assets
December 31,
2008
2007
Cash and cash equivalents .................................................................................
Accounts receivable (less allowance for doubtful accounts of $4,191
in 2008 and $3,556 in 2007) ....................................................................
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 ...........................................................
$ 30,161
169,418
7,481
14,169
13,000
6,974
241,203
3,347
38,972
90,938
189,784
323,041
(231,197)
91,844
5,589
97,433
Intangible and other assets
Goodwill, net......................................................................................................
Other intangible assets (less accumulated amortization of $12,241
in 2008 and $10,235 in 2007)..................................................................
Other assets ........................................................................................................
Total intangible and other assets ..............................................................
Total assets ...............................................................................................
552,877
17,989
4,064
574,930
$ 913,566
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt..................................................................
Accounts payable ...............................................................................................
Accrued payroll and related expenses ................................................................
Customer deposits and deferred revenue ...........................................................
Income taxes payable .........................................................................................
Other current liabilities ......................................................................................
Total current liabilities .............................................................................
Long-term debt.............................................................................................................
Other long-term liabilities (including deferred income taxes of $65,723
$
30,938
48,182
22,177
58,227
9,128
19,083
187,735
239,687
in 2008 and $66,060 in 2007) ............................................................................
Total liabilities .........................................................................................
129,772
557,194
Stockholders’ equity
Common stock, $1 par value, authorized: 250,000,000 shares
Issued 2008: 118,085,480; Issued 2007: 117,692,688 shares...................
Additional paid-in capital...................................................................................
Retained earnings...............................................................................................
Less treasury stock, 2008: 54,672,070; 2007: 49,756,675 shares at cost ...........
Accumulated other comprehensive loss .............................................................
Total stockholders’ equity ........................................................................
Total liabilities and stockholders’ equity .................................................
118,085
331,227
1,189,376
(1,236,581)
(45,735)
356,372
$ 913,566
See Accompanying Notes to Consolidated Financial Statements.
F-5
$ 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
543,583
20,939
9,370
573,892
$ 951,926
$
–
67,167
26,443
61,988
12,482
12,028
180,108
259,125
104,181
543,414
117,693
323,182
1,145,736
(1,160,205)
(17,894)
408,512
$ 951,926
Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Operations
In thousands, except per share amounts
Operating revenues ..............................................................................................
Operating expenses
Labor ..........................................................................................................
Production and distribution ........................................................................
Advertising, selling, general and administrative ........................................
Depreciation and amortization ...................................................................
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,
2008
2007
2006
$1,082,821
$1,162,886
$1,184,688
448,769
398,701
81,655
33,429
2,950
965,504
117,317
14,201
(378)
1,925
15,748
101,569
38,828
62,741
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
0.98
$
1.28
$
1.41
Weighted-average common shares outstanding ...................................................
63,933
72,524
79,049
Diluted earnings per common share.....................................................................
$
0.98
$
1.26
$
1.39
Weighted-average common and common equivalent shares outstanding ............
64,104
73,703
80,646
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:
Decrease (increase) in accounts receivable, net .............................
(Increase) decrease in inventory....................................................
Decrease (increase) in prepaid expenses and other current assets ..
(Decrease) increase in accounts payable ........................................
(Decrease) increase in other accrued expenses and other liabilities
Other, net........................................................................................
Net cash provided by operating activities.................................
Cash Flows from Investing Activities
Acquisitions, net of cash acquired..............................................................
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
Borrowings.................................................................................................
Payments on borrowings ............................................................................
Issuance of common stock .........................................................................
Excess tax benefits from stock-based compensation..................................
Purchase of treasury stock..........................................................................
Dividends paid ...........................................................................................
Net cash used in financing activities ........................................
Year Ended December 31,
2008
2007
2006
$
62,741
$ 92,640
$ 111,792
33,429
2,950
5,827
(342)
13,529
192
31,477
(1,474)
4,063
(21,548)
(16,034)
1,891
116,701
(8,688)
(19,947)
339
(28,296)
197,000
(185,500)
4,203
342
(76,649)
(19,101)
(79,705)
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)
16,747
2,455
(183,867)
(20,299)
(130,839)
298
(15,423)
38,270
$ 22,847
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)
12,736
2,950
(186,003)
(18,902)
(46,219)
319
13,709
24,561
$ 38,270
Effect of exchange rate changes on cash and cash equivalents............................
Net increase (decrease) in cash and cash equivalents ..........................................
Cash and cash equivalents at beginning of year...................................................
Cash and cash equivalents at end of year.............................................................
(1,386)
7,314
22,847
30,161
$
See Accompanying Notes to Consolidated Financial Statements.
F-7
Harte-Hanks, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Common
Stock
In thousands, except per share amounts
Balance at December 31, 2005......................................... $ 115,453
201
Common stock issued — employee stock purchase plan
843
Exercise of stock options..................................................
–
Net tax effect of stock options..........................................
–
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
–
–
–
(net of tax benefit of $14,108) ..............................
–
Balance at December 31, 2006......................................... $ 116,497
213
Common stock issued — employee stock purchase plan
983
Exercise of stock options..................................................
–
Net tax effect of stock options..........................................
–
Stock-based compensation ...............................................
–
Dividends paid ($0.28 per share) .....................................
–
Treasury stock issued .......................................................
Treasury stock repurchased ..............................................
–
Comprehensive income, net of tax:
Additional
Paid-in
Capital
$ 269,865
4,277
9,679
3,769
7,941
–
24
–
–
–
–
–
$ 295,555
3,851
13,163
3,554
7,057
–
2
–
Retained
Earnings
$ 980,505
–
–
–
–
(18,902)
–
–
111,792
–
–
–
$1,073,395
–
–
–
–
(20,299)
–
–
Accumulated
Other
Total
Comprehensive Stockholders’
Equity
Income(Loss)
$ 561,346
$ (21,982)
4,478
–
4,229
–
3,769
–
7,941
–
(18,902)
–
190
–
(186,003)
–
$
Treasury
Stock
(782,495)
–
(6,293)
–
–
–
166
(186,003)
–
–
–
$
–
(974,625)
–
(1,892)
–
–
–
179
(183,867)
–
111,792
24,909
1,290
(21,563)
$ (17,346)
–
–
–
–
–
–
–
24,909
1,290
137,991
(21,563)
$ 493,476
4,064
12,254
3,554
7,057
(20,299)
181
(183,867)
Net income ............................................................
