Harte Hanks
Annual Report 2015

Plain-text annual report

HARTE HANKS INC FORM 10-K (Annual Report) Filed 03/14/16 for the Period Ending 12/31/15 Address Telephone CIK 9601 MCALLISTER FREEWAY, SUITE 610 SAN ANTONIO, TX 78216 2108299000 0000045919 Symbol HHS SIC Code Industry Sector Fiscal Year 7331 - Direct Mail Advertising Services Advertising Services 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.  UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K(Mark One) ý ý   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2015 o o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from           to            Commission file number 001-7120 HARTE HANKS, INC.(Exact name of registrant as specified in its charter)Delaware 74-1677284(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.) 9601 McAllister Freeway, Suite 610, 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 Name of each exchange on which registered  Common Stock New York Stock Exchange  Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý 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 1934during 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 filingrequirements for the past 90 days. Yes ý No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes ý No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, andwill 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 orany amendment to this Form 10-K. ý Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definitions of “largeaccelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act Large accelerated filer o Accelerated filer x Non-accelerated filer o (Do not check if a smallerreporting company) Smaller reporting company o Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price ($5.96) as ofthe last business day of the registrant’s most recently completed second fiscal quarter ( June 30, 2015 ), was approximately $288,131,575 . The number of shares outstanding of each of the registrant’s classes of common stock as of January 31, 2016 was 61,266,978 shares of commonstock, all of one class. Documents incorporated by reference: Portions of the Proxy Statement to be filed for the company’s 2016 Annual Meeting of Stockholders are incorporated by reference into Part III of thisForm 10-K. THIS ANNUAL REPORT ON FORM 10-K IS BEING DISTRIBUTED TO STOCKHOLDERS IN LIEU OF A SEPARATE ANNUAL REPORT PURSUANTTO RULE 14a-3(b) OF THE ACT AND SECTION 203.01 OF THE NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL.Table of ContentsHarte Hanks, Inc. and SubsidiariesTable of ContentsForm 10-K ReportDecember 31, 2015  PagePart I  Item 1.Business3   Item 1A.Risk Factors8   Item 1B.Unresolved Staff Comments18   Item 2.Properties18   Item 3.Legal Proceedings18   Item 4.Mine Safety Disclosures18   Part II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities19   Item 6.Selected Financial Data21   Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations22   Item 7A.Quantitative and Qualitative Disclosures About Market Risk37   Item 8.Financial Statements and Supplementary Data38   Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure38   Item 9A.Controls and Procedures38   Item 9B.Other Information38   Part III Item 10.Directors, Executive Officers and Corporate Governance39   Item 11.Executive Compensation39   Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters39   Item 13.Certain Relationships and Related Transactions, and Director Independence40   Item 14.Principal Accountant Fees and Services40   Part IV Item 15.Exhibits and Financial Statement Schedules41   Signatures 422Table of ContentsPART IITEM 1.     BUSINESS INTRODUCTIONHarte Hanks, Inc. (Harte Hanks) partners with clients to deliver relevant, connected, and quality customer interactions. Our approach starts withdiscovery and learning, which leads to customer journey mapping, creative and content development, analytics, and data management, and endswith execution and support in a variety of digital and traditional channels. We produce engaging and memorable customer interactions to drivebusiness results for our clients, develop better customer relationships, experiences, and defining interaction-led marketing.Virtually all organizations rely on marketing to generate revenues and publicity. Many businesses have a chief-level executive responsible formarketing who is charged with combining data, technology, channels, and resources to demonstrate a return on marketing investment. This has ledmany businesses to use direct and targeted marketing, which offer accountability and measurability of marketing programs, allowing customerinsight to be leveraged to create and accelerate value. Harte Hanks is a leader in highly targeted, multichannel marketing.We are the successor to a newspaper business started by Houston Harte and Bernard Hanks in Texas in the early 1920s. In 1972, Harte Hankswent public and was listed on the New York Stock Exchange (NYSE). We became private in a leveraged buyout in 1984, and in 1993 we again wentpublic and listed our common stock on the NYSE.We provide public access to all reports filed with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, asamended (the 1934 Act). These documents may be accessed free of charge on our website at www.HarteHanks.com . These documents areprovided as soon as practical after they are filed with the SEC and may also be found at the SEC’s website at www.sec.gov . Additionally, we haveadopted and posted on our website a code of ethics that applies to our principal executive officer, principal financial officer and principal accountingofficer. Our website also includes our corporate governance guidelines and the charters for each of our audit, compensation, and nominating andcorporate governance committees. We will provide a printed copy of any of the aforementioned documents to any requesting stockholder.OUR BUSINESS During 2014, we initiated a new strategy and revised our operational structure to suit that new strategy by organizing into two distinct operatingdivisions: Customer Interaction and Trillium Software. In accordance with ASC 280, Segment Reporting, we determined that under this neworganizational structure, we will report the two operating divisions as two reportable segments — Customer Interaction and Trillium Software. Ourreportable segments are described below. Customer InteractionOur Customer Interaction services offer a wide variety of integrated, multi-channel, data-driven solutions for top brands around the globe. We helpour clients gain insight into their customers’ behaviors from their data and use that insight to create innovative multi-channel marketing programs todeliver a return on marketing investment. We believe our clients’ success is determined not only by how good their tools are, but how well we helpthem use the tools to gain insight and analyze their consumers. This results in a strong and enduring relationship between our clients and theircustomers which is key to being leaders in Customer Interaction. We offer a full complement of capabilities and resources to provide a broad rangeof marketing services, in media from direct mail to email, including:•Agency & Digital Services.  Our agency services are full-service, customer engagement agencies specializing in direct and digitalcommunications for both consumer and business-to-business markets. With strategy, creative, and implementation services, we helpmarketers within targeted industries understand, identify, and engage prospects and customers in their channel of choice. Our digitalsolutions integrate online services within the marketing mix and include: search engine management, display, digital analytics, websitedevelopment and design, digital strategy, social media, email, e-commerce, and interactive relationship management and a host of otherservices that support our core businesses.3Table of Contents•Database Marketing Solutions and Business-to-Business Lead Generation.  