Adjustment to pension liability
(net of tax benefit of $595).............................
Change in value of derivative instrument
–
–
–
–
92,640
–
–
–
–
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
Common stock issued — employee stock purchase plan
298
Exercise of stock options and release of nonvested
–
–
–
$ 323,182
2,639
–
–
–
$1,145,736
–
–
–
–
$ (1,160,205)
–
(1,557)
1,493
–
$ (17,894)
–
(1,557)
1,493
92,092
$ 408,512
2,937
shares .....................................................................
Net tax effect of stock options and nonvested shares ......
Stock-based compensation ...............................................
Dividends paid ($0.30 per share) .....................................
Treasury stock issued .......................................................
Treasury stock repurchased ..............................................
Comprehensive income, net of tax:
Net income ............................................................
Adjustment to pension liability
(net of tax benefit of $15,259) .......................
Change in value of derivative instrument
94
–
–
–
–
–
–
–
1,267
(1,550)
5,827
–
(138)
–
–
–
–
–
–
(19,101)
–
–
62,741
–
(49)
–
–
–
322
(76,649)
–
–
–
–
–
–
–
–
–
1,312
(1,550)
5,827
(19,101)
184
(76,649)
62,741
(22,886)
(22,886)
accounted for as a cash flow hedge
–
(net of tax benefit of $762).............................
–
Foreign currency translation adjustment...............
Total comprehensive income............................................
–
Balance at December 31, 2008......................................... $ 118,085
See Accompanying Notes to Consolidated Financial Statements.
–
–
–
$ 331,227
–
–
–
$1,189,376
–
–
–
$ (1,236,581)
(1,146)
(3,809)
–
$ (45,735)
(1,146)
(3,809)
34,900
$ 356,372
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. Actual results and outcomes could differ from those estimates and assumptions. On an ongoing basis
management reviews its estimates based on currently available information. Changes in facts and circumstances
could result in revised estimates and assumptions.
Operating Expense Presentation in Consolidated Statement of Operations
The “Labor” line in the Consolidated Statements of Operations includes all employee payroll and benefits,
including stock-based compensation, along with temporary labor costs. The “Production and distribution” and
“Advertising, selling and general administrative” lines do not include labor, depreciation or amortization.
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. In
most cases, proportional performance is based on the ratio of direct costs incurred to total estimated costs where
the costs incurred, primarily labor hours and outsourced services, represent a reasonable surrogate for output
measures or contract performance. 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. For fixed fee market research revenue
streams, revenue is recognized in proportion to the value of service provided based on output criteria. Contracts
F-9
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, 2008, 2007 and 2006.
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
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
F-10
multiple element arrangements into separate units of accounting when the delivered element(s) has stand-alone
value and objective and reliable evidence of the fair value of the undelivered element(s) exist(s). When we are
able to unbundle the arrangement into separate units of accounting, 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.
Shoppers 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, 2008 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 ...................
2008
$ 3,556
5,793
5,158
$ 4,191
2007
$ 3,928
3,483
3,855
$ 3,556
2006
$ 3,832
2,491
2,395
$ 3,928
Inventory
Inventory, consisting primarily of newsprint and operating supplies, is stated at the lower of cost (first-in, first-
out method) or market.
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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 2008 or 2007.
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 identifiable net
assets acquired. Other intangibles with definite and indefinite useful lives are recorded at fair value at the date
of the acquisition. 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 of our reporting units and other intangibles with indefinite useful lives has been determined
using discounted cash flow methodology. Our overall market capitalization was also considered when
evaluating the fair value of our reporting units. 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, 2008.
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
temporary differences by applying enacted statutory tax rates applicable to future years. These temporary
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
during the period. Diluted earnings per common share are based upon the weighted-average number of common
shares and dilutive common stock equivalents outstanding during the period. Dilutive common stock
equivalents are calculated based on the assumed exercise of stock options and vesting of nonvested shares using
the treasury stock method.
Stock-Based Compensation
We account for stock-based compensation in accordance with SFAS No. 123, as revised, Share-Based Payment
(SFAS 123R). 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.
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Reserve for Healthcare, Workers’ Compensation, Automobile and General Liability
We are self-insured for our workers’ compensation, automobile, general liability and a portion of our healthcare
insurance. We make various subjective judgments about a number of factors in determining our reserve for
healthcare, workers’ compensation, automobile and general liability insurance, and the related expense. Our
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 “Labor”
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
flow hedge. As such, we report the fair value of the swap as an asset or liability on our balance sheet. The
effective portion of changes in the fair value of the swap is recorded in other comprehensive loss and is
recognized as a component of interest expense in the Statement of Operations when the hedged item affects
results of operations. Any hedge ineffectiveness is recorded as interest expense. 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.
Foreign Currencies
In most instances the functional currencies of our foreign operations are the local currencies. Assets and
liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue
and expenses are translated at average rates of exchange prevailing during a given month. Translation
adjustments resulting from this process are charged or credited to other comprehensive loss.
Recent Accounting Pronouncements
We adopted the provisions of SFAS No. 157, Fair Value Measurements, (SFAS 157) relating to financial assets
and liabilities on January 1, 2008. In February 2008, the FASB issued Staff Position FAS 157-2, Effective Date
of FASB Statement No. 157, which delayed the effective date of SFAS 157 for all non-financial assets and non-
financial liabilities, except those that are measured at fair value on a recurring basis. SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. The adoption of the provisions of SFAS 157 relating to
financial assets and liabilities did not have a significant impact on our consolidated financial statements. New
disclosures required by SFAS 157 are included in Note D, Interest Rate Risk. The adoption of the non-financial
assets and non-financial liabilities provisions of SFAS 157 on January 1, 2009 are not expected to have a
significant impact on our consolidated financial statements.
We adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including an
Amendment of FASB Statement No. 115 (SFAS 159) on January 1, 2008. SFAS 159 permits entities to choose
to measure many financial instruments and certain other items at fair value. We have not made any fair value
elections as permitted under the provisions of SFAS 159; therefore, the adoption of this standard did not have an
impact on our consolidated financial statements.
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In December 2007, the FASB revised SFAS No. 141. The revised SFAS No. 141 (SFAS 141R) establishes
principles and requirements for how an acquiring company:
• 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 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. 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 requires an
acquiring company to recognize contingent consideration at fair value as of the acquisition date. 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, contingencies and contingent consideration. Our adoption of
SFAS 141R may also impact the amount of information we disclose about acquisitions.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161). SFAS 161 establishes, among other things, the disclosure requirements for derivative
instruments and for hedging activities. This statement requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair values and amounts of and gains and losses on
derivative instruments, and disclosures about contingent features related to credit risk in derivative agreements.
SFAS 161 is effective for us beginning January 1, 2009. As SFAS 161 only affects disclosure requirements, our
adoption of SFAS 161 will not affect our consolidated financial statements.
Note B – Acquisitions
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. Goodwill of $9.8 million has been
recognized in this transaction and assigned to the Direct Marketing segment. No other intangible assets were
recognized in this transaction.
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, other intangible assets not subject to amortization of $5.0 million, and other intangible assets
subject to amortization of $4.3 million have been recognized in this transaction and assigned to the Direct
Marketing segment.
F-14
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 other 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
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 other 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. Other 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.
The total cost of acquisitions in 2008 and 2006 was $8.7 million and $53.9 million, respectively, and all were
paid in cash. The operating results of these acquisitions have been included in the accompanying Consolidated
Financial Statements from the date of the acquisitions. We did not make any acquisitions in 2007.
We have not disclosed proforma amounts including the operating results of these 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 due August 12, 2010 ...................................................................
2006 Term Loan Facility, various interest rates based on Eurodollar
(effective rate of 0.46% at December 31, 2008), due
September 6, 2011 ........................................................................................
2008 Term Loan Facility, various interest rates based on Eurodollar
(effective rate of 0.46% at December 31, 2008), due
December 31,
2008
2007
$
–
$ 69,000
170,625
190,125
March 7, 2012 ...............................................................................................
Total debt ...........................................................................................................
Less current maturities .......................................................................................
Total long-term debt...........................................................................................
100,000
270,625
30,938
$ 239,687
–
259,125
–
$ 259,125
F-15
The carrying values and estimated fair values of our outstanding debt at year-end were as follows:
In thousands
Total debt
2008
2007
Carrying
Value
$ 270,625
Fair
Value
$ 251,534
Carrying
Value
$ 259,125
Fair
Value
$ 259,125
The fair value of our total debt is estimated based on the current rates proposed to us for debt of the same
remaining maturity and characteristics.
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 Facility) rate plus a
spread. The spread is determined based on our total debt-to-EBITDA (as defined in the Revolving Credit
Facility) 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 $200 million term loan facility (2006 Term Loan Facility)
with Wells Fargo Bank, N.A., as Administrative Agent. 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 2006 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 2006 Term Loan Facility) rate, plus a spread which is determined based on our
total debt-to-EBITDA ratio (as defined in the 2006 Term Loan Facility) 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 2006
Term Loan Facility that is based on a facility fee rate applied to the outstanding principal balance owed under
the 2006 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.
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 had a maturity date of July
18, 2008 and would have allowed us to obtain revolving credit loans up to that date if it had not been terminated
in March 2008.
F-16
On March 7, 2008, we terminated the Bridge Loan Facility and entered into a new four-year $100 million term
loan facility (2008 Term Loan Facility) with Wells Fargo Bank, N.A., as Administrative Agent. On March 31,
2009, we will begin making the scheduled quarterly principal payments as follows:
Quarterly
Installments
1 – 4
5 – 8
9 – 12
Maturity Date
Percentage of
Drawn Amount
2.25% each
3.75% each
4.00% each
Remaining Principal Balance
The 2008 Term Loan Facility matures on March 7, 2012. For each borrowing under the 2008 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 2008 Term Loan Facility) rate, plus a spread which is determined based on our
total debt-to-EBITDA ratio (as defined in the 2008 Term Loan Facility) 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 2008
Term Loan Facility that is based on a rate applied to the outstanding principal balance owed under the 2008
Term Loan Facility. The facility fee rate ranges from .10% to .25% per annum, depending on our total debt-to-
EBITDA ratio then in effect. We may elect to prepay the 2008 Term Loan Facility at any time. Once an
amount has been prepaid, it may not be reborrowed.
Under all of our credit facilities we are required to maintain an interest coverage ratio of not less than 2.75 to 1
and a total debt-to-EBITDA ratio of not more than 3.0 to 1. The credit facilities also contain 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, 2008, we were in compliance with all of the
covenants of our credit facilities.
The future minimum principal payments related to our debt at December 31, 2008 are as follows:
In thousands
2009.......................... $ 30,938
46,688
2010..........................
133,000
2011..........................
60,000
2012..........................
$ 270,625
Cash payments for interest were $14.4 million, $13.2 million, and $6.1 million for the years ended December
31, 2008, 2007 and 2006, 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. We assess interest rate risk by regularly identifying and
F-17
monitoring changes in interest rate exposure that may adversely impact expected future cash flows and by
evaluating hedging opportunities. The derivative instrument used to manage such risk is the interest rate swap.
We do not enter into derivative instruments for any purpose other than cash flow hedging. We do not speculate
using derivative instruments.
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 account for interest rate swaps in accordance with SFAS 133. 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 loss and is recognized as a
component of interest expense in the Statement of Operations when the hedged item affects results of
operations. 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 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. 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 period that cash flows that were being hedged affect earnings.
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 2005
Revolving Credit Facility and 2006 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 income (loss). Fair value is determined using projected discounted
future cash flows calculated using readily available market information (future LIBOR rates). At December 31,
2008 this swap is recorded at fair value as a $4.5 million liability. We recognized into earnings losses of $2.7
million for the year ended December 31, 2008, that were related to the swap and previously reported in other
comprehensive loss. We expect losses of $4.5 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.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. SFAS 157 also establishes a fair
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value hierarchy that prioritizes the inputs used in valuation methodologies into three levels. Fair values
determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Fair values
determined by Level 2 inputs are based on quoted prices for similar assets and liabilities in active markets, and
inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable
inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or
liability. The following table provides additional detail of the fair value of our swap liability at December 31,
2008 by level within the SFAS 157 fair value measurement hierarchy, as required by SFAS 157:
In thousands
Interest rate swap liability
Total
December 31,
2008
$ 4,502
$ 4,502
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
-
$
-
$
Significant
Other
Observable
Inputs
(Level 2)
$ 4,502
$ 4,502
Significant
Unobservable
Inputs
(Level 3)
-
$
-
$
Note E – Income Taxes
The components of income tax expense (benefit) are as follows:
In thousands
Current
Federal...........................................