We have successfully delivered marketing databasesolutions across various industries. Our solutions are built around centralized marketing databases with three core offerings: insight andanalytics; customer data integration; and marketing communications tools. Our solutions enable organizations to build and managecustomer communication strategies that drive new customer acquisition and retention and maximize the value of existing customerrelationships. Through insight, we help clients identify models of their most profitable customer relationships and then apply these models toincrease the value of existing customers while also winning profitable new customers. Through customer data integration, data from multiplesources comes together to provide a single customer view of client prospects and customers. Then we help clients apply their data andinsights to the entire customer life cycle, to help clients sustain and grow their business, gain deeper customer insights, and continuouslyrefine their customer resource management strategies and tactics.•Direct Mail. As a full-service direct marketing provider and one of the largest mailing partners of the U.S. Postal Service (USPS), ouroperational mandate is to ensure creativity and quality, provide an understanding of the options available in technologies and segmentationstrategies and capitalize on economies of scale with our variety of execution options. Our services include: digital printing, print on demand,advanced mail optimization, logistics and transportation optimization, tracking (including our proprietary prEtrak solution), commingling,shrink wrapping, and specialized mailings. We also maintain fulfillment centers where we provide custom kitting services, print on demand,product recalls, and freight optimization allowing our customers to distribute literature and other marketing materials.•Contact Centers. We operate teleservice workstations around the globe providing advanced contact center solutions such as: speech,voice and video chat, integrated voice response, analytics, social cloud monitoring, and web self-service. We provide both inbound andoutbound contact center services and support many languages with our strategically placed global locations for both consumer andbusiness-to-business markets. Many of our client relationships start with an offering from the list above on an individual solution basis or a combination of our offerings from acrossour portfolio of businesses. Trillium SoftwareTrillium Software is a leading global enterprise data quality solutions provider. Our data quality specialists help organizations achieve increasedbusiness from their data management initiatives and existing business-critical processes by providing enterprise data profiling and data cleansingsoftware and services. We offer industry-specific business solutions that help solve data problems experienced by financial services, banking, retail,healthcare, manufacturing, and risk professionals. Our full complement of technologies and services includes global data profiling, data cleansing,enrichment, and data linking for e-business, Big Data customer relationship management, data governance, enterprise resource planning, supplychain management, data warehouse, and other enterprise applications. Revenues from the Trillium Software segment are comprised primarily ofperpetual software licenses, annual maintenance and professional services. In 2015 , 2014 , and 2013 , Harte Hanks had revenues from continuing operations of $495.3 million , $553.7 million , and $559.6 million ,respectively. Customer Interaction had revenues from continuing operations of $444.2 million , $499.4 million , and $503.8 million ,respectively. Trillium Software had revenues from continuing operations of $51.1 million , $54.2 million , and $55.8 million , respectively. Customers Our services are marketed to specific industries or markets with services and software products tailored to each industry or market. We believe thatwe are generally able to provide services to new industries and markets by modifying our existing services and applications. We currently provideservices primarily to the retail, technology, financial services, automotive and consumer brands, and pharmaceutical/healthcare vertical markets, inaddition to a range of select markets. The largest client (measured in revenue) comprised 6% of total revenues in 2015 . The largest 25 clients interms of revenue comprised 57% of total revenues in 2015 . 4Table of ContentsSales and Marketing Our Customer Interaction enterprise sales force sells a variety of solutions and services to address client’s targeted marketing needs. We maintainsolution-specific sales forces and sales groups to sell our individual products and solutions. Our direct sales forces, with industry-specific knowledgeand experience, emphasize the cross-selling of a full range of Customer Interaction direct marketing services and are supported by employees ineach sector assigned to specific clients with industry specific expertise. We rely on our enterprise and solution sellers to primarily sell our productsand services to new clients and task our employees supporting existing clients to expand our client relationship through additional solutions andproducts. Trillium Software is marketed and sold world-wide through direct, reseller, and Original Equipment Manufacturers (OEMs) channels. Our primarysales channel is our direct sales force in North America, Europe, and Australia. Resellers covering over 40 countries serve to provide even widercoverage where we lack a direct sales presence. The Trillium Software System can also be obtained through a network of OEMs and integrationpartners. Our product is also available directly from our website in a cloud deployment method. Facilities Our services are provided at the following facilities, all of which are leased:Domestic Offices Austin, TexasMaitland, FloridaBaltimore, MarylandNew York, New YorkBurlington, MassachusettsOakland, CaliforniaBurlington, VermontSan Antonio, TexasChicago, IllinoisSan Diego, CaliforniaDeerfield Beach, FloridaSan Francisco, CaliforniaEast Bridgewater, MassachusettsSan Mateo, CaliforniaFullerton, CaliforniaShawnee, KansasGrand Prairie, TexasTrevose, PennsylvaniaJacksonville, FloridaTexarkana, TexasLanghorne, PennsylvaniaWilkes-Barre, Pennsylvania International Offices Böblingen, GermanyManila, PhilippinesBristol, United KingdomReading, United KingdomHasselt, BelgiumUxbridge, United Kingdom Competition Our business faces significant competition in all of its offerings and within each of its vertical markets. Direct marketing is a dynamic business,subject to rapid technological change, high turnover of client personnel who make buying decisions, client consolidations, changing client needs andpreferences, continual development of competing products and services, and an evolving competitive landscape. Our competition comes fromnumerous local, national, and international direct marketing and advertising companies, and client internal resources, against whom we compete forindividual projects, entire client relationships, and marketing expenditures. Competitive factors in our industry include the quality and scope ofservices, technical and strategic expertise, the perceived value of the services provided, reputation, and brand recognition. We also compete againstprint and electronic media and other forms of advertising for marketing and advertising dollars in general. Failure to continually improve our currentprocesses, 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 newproducts and services could adversely affect our growth. Although we believe that our capabilities and breadth of services, combined with our U.Sand international production capability, industry focus, and ability to offer a broad range of integrated services, enable us to compete effectively, ourbusiness results may be adversely impacted by competition. Please refer to Item 1A, “Risk Factors”, for additional information regarding risks relatedto competition. 