State and local ...............................
Foreign ..........................................
Total current ..................................
Deferred
Federal...........................................
State and local ...............................
Foreign ..........................................
Total deferred ................................
Year Ended December 31,
2008
2007
2006
$ 19,502
4,153
1,644
$ 25,299
$ 11,703
1,555
271
$ 13,529
$ 39,855
8,719
1,292
$ 49,866
$
$
8,145
609
(123)
8,631
$ 49,958
10,349
433
$ 60,740
$
$
5,487
891
338
6,716
Total income tax expense ..............
$ 38,828
$ 58,497
$ 67,456
The United States and foreign components of income before income taxes were as follows:
In thousands
United States .................................
Foreign ..........................................
2008
$ 95,826
5,743
2007
$ 148,291
2,846
2006
$ 176,777
2,471
Year Ended December 31,
Total income before income taxes.
$ 101,569
$ 151,137
$ 179,248
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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:
2008
In thousands
35%
Computed expected income tax expense.......... $ 35,550
4%
4,081
Net effect of state income taxes .......................
(479)
Production activities deduction ........................
-1%
(324) 0%
Other, net..........................................................
38%
Income tax expense for the period ................... $ 38,828
Total income tax expense (benefit) was allocated as follows:
Year Ended December 31,
2007
$ 52,898
6,063
(1,282)
818
$ 58,497
35%
4%
-1%
1%
39%
2006
$ 62,737
7,306
(1,940)
(647)
$ 67,456
35%
4%
-1%
0%
38%
In thousands
Results of operations ..............................
Stockholders’ equity...............................
Total .......................................................
2008
$ 38,828
(14,471)
$ 24,357
Year Ended December 31,
2007
$ 58,497
(5,187)
$ 53,310
2006
$ 67,456
(1,580)
$ 65,876
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and
deferred tax liabilities were as follows:
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...............................................................
Deferred tax liabilities
Property, plant and equipment ..................................................
Goodwill and other intangibles .................................................
Other, net……………………………………………………...
Total gross deferred tax liabilities ............... .............................
Net deferred tax liabilities ........................... .............................
December 31,
2008
2007
$ 20,835
7,575
4,829
1,391
256
–
1,153
1,051
678
37,768
(663)
37,105
(13,002)
(76,744)
(82)
(89,828)
$ (52,723)
$
9,564
6,520
4,514
1,443
252
627
2,239
1,564
1,101
27,824
(1,047)
26,777
(11,825)
(67,997)
__(387)
(80,209)
$ (53,432)
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, 2008 and 2007.
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 assets and liabilities that give rise to the temporary difference. There
are approximately $24.1 million and $14.2 million of deferred tax assets related to non-current items that are
netted with long-term deferred tax liabilities at December 31, 2008 and 2007, respectively.
F-20
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
2004. For U.S. federal returns, we are no longer subject to tax examinations for the years prior to 2005.
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109 (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................................... $ 10,590
640
Additions for current year tax positions ...............
1,205
Additions for prior year tax positions ..................
(871)
Reductions for prior year tax positions ................
(1,762)
Lapse of statute ....................................................
–
Settlements ...........................................................
9,802
Balance at December 31, 2007.............................
–
Additions for current year tax positions ...............
307
Additions for prior year tax positions ..................
(907)
Reductions for prior year tax positions ................
(2,121)
Lapse of statute ....................................................
–
Settlements ...........................................................
Balance at December 31, 2008............................. $ 7,081
Included in the balance as of December 31, 2008 are $4.8 million of tax benefits that, if recognized, would
impact the effective tax rate. During the years ended December 31, 2008, 2007, and 2006, we recognized
approximately $1.2 million, $0.2 million and $0.1 million in taxes related to interest and penalties. We had
approximately $2.5 million and $1.3 million of interest and penalties accrued at December 31, 2008 and 2007,
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 $2.3 million to $2.5 million during 2009 as a result of the lapsing statutes.
As of December 31, 2008, we had net operating loss carryforwards that are available to reduce future taxable
income and that will begin to expire in 2011.
The valuation allowance for deferred tax assets as of January 1, 2007, was $1.1 million. The valuation
allowance at December 31, 2008 and 2007 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 $28.5 million, $44.1 million and $59.1 million in 2008, 2007 and 2006,
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 identifiable net assets acquired. Pursuant to SFAS 142,
goodwill and other intangibles with indefinite useful lives are tested for impairment as described below.
F-21
We assess the impairment of goodwill and other intangibles with indefinite useful lives in accordance with
SFAS 142. We assess the impairment of goodwill by determining the fair value of each of our reporting units
and comparing the fair value to the carrying value for each reporting unit. We have identified our reporting
units as Direct Marketing and Shoppers. As quoted market prices are not available for our reporting units,
estimated fair value is determined using projected discounted future cash flows based on historical performance
and management’s estimate of future performance, giving consideration to existing and anticipated competitive
and economic conditions. Cash flow multiple models and our overall market capitalization are also considered
when evaluating the fair value of our reporting units. 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 business
combination 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.
We assess the impairment of other intangibles with indefinite lives by determining the fair value of each
intangible and comparing the fair value to the carrying value for each intangible. Fair value is determined using
the relief from royalty method, a form of the income approach, based on historical performance and
management’s estimate of future performance, giving consideration to existing and anticipated competitive and
economic conditions. If an intangible’s carrying amount exceeds its fair value, the intangible asset is written
down to fair value and an impairment loss is recorded.
Both the Direct Marketing and Shoppers reporting units and all other intangibles with indefinite lives were
tested for impairment using the November 30, 2008 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, 2008.
The changes in the carrying amount of goodwill for the years ended December 31, 2008 and 2007, are as
follows:
In thousands
Balance at December 31, 2006.............................