5Table of ContentsTrillium Software likewise faces widely varied competitors, but the most frequent competition is a potential client’s own information technology staff,who may design and produce customized information quality solutions rather than seeking more robust, specialized, or scalable capabilities orsoftware. Trillium Software also competes against large market makers (such as IBM, Oracle, and SAP) whose product offering are greater inbreadth, if less capable in information quality alone. We also compete against about 40 niche providers of information quality software and services,whose sales focus is usually geared toward narrower markets. Seasonality Our revenues tend to be higher in the fourth quarter than in other quarters during a given year. This increased revenue is a result of overallincreased marketing activity prior to and during the holiday season, primarily related to our retail vertical. Discontinued Operations Previously, Harte Hanks also provided shopper advertising opportunities through our Shoppers segment, which operated in certain Californiamarkets. On September 27, 2013 we sold the assets of our California Shoppers operations, The Pennysaver, for gross proceeds of $22.5million. This transaction resulted in an after-tax loss of $12.4 million. Because Shoppers represented a distinct business unit with operations andcash flows that can clearly be distinguished, both operationally and for financial purposes, from the rest of Harte Hanks, the results of the Shoppersoperations are reported as discontinued operations for all periods presented. Results of the remaining Harte Hanks business are reported ascontinuing operations. After this sale, Harte Hanks no longer has any Shoppers operations or circulation. GOVERNMENT REGULATION As a company conducting varied business activities for clients across diverse industries around the world, we are subject to a variety of domesticand international legal and regulatory requirements that impact our business, including, for example, regulations governing consumer protection,and unfair business practices, contracts, e-commerce, intellectual property, labor, and employment (especially wage and hour laws), securities, tax,and other laws that are generally applicable to commercial activities. We are also subject to, or affected by, numerous local, national, and international laws, regulations, and industry standards that regulate directmarketing activities, including those that address privacy, data security, and unsolicited marketing communications. Examples of some of these lawsand regulations that may be applied to, or affect, our business or the businesses of our clients include the following: •Federal and state laws governing the use of the internet and regulating telemarketing, including the U.S. Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM), which regulates commercial email and requires that commercial emailsgive recipients an opt-out method. Canada’s Anti-Spam Legislation (CASL) applies in a comparable manner for our activities inCanada. Telemarketing activities are regulated by, among other requirements, the Federal Trade Commission’s Telemarketing SalesRule (TSR), the Federal Communications Commission’s Telephone Consumer Protection Act (TCPA), and various state do-not-call laws.•Federal and state laws governing the collection and use of personal data online and via mobile devices, including but not limited to theFederal Trade Commission Act and the Children's Online Privacy Protection Act, which seek to address consumer privacy and protection.•The U.S. Department of Commerce’s proposed Privacy Shield Framework, the Federal Trade Commission’s Protecting Consumer Privacyin an Era of Rapid Change policy, and the European Commission’s newly announced European General Data Protection Regulation(GDPR), each of which seeks to address consumer privacy, data protection, and technological advancements in relation to the collection oruse of personal information.6Table of Contents•A significant number of states in the U.S. have passed versions of data security or breach notification laws, which include requiredstandards for data security and generally require timely notifications to affected persons in the event of data security breaches or otherunauthorized access to certain types of protected personal data. With the increased attention security breaches have received, federallegislation may also be adopted and impose additional obligations.•The Fair Credit Reporting Act (FCRA), which governs, among other things, the sharing of consumer report information, access to creditscores, and requirements for users of consumer report information.•The Financial Services Modernization Act of 1999, or Gramm-Leach-Bliley Act (GLB), which, among other things, regulates the use formarketing purposes of non-public personal financial information of consumers that is held by financial institutions. Although Harte Hanks isnot considered a financial institution, many of our clients are subject to the GLB. The GLB also includes rules relating to the physical,administrative, and technological protection of non-public personal financial information.•The Health Insurance Portability and Accountability Act of 1996 (HIPAA), which regulates the use of protected health information formarketing purposes and requires reasonable safeguards designed to prevent intentional or unintentional use or disclosure of protectedhealth information.•The Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amended the FCRA and requires, among other things, consumercredit report notice requirements for creditors that use consumer credit report information in connection with risk-based credit pricing actionsand also prohibits a business that receives consumer information from an affiliate from using that information for marketing purposes unlessthe 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) (EU Directive), and theGDPR (which will replace the EU Directive once implemented), which imposes a number of obligations with respect to use of personal data,and includes a prohibition on the transfer of personal information from the EU to other countries that do not provide consumers with an“adequate” level of privacy or security. The EU standard for adequacy is generally stricter and more comprehensive than that of the U.S.and most other countries.There are additional consumer protection, privacy and data security regulations in locations where we or our clients do business. These lawsregulate 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 alsobelong to trade associations that impose guidelines that regulate direct marketing activities, such as the Direct Marketing Association’s Commitmentto Consumer Choice. As a result of increasing public awareness and interest in individual privacy rights, data protection, information security, and environmental and otherconcerns regarding marketing communications, federal, state, and foreign governmental and industry organizations continue to consider newlegislative and regulatory proposals that would impose additional restrictions on direct marketing services and products. Examples include dataencryption standards, data breach notification requirements, consumer choice and consent restrictions, and increased penalties against offendingparties, among others. In 2012 and 2013, several members of the U.S. Congress (in coordination with the Federal Trade Commission and consumeradvocacy groups) initiated several inquiries regarding data brokerage, one of which was directed to us (among others). We anticipate that furtherinquiries and legislative proposals will be made which may affect the services we offer our clients. In addition, our business may be affected by the impact of these restrictions on our clients and their marketing activities. These additionalregulations could increase compliance requirements and restrict or prevent the collection, management, aggregation, transfer, use, or disseminationof information or data that is currently legally available. Additional regulations may also restrict or prevent current practices regarding unsolicitedmarketing communications. For example, many states have considered implementing do-not-mail legislation that could impact our business and thebusinesses of our clients and customers. In addition, continued public interest in individual privacy rights and data security may result in the adoptionof further voluntary industry guidelines that could impact our direct marketing activities and business practices. 