Direct
Marketing
$377,860
Shoppers
$167,487
Total
$545,347
Purchase accounting adjustments.........................
Balance at December 31, 2007.............................
(1,764)
$376,096
–
$167,487
(1,764)
$543,583
Purchase consideration.........................................
Purchase accounting adjustments.........................
Balance at December 31, 2008.............................
9,626
(332)
$385,390
–
–
$167,487
9,626
(332)
$552,877
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 carrying amount of other intangibles with indefinite lives for the years ended December 31, 2008 and 2007,
was $5.0 million in Direct Marketing and $7.6 million in Shoppers.
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
F-22
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, 2008.
The changes in the carrying amount of other intangibles with definite lives for the years ended December 31,
2008 and 2007, are as follows:
In thousands
Balance at December 31, 2006.............................
Direct
Marketing
$ 4,489
Shoppers
$ 6,359
Total
$ 10,848
Amortization ........................................................
Purchase accounting adjustments.........................
Balance at December 31, 2007.............................
(2,347)
1,000
$ 3,142
(1,162)
–
$ 5,197
(3,509)
1,000
$ 8,339
Amortization ........................................................
Balance at December 31, 2008.............................
(1,903)
$ 1,239
(1,047)
$ 4,150
(2,950)
$ 5,389
Amortization expense related to other intangibles with definite useful lives was $3.0 million, $3.5 million and
$2.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. Expected amortization
expense for the next five years is as follows:
In thousands
2009........................... $ 1,712
934
2010...........................
674
2011...........................
648
2012...........................
625
2013...........................
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 other comprehensive income. We currently measure the
funded status of our defined benefit plans as of December 31, the date of our year-end consolidated balance
sheets.
F-23
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) ....................................................
Curtailment..................................................................
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,
2007
2008
$ 131,049
671
7,967
(533)
(1,975)
(6,644)
$ 130,535
$ 115,012
(33,865)
795
(6,644)
$ 75,298
$ 126,565
766
7,778
1,943
–
(6,003)
$ 131,049
$ 108,343
7,227
5,445
(6,003)
$ 115,012
Funded status at end of year........................................
$ (55,237)
$ (16,037)
The following amounts have been recognized in the Consolidated Balance Sheets at December 31:
In thousands
Noncurrent assets ........................................................
Current liabilities.........................................................
Noncurrent liabilities...................................................
$
2008
–
(6,800)
(48,437)
$ (55,237)
$
2007
4,537
–
(20,574)
$ (16,037)
The following amounts have been recognized in accumulated other comprehensive loss at December 31:
In thousands
Net loss........................................................................
Transition obligation ...................................................
Prior service cost .........................................................
2008
$ 45,168
7
97
$ 45,272
2007
$ 22,172
65
146
$ 22,383
We plan to make a $6.0 million contribution to our frozen pension plan in September of 2009 in order to obtain
the Pension Protection Act of 2006 full funding limit exemption. We are not required to make and do not intend
to make any additional contributions to our frozen pension plan in 2009. We are not required to make and do
not intend to make any contributions to our unfunded pension plan in 2009 other than to the extent needed to
cover benefit payments.
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 ..............................................
2008
$ 130,535
$ 128,992
$ 75,298
2007
$ 131,049
$ 127,037
$ 115,012
December 31,
The non-qualified, unfunded pension plan had an accumulated benefit obligation of $16.1 million and $16.6
million at December 31, 2008 and 2007, 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,
2007
2006
2008
$
671
7,967
(8,976)
61
96
2,008
$ 1,827
$
766
7,778
(8,964)
61
96
2,442
$ 2,179
$
762
7,320
(8,258)
61
96
2,513
$ 2,494
Amounts Recognized in Other Comprehensive
Loss (Pre-tax)
Net loss.............................................................................
Transition obligation ........................................................
Prior service cost ..............................................................
Total recognized in other comprehensive loss .................
$ 38,326
(99)
(82)
$ 38,145
Total recognized in net periodic benefit cost and other
comprehensive loss ...................................................
$ 39,972
The estimated net loss and prior service cost 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 $5.5 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 .........................................
6.25%
8.00%
4.00%
6.00%
8.25%
4.00%
6.00%
8.50%
4.00%
2008
Year Ended December 31,
2007
2006
Weighted-average assumptions used to determine
benefit obligations
Discount rate ....................................................................
Rate of compensation increase .........................................
6.25%
4.00%
6.25%
4.00%
December 31,
2008
2007
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, 2008 and 2007, by asset category are as follows:
In thousands
2008
%
Equity securities ............................................................... $ 48,793
65%
35%
26,505
Debt securities ..................................................................
$ 75,298 100%
Total plan assets
2007
$ 87,432
27,580
$ 115,012
%
76%
24%
100%
The expected future pension benefit payments for the next ten years as of December 31, 2008 are as follows:
In thousands
2009............................... $ 6,766
7,451
2010...............................
7,611
2011...............................
8,023
2012...............................
8,410
2013...............................
47,638
2014 - 2018 ...................
$ 85,899
The investment policy for the Harte-Hanks, Inc. Pension Plan focuses on the preservation and enhancement of
the corpus of the plan’s assets through prudent asset allocation, quarterly monitoring and evaluation of
investment results, and periodic meetings with investment managers.
The investment policy’s goals and objectives are to meet or exceed the representative indices over a full market
cycle (3-5 years). The policy establishes the following investment mix, which is intended to subject the
principal to an acceptable level of volatility while still meeting the desired return objectives:
Target
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%
0% - 10%
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%
15% - 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 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 2008, 2007 and 2006 was $6.7 million, $7.2 million and $7.0 million, respectively.
Note H – Stockholders’ Equity
We paid a quarterly dividend of 7.5 cents per common share and 7.0 cents per common share in each of the
quarters in the years ended December 31, 2008 and 2007, respectively. We currently plan to pay a quarterly
F-26
dividend of 7.5 cents per common share in each of the quarters in 2009, although any actual dividend
declaration can be made only upon approval of our Board of Directors, based on its business judgment.
During 2008, we repurchased 4.9 million shares of our common stock for $76.6 million under our stock
repurchase program, all of which was repurchased during the first quarter of 2008. As of December 31, 2008,
we have repurchased 63.9 million shares since the beginning of our January 1997 stock repurchase program. 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. Under this program, we had authorization to
repurchase approximately 10.5 million additional shares at December 31, 2008.
During 2008, we received 4,261 shares of our common stock, with an estimated market value of $49.9 thousand,
in connection with stock option exercises and the vesting of nonvested shares. Since January 1997, we have
received 1.6 million shares in connection with stock option exercises and the vesting of nonvested shares.
Note I – Stock-Based Compensation
We account for stock-based compensation in accordance with SFAS 123R. 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.
Compensation expense for stock-based awards is recognized on a straight-line basis over the vesting
period of the entire award in the “Labor” line of the Consolidated Statement of Operations. For the
years ended December 31, 2008, 2007 and 2006, we recorded total stock-based compensation expense of $5.8
million ($3.6 million, net of tax), $7.1 million ($4.3 million, net of tax) and $7.4 million ($4.6 million, net of
tax), respectively.
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, 2008, there were 2.0 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 value of the common
stock on the grant date (2005 Plan options). All 2005 Plan 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, 2008, 2005 Plan options to purchase 2.3 million shares were outstanding
with exercise prices ranging from $10.12 to $28.85 per share.
Under the 1991 Plan, options were granted at exercise prices equal to the market value of the common stock on
the grant date (1991 Plan market price options) and at exercise prices below the market value of the common
stock (1991 Plan performance options). 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, 2008, 1991 Plan market price options to purchase 4.4 million shares
were outstanding with exercise prices ranging from $13.04 to $26.55 per share.
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. At December 31, 2008, 1991 Plan performance options to
purchase 6,000 shares were outstanding, all with exercise prices of $1.33 per share. No 1991 Plan performance
options have been granted since January 1999 and all remaining 1991 Plan performance options were exercised
in January 2009.
F-27
The following summarizes all stock option activity during 2008, 2007 and 2006:
Weighted-
Average Aggregate
Intrinsic
Remaining
Number
Value
Average Contractual
of Shares Option Price Term (Years) (Thousands)
Weighted-
Options outstanding at December 31, 2005 .........
7,428,184
$18.07
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
Granted.................................................................
Exercised ..............................................................
Cancelled..............................................................
Options outstanding at December 31, 2008 .........
1,083,550
(89,707)
(1,069,797)
6,707,690
25.92
12.00
25.12
$19.44
24.91
14.16
24.67
$20.71
15.73
12.57
20.68
$20.02
Exercisable at December 31, 2008 .......................
4,035,719
$ 18.84
$ 12,754
$ 9,009
$
$
$
327
29
29
5.04
3.20
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,
2008. The pre-tax intrinsic value is the difference between the closing price of our common stock on December
31, 2008 and the exercise price for each in-the-money option. This value fluctuates with the changes in the
price of our common stock.
F-28
The following table summarizes information about stock options outstanding at December 31, 2008:
Range of
Number
Exercise Prices Outstanding
518,364
$ 1.33 – 14.50
551,628
$14.54 – 15.79
886,050
$15.90 – 15.90
603,724
$16.04 – 17.30
787,807
$17.45 – 18.22
508,750
$18.31 – 21.23
637,592
$22.03 – 22.03
377,700
$22.78 – 24.42
739,499
$25.63 – 25.63
509,751
$25.74 – 25.80
586,825
$26.07 – 28.85
6,707,690
Outstanding
Weighted- Weighted-
Average
Exercise
Price
$ 13.49
$ 14.81
$ 15.90
$ 16.59
$ 18.13
$ 19.89
$ 22.03
$ 23.81
$ 25.63
$ 25.80
$ 26.34
$ 20.02
Average
Remaining
Life (Years)
1.55
1.78
9.10
1.57
3.19
3.69
5.08
6.99
6.07
7.09
7.90
5.04
Exercisable
Weighted-
Average
Exercise
Price
$ 13.67
$ 14.81
$ 15.90
$ 16.53
$ 18.13
$ 19.89
$ 22.03
$ 24.00
$ 25.63
$ 25.80
$ 27.20
$18.84
Number
Exercisable
480,864
551,628
–
552,224
787,807
508,750
471,469
139,575
367,413
133,236
42,753
4,035,719
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 2008, 2007 and 2006:
Expected term (in years) ......................................
Expected stock price volatility .............................
Risk-free interest rate ...........................................
Expected dividend yield.......................................
Years Ended December 31,
2007
6.75
21.43%
4.59%
1.11%
2006
6.75
23.25%
4.45%
0.89%
2008
6.75
24.60%
3.13%
1.66%
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 a lack of relevant historical data resulting from changes in option vesting
schedules and changes in the pool of employees receiving option grants. Expected stock price volatility is based
on the historical volatility from traded shares of our stock over the expected term. The risk-free interest rate is
based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the
expected term. 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 $0.30 and $0.42 per share, with a weighted-average annual dividend of $0.36 per share.
The weighted-average fair value of options granted during 2008, 2007 and 2006 was $4.05, $7.32 and $8.11,
respectively. As of December 31, 2008, there was $8.8 million of total unrecognized compensation cost related
to unvested stock options. This cost is expected to be recognized over a weighted average period of
approximately 2.82 years.
Nonvested Shares
All nonvested shares have been granted under the 2005 Plan. In general, nonvested shares vest 100% on the
third anniversary of their date of grant.
F-29
The following summarizes all nonvested share activity during 2008, 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 ............................................
Granted.................................................................
Vested...................................................................
Cancelled..............................................................
Nonvested shares outstanding at
December 31, 2008 ............................................
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
57,730
(4,335)
(26,968)
15.90
17.30
23.30
180,386
$22.88
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,
2008, there was $1.2 million of total unrecognized compensation cost related to nonvested shares. This cost is
expected to be recognized over a weighted average period of approximately 1.61 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 similar to nonvested shares, except that 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%.
F-30
The following summarizes all performance stock unit activity during 2008, 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 ............................................
Granted.................................................................
Issued ...................................................................
Cancelled..............................................................
Performance stock units outstanding at
December 31, 2008 ............................................