7Table of ContentsWe cannot predict the scope of any new legislation, regulations, or industry guidelines or how courts may interpret existing and new laws.Additionally, enforcement priorities by governmental authorities may change and also impact our business either directly or through requiring ourcustomers to alter their practices. Compliance with regulations is costly and time-consuming for us and our clients, and we may encounterdifficulties, delays, or significant expenses in connection with our compliance. We may also be exposed to significant penalties, liabilities,reputational harm, and loss of business in the event that we fail to comply with applicable regulations. There could be a material adverse impact onour 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 securityissues. INTELLECTUAL PROPERTY RIGHTS Our intellectual property assets include trademarks and service marks that identify our company and our products and services, know-how,software, and other technology that we develop for our internal use and for license to clients and data and intellectual property licensed from thirdparties, such as commercial software and data providers. We generally seek to protect our intellectual property through a combination of licenseagreements and trademark, service mark, copyright, patent and trade secret laws, and domain name registrations and enforcement procedures. Wealso enter into confidentiality agreements with many of our employees, vendors, and clients and seek to limit access to and distribution of intellectualproperty and other proprietary information. We pursue the protection of our trademarks and other intellectual property in the U.S. and internationally. Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy or otherwise obtain and use our proprietaryinformation and technology. Monitoring unauthorized use of our intellectual property is difficult, and unauthorized use of our intellectual property mayoccur. We cannot be certain that patents or trademark registrations will be issued, nor can we be certain that any issued patents or trademarkregistrations will give us adequate protection from competing products. For example, issued patents may be circumvented or challenged anddeclared invalid or unenforceable. In addition, others may develop competing technologies or databases on their own. Moreover, there is noassurance that our confidentiality agreements with our employees or third parties will be sufficient to protect our intellectual property and proprietaryinformation. We may also be subject to infringement claims against us by third parties and may incur substantial costs and devote significant managementresources in responding to such claims, as we did in 2013. We have been, and continue to be, obligated under some agreements to indemnify ourclients as a result of claims that we infringe on the proprietary rights of third parties. These costs and distractions could cause our business to suffer.If any party asserts an infringement claim, we may need to obtain licenses to the disputed intellectual property. We cannot assure you, however, thatwe 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 obtainnecessary licenses or other rights may have an adverse affect on our ability to provide our products and services. EMPLOYEES As of December 31, 2015 , Harte Hanks employed 5,529 full-time employees and 44 part-time employees, of which approximately 2,333 are basedoutside of the U.S., primarily in the Philippines. A portion of our workforce is provided to us through staffing companies. None of the workforce isrepresented 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 providedpursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 (1933 Act) and Section 21E of the Securities Exchange Act of1934 (1934 Act). Forward-looking statements may also be included in our other public filings, press releases, our website and oral and writtenpresentations 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 statementsregarding (1) our strategies and initiatives, (2) adjustments to our cost structure and other actions designed to respond to market conditions andimprove our performance, and the anticipated8Table of Contentseffectiveness and expenses associated with these actions, (3) our financial outlook for revenues, earnings per share, operating income, expenserelated to equity-based compensation, capital resources and other financial items, (4) expectations for our businesses and for the industries in whichwe operate, including the impact of economic conditions of the markets we serve on the marketing expenditures and activities of our clients andprospects, (5) competitive factors, (6) acquisition and development plans, (7) our stock repurchase program, (8) expectations regarding legalproceedings 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, andother 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, andinvestors in our securities could lose part or all of their investments. Some of these risks, uncertainties, assumptions, and other factors can be foundin 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. Theforward-looking statements included in this report and those included in our other public filings, press releases, our website, and oral and writtenpresentations 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 orother events occur in the future. In addition to the information set forth elsewhere in this report, including in the MD&A section, the factors described below should be consideredcarefully in making any investment decisions with respect to our securities. The risks described below are not the only ones we face or may face inthe future. Additional risks and uncertainties that are not presently anticipated or that we may currently believe are immaterial could also impair ourbusiness operations and financial performance.We have developed a new strategy, and the future success of our company will depend on its successful execution. In 2014, we developed and announced our new strategy, and began executing against it. Capital constraints may limit our ability to pursue allelements of our strategy, and may force us to modify this strategy and its objectives. Our strategy will bring additional risks to the business (such asthose associated with greater use of capital, development and acquisition of new products, and elimination of certain services and product lines) ormagnify existing risks as our business priorities and objectives are adjusted. If our strategy is flawed, or if we fail to execute it well, our business andfinancial performance may be materially and adversely affected.If our new leaders are unsuccessful, or if we lose key management and are unable to attract and retain the talent required for ourbusiness, our operating results could suffer. In the past three years, we replaced many of our leaders, including our Chief Executive Officer (twice) and Chairman, and significantly reorganizedour operational structures. If our new leaders fail in their new roles and responsibilities (and more generally if we are unable to attract new leaderswith the necessary skills to manage our business) our business and its operating results may suffer. Further, our prospects depend in large partupon 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 generaleconomic conditions, our recent business performance may diminish our attractiveness as an employer. The loss or prolonged absence of theservices of these individuals could have a material adverse effect on our business, financial position, or operating results .9Table of ContentsMost of our client engagements are cancelable on short notice.The marketing services we offer, and in particular for direct mail and contact center services, are generally terminable upon short notice by ourclients, even if the term of the agreement (and the expected duration of services) is several or many years. Many of our customer agreements donot have minimum volume or revenue requirements, so clients may (and do) vary their actual orders from us over time based on their own businessneeds, their satisfaction with the quality and pricing of our services, and a variety of other competitive factors. In addition, the timing of particular jobsor types of jobs at particular times of year (such as mail programs supporting the holiday shopping season, or contact center programs supporting aspecific event) may cause significant fluctuations in the operating results of our operations in any given quarter. We depend to some extent on salesto certain industries, such as the financial services, technology, and consumer retail. To the extent these industries experience downturns, theresults of our operations may be adversely