48,175
-
(3,025)
45,150
48,900
-
(5,600)
88,450
38,875
-
(21,975)
25.03
-
25.03
$ 25.03
25.29
-
25.08
$ 25.17
15.90
-
21.84
105,350
$22.44
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 $0.30 and $0.34
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, 2008, 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, 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 2008, we issued 0.3 million shares under our employee stock purchase plan at an average price of $9.84
per share. 1.9 million shares were available for issuance at December 31, 2008.
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 cash and cash equivalents, 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 and is disclosed in Note D, Interest Rate Risk. The fair value of our outstanding debt is disclosed in
Note C, Long-Term Debt.
F-31
Note K – Commitments and Contingencies
At December 31, 2008, we had letters of credit in the amount of $17.6 million. No amounts were drawn against
these letters of credit at December 31, 2008. These letters of credit exist to support insurance programs relating
to workers’ compensation, automobile and general liability, and leases.
On March 23, 2001, inactive Harte-Hanks Shoppers employees Frank Gattuso and Ernest Sigala filed a putative
class action against Harte-Hanks Shoppers, Inc., claiming that Harte-Hanks Shoppers failed to comply with a
California statutory provision requiring an employer to indemnify employees for expenses incurred on behalf of
the employer. The plaintiffs allege that Harte-Hanks Shoppers failed to reimburse them for expenses of using
their automobiles as outside sales representatives and failed to accurately itemize these expenses on plaintiffs'
wage statements. The suit was filed in Los Angeles County Superior Court. The putative class that plaintiffs
seek to represent has been limited to all California Harte-Hanks outside sales representatives who were not
separately reimbursed apart from their base salary and commissions for the expenses they incurred in using their
own automobiles after early 1998. The plaintiffs seek indemnification and compensatory damages, statutory
damages, exemplary damages, penalties, interest, costs of suit, and attorneys' fees. Harte-Hanks Shoppers filed
a cross-complaint seeking a declaratory judgment that the plaintiffs have been indemnified for their automobile
expenses by the higher salaries and commissions paid to them as outside sales representatives. The cross-
complaint also alleges conversion, unjust enrichment, constructive trust and rescission and restitution based on
mutual mistake. On January 30, 2002, the trial court ruled that California Labor Code Section 2802 requires
employers to reimburse employees for mileage and other expenses incurred in the course of employment, but
that an employer is permitted to pay increased wages or commissions instead of indemnifying actual expenses.
On May 28, 2003, the trial court denied the plaintiffs’ motion for class certification. On October 27, 2005, the
California Court of Appeal issued a unanimous opinion affirming the trial court's rulings, including the
interpretation of Labor Code Section 2802 and denial of class certification. On November 23, 2005, the Court
of Appeal denied the plaintiffs' petition for rehearing. On November 5, 2007, the California Supreme Court
affirmed the trial court's ruling that Labor Code Section 2802 permits lump sum reimbursement and that an
employer may satisfy its obligations to indemnify employees for reasonable and necessary business expenses
under Labor Code Section 2802 by paying enhanced taxable compensation. The Supreme Court remanded the
matter back to the trial court for further proceedings related to the class certification issue and directed the trial
court to consider whether the following issues could properly be resolved on a class-wide basis: (1) did Harte-
Hanks Shoppers adopt a practice or policy of reimbursing outside sales representatives for automobile expenses
by paying them higher commission rates and base salaries than it paid to inside sales representatives, (2) did
Harte-Hanks Shoppers establish a method to apportion the enhanced compensation payments between
compensation for labor performed and expense reimbursement and (3) was the amount paid for expense
reimbursement sufficient to fully reimburse the employees for the automobile expenses they reasonably and
necessarily incurred. On July 29, 2008, the trial court stated its intention to issue a split class action certification
ruling, certifying a class action with respect to the first two questions listed immediately above (adoption of a
policy or practice, and establishment of an apportionment method) and denying class certification on the third
question listed immediately above (sufficiency of reimbursement). Based upon its belief that the conditions for
a loss accrual described in SFAS No. 5, Accounting for Contingencies, have not been met, Harte-Hanks has
made no accrual for this loss contingency. An estimate of the possible loss or range of loss from any adverse
result on this case cannot reasonably be made. We believe that we have substantial meritorious defenses to these
claims and we intend to vigorously defend the lawsuit. Nevertheless, we cannot predict the impact of future
developments in this lawsuit, and any resolution of this lawsuit within a particular fiscal quarter may adversely
impact our results of operations for that quarter.
We are also currently subject to various other 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 these pending
claims and lawsuits is not currently expected to have a material adverse effect on our consolidated financial
position or results of operations. Nevertheless, we cannot predict the impact of future developments affecting
our pending or future claims and lawsuits and any resolution of a claim or lawsuit within a particular fiscal
F-32
quarter may adversely impact our results of operations for that quarter. We expense legal costs as incurred, and
all recorded legal liabilities are adjusted as required as better information becomes available to us. The factors
we consider when recording an accrual for contingencies include, among others: (i) the opinions and views of
our legal counsel; (ii) our previous experience; and (iii) the decision of our management as to how we intend to
respond to the complaints.
Note 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 $30.5 million,
$31.1 million and $28.2 million for the years ended December 31, 2008, 2007 and 2006, 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, 2008 are as follows:
In thousands
2009........................... $ 25,159
20,117
2010...........................
13,839
2011...........................
10,351
2012...........................
7,790
2013...........................
9,501
After 2013 .................
$ 86,757
Note M – Selected Quarterly Data (Unaudited)
In thousands,
except per share amounts
Revenues...................................... $269,643
25,520
Operating income ........................
14,326
Net income...................................
0.23
Basic earnings per share .............. $
0.23
Diluted earnings per share ........... $
2008 Quarter Ended
2007 Quarter Ended
December 31 September 30
December 31 September 30
June 30 March 31
$ 269,913 $ 274,756 $ 268,509
25,811
34,740
31,246
13,586
16,615
18,214
0.21
$
0.21
$
0.29 $
0.29 $
0.26 $
0.26 $
$ 303,017
47,233
27,536
0.39
$
0.39
$
$ 286,696 $ 290,145
41,579
40,000
22,895
21,882
0.31
$
0.31
$
June 30 March 31
$ 283,028
36,115
20,327
0.27
$
0.27
$
0.30 $
0.30 $
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.
Note N – Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average
number of shares of common stock plus the effect of dilutive potential common shares outstanding during the
period using the treasury stock method. Dilutive potential common shares include outstanding stock options
and nonvested shares.
F-33
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
Weighted-average common shares outstanding ..........
Weighted-average common equivalent shares —
dilutive effect of options and nonvested shares .....
Shares used in diluted earnings per share
Year Ended December 31,
2007
2008
2006
$ 62,741
$ 92,640
$ 111,792
63,933
0.98
$
72,524
1.28
$
79,049
1.41
$
$ 62,741
$ 92,640
$ 111,792
64,104
0.98
$
73,703
1.26
$
80,646
1.39
$
63,933
72,524
79,049
171
1,179
1,597
computations..........................................................
64,104
73,703
80,646
For the purpose of calculating the shares used in the diluted EPS calculations, 7.3 million, 2.5 million and 1.8
million anti-dilutive options have been excluded from the EPS calculations for the years ended December 31,
2008, 2007 and 2006, respectively.
Note O – Business Segments
We are a worldwide direct and targeted marketing company with operations in two segments – Direct Marketing
and Shoppers.
Harte-Hanks Direct Marketing uses various capabilities and technologies to enable our clients to capture,
analyze and disseminate customer and prospect data across all points of customer contact. 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.
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, PennySaverUSA.com and TheFlyer.com. 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. At December
31, 2008, our Shoppers publications were zoned into more than 1,000 separate editions with total circulation of
over 12 million shopper packages in California and Florida each week. After planned first quarter 2009
circulation reductions, Shoppers circulation will total approximately 11.5 million.
F-34
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 intangible amortization .................................................
Capital expenditures
Direct Marketing .........................................................
Shoppers......................................................................
Corporate Activities ....................................................
Total capital expenditures ...........................................
Year Ended December 31,
2007
2008
2006
$ 732,740
350,081
$ 1,082,821
$ 732,461
430,425
$ 1,162,886
$ 709,728
474,960
$1,184,688
$ 103,121
25,884
(11,688)
$ 117,317
$ 108,796
70,784
(14,653)
$ 164,927
$ 109,458
88,814
(12,220)
$ 186,052
$ 117,317
(14,201)
378
(1,925)
$ 101,569
$ 164,927
(12,992)
539
(1,337)
$ 151,137
$ 186,052
(6,333)
231
(702)
$ 179,248
$
$
$
$
$
$
25,350
8,056
23
33,429
1,903
1,047
2,950
17,116
2,814
17
19,947
$
$
$
$
$
$
25,569
7,606
20
33,195
$ 24,618
6,930
18
$ 31,566
2,347
1,162
3,509
$
$
1,303
1,163
2,466
21,270
6,947
–
28,217
$ 25,758
7,935
15
$ 33,708
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,
2007
2008
$ 617,926
252,766
42,874
$ 913,566
$ 657,462
269,910
24,554
$ 951,926
$ 385,390
167,487
$ 552,877
$ 376,096
167,487
$ 543,583
$
$
6,239
11,750
17,989
$
$
8,141
12,798
20,939
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.................................................
Year Ended December 31,
2007
2008
2006
$ 980,236
102,585
$ 1,082,821
$ 1,078,795
84,091
$ 1,162,886
$1,122,194
62,494
$1,184,688
$
$
86,288
11,145
97,433
$
95,685
16,669
$ 112,354
a
b
Geographic revenues are based on the location of the service being performed. In prior years, geographic revenues were presented based on the
location of the client. 2007 and 2006 amounts have been reclassified to reflect geographic revenues based on the location of the service being
performed.
Long-lived assets are based on physical location.
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).
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 the 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 the 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 the Company’s Form 8-K dated September 18,
2006).
Term Loan Agreement by and between the Company and Wells Fargo Bank,
N.A, as administrative agent, dated March 7, 2008 (filed as Exhibit 10.1 to
the Company’s Form 8-K dated March 7, 2008).
Management and Director Compensatory Plans and Forms of Award Agreements
10.2(a)
10.2(b)
10.2(c)
10.2(d)
Harte-Hanks, Inc. Restoration Pension Plan (As Amended and Restated
Effective January 1, 2008) (filed as Exhibit 10.1 to the Company’s Form 8-K
dated June 27, 2008).
Harte-Hanks, Inc. Deferred Compensation Plan (As Amended and Restated
Effective January 1, 2008) (filed as Exhibit 10.3 to the Company’s Form 10-K
dated June 27, 2008).
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).
10.2(e)
10.2(f)
10.2(g)
10.2(h)
10.2(i)
10.2(j)
10.2(k)
10.2(l)
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).
Harte-Hanks, Inc. 2005 Omnibus Incentive Plan (As Amended and Restated
Effective February 13, 2009) (filed as Exhibit 10.1 to the Company’s Form
8-K dated February 13, 2009).
10.2(m)
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(n)
10.2(o)
10.2(p)
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(q)
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)
Transition and Consulting Agreement, dated as of August 29, 2007, by
and between the Company and Richard Hochhauser (filed as Exhibit
10.1 to the Company’s Form 8-K dated August 29, 2007).
Form of Change of Control Severance Agreement between the Company
and its President and Chief Executive Officer and its Executive Vice
Presidents (other than Peter E. Gorman) and Senior Vice Presidents,
dated as of June 27, 2008 (filed as Exhibit 10.4 to the Company’s
Form 8-K, dated June 27, 2008).
Form of Severance Agreement between the Company and Peter E. Gorman,
dated as of June 27, 2008 (filed as Exhibit 10.5 to the Company’s
Form 8-K, dated June 27, 2008).
Form of Change of Control Severance Agreement between the Company
and its Vice Presidents, dated as of June 27, 2008 (filed as Exhibit 10.6
to the Company’s Form 8-K, dated June 27, 2008).
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).
Transition Agreement, dated as of December 15, 2008, by and between
the Company and Dean Blythe (filed as Exhibit 10.1 to the Company’s
Form 8-K dated December 15, 2008).
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, Larry Franklin, 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.
March 2, 2009
Date
/s/ Larry Franklin
Larry Franklin
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.
March 2, 2009
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, Larry Franklin, 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, 2008 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.
March 2, 2009
Date
/s/ Larry Franklin
Larry Franklin
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, 2008
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.
March 2, 2009
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