affected.A large portion of our revenue is generated from a limited number of clients, and the loss of significant work from one or more of ourclients could adversely affect our business.Our ten largest clients collectively represented 38% of our revenues for 2015. These clients are concentrated in the consumer retail and technologyindustries, which are experiencing uneven economic performance. While we typically have multiple projects with our largest customers which wouldnot all terminate at the same time, the loss of one or more of the projects or contracts with one of our largest clients could adversely affect ourbusiness, results of operations, and financial condition if the lost revenues were not replaced with profitable revenues from that client or otherclients.We face significant competition for individual projects, entire client relationships and advertising dollars in general. Our Customer Interaction business faces significant competition in all of its offerings and within each of its vertical markets. Direct marketing is adynamic business, subject to rapid technological change, high turnover of client personnel who make buying decisions, client consolidations,changing client needs and preferences, continual development of competing products and services, and an evolving competitive landscape. Thiscompetition comes from numerous local, national, and international direct marketing and advertising companies, and client internal resources,against whom we compete for individual projects, entire client relationships, and marketing expenditures by clients and prospective clients. We alsocompete against print and electronic media and other forms of advertising for marketing and advertising dollars in general. In addition, our ability toattract new clients and to retain existing clients may, in some cases, be limited by clients’ policies on or perceptions of conflicts of interest. Thesepolicies can prevent us from performing similar services for competing products or companies. Some of our clients have also sought to reduce thenumber of marketing vendors or use third-party procurement organizations, all of which increases pricing pressure, and may disadvantage usrelative to our competitors. Our failure to improve our current processes or to develop new products and services could result in the loss of ourclients to current or future competitors. In addition, failure to gain market acceptance of new products and services could adversely affect ourgrowth. Trillium Software faces widely varied competitors, many of whom have greater development resources, and market access. In addition, becauseTrillium Software offers specialized information quality solutions, competitors who offer a broad array of technology solutions — such as marketmakers and system integrators — have advantages for many potential clients, including a greater ability to bundle unrelated products to achieve abetter price. Trillium Software also competes against niche providers of information quality software and services, so that despite our relativespecialization on information quality solutions, some potential clients may nevertheless seek or prefer an even more-specific solution. If TrilliumSoftware is unable to overcome these competitive disadvantages, it will adversely affect the company’s growth and financial performance. 10Table of ContentsCurrent and future competitors may have significantly greater financial and other resources than we do, and they may sell competingproducts and services at lower prices or at lower profit margins, resulting in pressures on our prices and margins. The sizes of our competitors vary widely across market and service segments. Therefore, some of our competitors may have significantly greaterfinancial, technical, marketing, or other resources than we do in any one or more of our market segments, or overall. As a result, our competitorsmay be in a position to respond more quickly than we can to new or emerging technologies, methodologies, and changes in customer requirements,or may devote greater resources than we can to the development, promotion, sale, and support of products and services. Moreover, newcompetitors or alliances among our competitors may emerge and potentially reduce our market share, revenue, or margins. Some of ourcompetitors also may choose to sell products or services competitive to ours at lower prices by accepting lower margins and profitability, or may beable to sell products or services competitive to ours at lower prices given proprietary ownership of data, technical superiority, a broader or deeperproduct or experience set, or economies of scale. Price reductions or pricing pressure by our competitors could negatively impact our margins andresults of operations, and could also harm our ability to obtain new customers on favorable terms. Competitive pricing pressures tend to increase indifficult or uncertain economic environments, due to reduced marketing expenditures of many of our clients and prospects, and the resulting impacton 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 andservices in a timely and cost-effective manner. We believe that our success depends on, among other things, maintaining technological competitiveness in our products, processing functionality,and software systems and services. Technology changes rapidly as makers of computer hardware, network systems, programming tools, computerand data architectures, operating systems, database technology, and mobile devices continually improve their offerings. Advances in informationtechnology may result in changing client preferences for products and product delivery channels in our industry. The increasingly sophisticatedrequirements of our clients require us to continually improve our processes and provide new products and services in a timely and cost-effectivemanner (whether through development, license or acquisition). In particular, our Trillium Software business faces continuous pressure to updateofferings to deliver the latest features and capabilities while maintaining accessibility on a wide variety of platforms. Our direct mail operations arealso increasingly pressured by larger-scale competitors who are adopting technologies allowing them to more effectively customize mailedmarketing materials. We may be unable to successfully identify, develop, and bring new and enhanced services and products to market in a timelyand cost-effective manner, such services and products may not be commercially successful, and services, products, and technologies developed byothers 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 time frame andbudget. Depending on the needs of our clients, our engagements may require customization, integration, and coordination of a number of complexproduct and service offerings and execution across many facilities in our network. Moreover, in some of our engagements, we rely onsubcontractors and other third parties to provide some of the services to our clients, and we cannot guarantee that these third parties will effectivelydeliver their services or that we will have adequate recourse against these third parties in the event they fail to effectively deliver theirservices. Other contingencies and events outside of our control may also impact our ability to provide our products and services. Our failure toeffectively and timely staff, coordinate and execute our client engagements may adversely impact existing client relationships, the amount or timingof payments from our clients, our reputation in the marketplace and ability to secure additional business and our resulting financial performance. Inaddition, our contractual arrangements with our clients and other customers may not provide us with sufficient protections against claims for lostprofits or other claims for damages.11Table of ContentsSignificant system disruptions, loss of data center capacity or interruption of telecommunication links could adversely affect ourbusiness and results of operations.Our business is heavily dependent upon our ability to create, access, manipulate, and maintain large and complex databases. We operate severaldata centers to support our needs in this regard, as well as those of some of our clients. Our ability to protect our data centers against damage orinterruption from fire, flood, tornadoes, power loss, telecommunications, or equipment failure or other disasters and events beyond our control iscritical to our continued success. Our services are very dependent on links to telecommunication providers. We believe we have taken reasonableprecautions to protect our data centers and telecommunication links from events that could interrupt our operations. Any damage to our data centersor any failure of our telecommunications links that causes loss of data center capacity or otherwise causes interruptions in our operations, however,could materially adversely affect our ability to quickly and effectively respond to our clients’ requirements, which could result in loss of theirconfidence, adversely impact our ability to attract new clients and force us to expend significant company resources to repair the damage. Suchevents could result in decreased revenues, net income, and earnings per share.If we do not prevent security breaches and other interruptions to our infrastructure, we may be exposed to lawsuits, lose customers,suffer harm to our reputation, and incur additional costs. The services we offer involve the transmission of large amounts of sensitive and proprietary information over public communications networks, aswell as the processing and storage of confidential customer information. Unauthorized access, remnant data exposure, computer viruses, denial ofservice attacks, accidents, employee error or malfeasance, “social engineering” and “phishing” attacks, intentional misconduct by computer“hackers” and other disruptions can occur, and infrastructure gaps, hardware and software vulnerabilities, inadequate or missing security controlsand exposed or unprotected customer data can exist that (i) interfere with the delivery of services to our customers, (ii) impede our customers' abilityto do business, or (iii) compromise the security of systems and data, which exposes information to unauthorized third parties. We are a constanttarget of cyber attacks of varying degrees on a regular basis. Although we maintain insurance which may respond to cover some types of damagesincurred by damage to, breaches of, or problems with, our information and telecommunications systems, such insurance is limited and expensive,and may not respond or be sufficient to offset the costs of such damages, and therefore such damages may materially harm our business.We have recently experienced, and may experience in the future, reduced demand for our products and services because of generaleconomic conditions, the financial conditions and marketing budgets of our clients and other factors that may impact the industryverticals that we serve. Economic downturns and turmoil severely affect the marketing services industry. Throughout the most recent recession, as in prior economicdownturns, our customers responded to weak economic conditions by reducing their marketing and software budgets, which are generallydiscretionary in nature and easier to reduce in the short-term than other expenses. Many of our customers have been slow to restore their marketingand software budgets to prior levels during a recovery, and may respond similarly to adverse economic conditions in the future. Our revenues aredependent on national, regional, and international economies and business conditions. A lasting economic recession or anemic recovery in themarkets in which we operate (such as the recent recession and recovery) could have material adverse effects on our business, financial position, oroperating results. Similarly, industry or company-specific factors may negatively impact our clients and prospective clients or their industries, and inturn result in reduced demand for our products and services, client insolvencies, collection difficulties or bankruptcy preference actions related topayments received from our clients. We may also experience reduced demand as a result of consolidation of clients and prospective clients in theindustry verticals that we serve. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Kfor additional information about the adverse impact on our financial performance of the ongoing difficult economic environment in the U.S. and othereconomies. We must effectively manage our costs to be successful. If we do not achieve our cost management objectives, our financial results couldbe adversely affected. Our business plan and expectations for the future require that we effectively manage our cost structure, including our operating expenses andcapital expenditures across our operations. To the extent that we do not accurately anticipate and effectively manage our costs, our financial resultsmay be adversely affected in any economic climate and even more so during a prolonged recession, such as the recent economic downturn in theU.S. and elsewhere. 12Table of ContentsPrivacy, information security and other regulatory requirements may prevent or impair our ability to offer our products and services. We are subject to and affected by numerous laws, regulations, and industry standards that regulate direct marketing activities, including those thataddress privacy, data protection, information security, and marketing communications. Please refer to the section above entitled “GovernmentRegulation” for additional information regarding some of these regulations. As a result of increasing public awareness and interest in privacy rights, data protection and access, information security, environmental protection,and other concerns, national and local governments and industry organizations regularly consider and adopt new laws, rules, regulations, andguidelines that restrict or regulate marketing communications, services, and products. Examples include data encryption standards, data breachnotification requirements, registration/licensing requirements (often with fees), consumer choice, notice, and consent restrictions and penalties forinfractions, among others. We anticipate that additional restrictions and regulations will continue to be proposed and adopted in the future. Our business may also be affected by the impact of these restrictions and regulations on our clients and their marketing activities. In addition, as weacquire new capabilities and deploy new technologies to execute our strategy, we may be exposed to additional types or layers ofregulation. Current and future restrictions and regulations could increase compliance requirements and costs, and restrict or prevent the collection,management, aggregation, transfer, use or dissemination of information, or change the requirements therefore so as to require other changes to ourbusiness or that of our clients. Additional restrictions and regulations may limit or prohibit current practices regarding marketing communications andinformation quality solutions. For example, many states and countries have considered implementing do not contact legislation that could impact ourbusiness and the businesses of our clients and customers. In addition, continued public interest in privacy rights, data protection and access, andinformation security may result in the adoption of further industry guidelines that could impact our direct marketing activities and business practices. We cannot predict the scope of any new laws, rules, regulation, or industry guidelines or how courts or agencies may interpret currentones. Additionally, enforcement priorities by governmental authorities will change over time, which may impact our business. Understanding thelaws, rules, regulations, and guidelines applicable to specific client multichannel engagements and across many jurisdictions poses a significantchallenge, as such laws, rules, regulations, and guidelines are often inconsistent or conflicting, and are sometimes at odds with clientobjectives. Our failure to properly comply with these regulatory requirements and client needs may materially and adversely affect ourbusiness. General compliance with privacy, data protection, and information security obligations is costly and time-consuming, and we mayencounter difficulties, delays, or significant expenses in connection with our compliance, or because of our clients’ need to comply. We may beexposed to significant penalties, liabilities, reputational harm, and loss of business in the event that we fail to comply. We could suffer a materialadverse impact on our business due to the enactment or enforcement of legislation or industry regulations affecting us and/or our clients, theissuance of judicial or governmental interpretations, changed enforcement priorities of governmental agencies, or a change in behavior arising frompublic concern over privacy, data protection, and information security issues. Consumer perceptions regarding the privacy and security of their data may prevent or impair our ability to offer our products andservices. Various local, national, and international regulations, as well as industry standards, give consumers varying degrees of control as to how certaindata regarding them is collected, used, and shared for marketing purposes. If, due to privacy, security, or other concerns, consumers exercise theirability to prevent or limit such data collection, use, or sharing, it may impair our ability to provide marketing to those consumers and limit our clients’demand for our services. Additionally, privacy and security concerns may limit consumers’ willingness to voluntarily provide data to our customers ormarketing companies. Some of our services depend on voluntarily provided data and therefore may be impaired without such data. 13Table of ContentsOur reputation and business results may be adversely impacted if we, or subcontractors upon whom we rely, do not effectively protectsensitive 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 customerand prospect data as part of our client engagements. In many instances, our client contracts also mandate privacy and security practices. If we failto effectively protect and control sensitive personal information (such as personal health information, social security numbers, or credit cardnumbers) of our clients and their customers or prospects in accordance with these requirements, we may incur significant expense, sufferreputational harm, and loss of business, and, in certain cases, be subjected to regulatory or governmental sanctions or litigation. These risks may beincreased due to our reliance on subcontractors and other third parties in providing a portion of our overall services in certain engagements. Wecannot guarantee that these third parties will effectively protect and handle sensitive personal information or other confidential information, or thatwe will have adequate recourse against these third parties in that event. 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 propertyright protections, including patents, copyrights, database rights, trade secrets, trademarks and domain name registrations, and enforcementprocedures. The extent to which such rights can be protected and enforced varies by jurisdiction, and capabilities we procure through acquisitionsmay have less protection than would be desirable for the use or scale we intend or need. Litigation involving patents and other intellectual propertyrights has become far more common and expensive in recent years, and we face the risk of additional litigation relating to our use or future use ofintellectual property rights of third parties. Third-party infringement claims and any related litigation against us could subject us to liability fordamages, significantly increase our costs, restrict us from using and providing our technologies, products or services or operating our businessgenerally, or require changes to be made to our technologies, products, and services. Please refer to the section above entitled “IntellectualProperty Rights” for additional information regarding our intellectual property and associated risks.Breaches of security, or the perception that e-commerce is not secure, could severely harm our business and reputation.Business-to-business and business-to-consumer electronic commerce requires the secure transmission of confidential information over publicnetworks. Some of our products and services are accessed through or are otherwise dependent on the internet. Security breaches in connectionwith the delivery of our products and services, or well-publicized security breaches that may affect us or our industry (such as database intrusion)could be severely detrimental to our business, operating results, and financial condition. We cannot be certain that advances in criminal capabilities,new discoveries in the field of cryptography, or other developments will not compromise or breach the technology protecting the information systemsthat deliver 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 for ourselves and for our clients. There could be a material adverse impact on our business ifowners of the data we use were to withdraw or curtail access to the data or materially restrict the authorized uses of their data. Data providers couldwithdraw their data if there is a competitive reason to do so, if there is pressure from the consumer community or if additional regulations areadopted restricting the use of the data. We also rely upon data from other external sources to maintain our proprietary and non-proprietarydatabases, including data received from customers and various government and public record sources. If a substantial number of data providers orother 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 ofdata becomes uneconomical, our ability to provide products and services to our clients could be materially and adversely affected, which couldresult in decreased revenues, net income, and earnings per share.14Table of ContentsWe must successfully identify and evaluate acquisition targets and integrate acquisitions. We frequently evaluate acquisition opportunities to expand our product and service offerings and geographic locations, including potentialinternational acquisitions. Acquisition activities, even if not consummated, require substantial amounts of management time and can distract fromnormal operations. In addition, we have in the past and may in the future be unable to achieve the profitability goals, synergies and other objectivesinitially sought in acquisitions, and any acquired assets, data or businesses may not be successfully integrated into our operations. Acquisitions mayresult in the impairment of relationships with employees and customers. Moreover, although we review and analyze assets or companies weacquire, such reviews are subject to uncertainties and may not reveal all potential risks, and we may incur unanticipated liabilities and expenses as aresult of our acquisition activities. The failure to identify appropriate candidates, to negotiate favorable terms, or to successfully integrate futureacquisitions into existing operations could result in not achieving planned revenue growth and could negatively impact our net income and earningsper share. We may be unable to make dispositions of assets on favorable terms. In 2013 we sold the assets of our California Shoppers operations, The Pennysaver, resulting in a pre-tax loss of $21.4 million. In 2015 we sold ourB2B research business resulting in a pre-tax loss of $9.5 million. We may in the future determine to divest certain assets or businesses consistentwith our corporate strategy. However, the price we obtain for such assets or businesses will be driven by performance of those businesses and thecurrent market demand for such assets, and we may not be able to realize a profit upon sale. If we are unable to dispose of businesses or assets ina timely manner or at profitable price, our business, net income, and earnings per share could be materially and adversely affected. We are vulnerable to increases in postal rates and disruptions in postal services. Our services depend on the USPS and other commercial delivery services to deliver products. Standard postage rates have increased in recentyears (most recently in May 2015) and may continue to do so at frequent and unpredictable intervals. Postage rates influence the demand for ourservices 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. In addition, the USPS has had significant financial and operational challenges recently. In reaction, the USPS has proposed many changes in itsservices, such as delivery frequency and facility access. These changes, together with others that may be adopted, individually or in combinationwith other market factors, could materially and negatively affect our costs and ability to meet our clients’ expectations.We are vulnerable to increases in paper prices. Prices of print materials are subject to fluctuations. Increased paper costs could cause our customers to reduce spending on other marketingprograms, or to shift to formats, sizes, or media which may be less profitable for us, in each case potentially materially affecting our revenues andprofits.Our financial results could be negatively impacted by impairments of goodwill or other intangible assets with indefinite useful lives. In the third quarter of 2013 we recorded a non-cash impairment charge of $2.8 million related to a trade name intangible asset as a result ofcontinuing revenue declines, an overall strategic assessment of the related operations, and management's evaluation of the business. In the thirdquarter of 2015, as a result of a sustained decline in our market capitalization below our book value of equity and recent operating performance, weperformed an interim Step One impairment test of Customer Interaction and Trillium goodwill. As a result we recorded a non-cash impairmentcharge of $209.9 million in our Customer Interaction segment. As of December 31, 2015 , the net book value of our goodwill and other intangiblesrepresented approximately $223.1 million out of our total assets of $414.6 million . We test goodwill and other intangible assets with indefinite usefullives for impairment as of November 30 of each year and on an interim basis should factors or indicators become apparent that would require aninterim test. A downward revision in the fair value of our reporting units or any of the other intangible assets could result in additional impairmentsand non-cash charges. Any such impairment charges could have a significant negative effect on our reported net income. 15Table of ContentsOur 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 havesignificant consequences for our business. Our debt covenants require that we maintain certain financial measures and ratios. As a result of thesecovenants and ratios, we may be limited in the manner in which we can conduct our business, and we may be unable to engage in favorablebusiness activities or finance future operations or capital needs. A failure to comply with these restrictions or to maintain the financial measures andratios contained in the debt agreements could lead to an event of default that could result in an acceleration of outstanding indebtedness. Inaddition, 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 abilityto 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, andother general corporate purposes; and•result in higher interest expense in the event of increases in interest rates, as discussed below under “Interest rate increases could affectour 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. Thecompany recently negotiated a new credit facility and used a portion of the proceeds to pay off the remaining obligation related to our previous creditfacilities. The terms of future arrangements may be less favorable to the company than our current facilities. Any failure to obtain new financingarrangements on favorable terms could have a material and adverse effect on our liquidity position.We are unlikely to declare cash dividends or repurchase our shares.Although our board of directors has historically authorized the payment of quarterly cash dividends on our common stock, we recently announcedthat we would not declare further dividends in the future. In addition, although our board has authorized stock purchase programs (and werepurchased shares in 2015 and in prior years through these programs), we may discontinue doing so at any time and are unlikely to make anypurchases in the near term. Decisions to pay dividends on our common stock or to repurchase our common stock will be based upon periodicdeterminations by our board that such dividends or repurchases are both in compliance with all applicable laws and agreements and in the bestinterest of our stockholders after considering our financial condition and results of operations, the price of our common stock, credit conditions, andsuch other factors as are deemed relevant by our board. The failure to pay a cash dividend or repurchase stock could adversely affect the marketprice of our common stock.Interest rate increases could affect our results of operations, cash flows and financial position.Interest rate movements in Europe and the U.S. can affect the amount of interest we pay related to our debt and the amount we earn on cashequivalents. Our primary interest rate exposure is to interest rate fluctuations in Europe, specifically Eurodollar rates, due to their impact on interestrelated to our credit facilities. On December 31, 2015 , we had $77.3 million of debt outstanding, all of which bore variable interest rates. Werefinanced this debt in March 2016 under a facility that also bears variable rates. Our results of operations, cash flows, and financial position couldbe materially adversely affected by significant increases in interest rates. We also have exposure to interest rate fluctuations in the U.S., specificallymoney market, commercial paper, and overnight time deposit rates, as these affect our earnings on excess cash. Even with the offsetting increasein 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 materialadverse impact on our business, financial position, or operating results. We are subject to risks associated with operations outside the U.S. Harte Hanks conducts business outside of the U.S. During 2015 , approximately 16.9% of our revenues were derived from operations outside theUnited States, primarily Europe and Asia. We may expand our international operations in the future as part of our growth strategy. Accordingly, ourfuture operating results could be negatively affected by a variety of factors, some of which are beyond our control, including: 16Table of Contents•social, economic, and political instability;•changes in local, national, and international legal requirements or policies resulting in burdensome government controls, tariffs, restrictions,embargoes, or export license requirements;•higher rates of inflation;•the potential for nationalization of enterprises;•less favorable labor laws that may increase employment costs and decrease workforce flexibility;•potentially adverse tax treatment;•less favorable foreign intellectual property laws that would make it more difficult to protect our intellectual property from misappropriation;•more onerous or differing data privacy and security requirements or other marketing regulations;•longer payment cycles; and•the differing costs and difficulties of managing international operations.Our current credit facilities also contain covenants that limit to 20% the portion of our assets, revenue, and earnings that we can derive from ourbusinesses outside of the U.S. Although we believe we could obtain a waiver or amendment of these covenants if our business outside the U.S.exceeded this level (whether through acquisitions or improved organic growth), we cannot guarantee that we will obtain a waiver or amendment, orthat such a request may compel us to renegotiate our credit facilities at a time, or on terms, that are not favorable.In addition, exchange rate movements may have an impact on our future costs or on future cash flows from foreign investments. We have notentered into any foreign currency forward exchange contracts or other derivative instruments to hedge the effects of adverse fluctuations in foreigncurrency exchange rates. The various risks that are inherent in doing business in the U.S. are also generally applicable to doing business anywhereelse, and may be exacerbated by the difficulty of doing business in numerous sovereign jurisdictions due to differences in culture, laws, andregulations.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 welldesigned and operated, can provide only reasonable assurance of achieving desired control objectives and that no system of internal controls canbe designed to provide absolute assurance of effectiveness. If we fail to maintain a system of effective internal controls, it could have a materialadverse effect on our business, financial position, or operating results. Additionally, adverse publicity related to a failure in our internal controls overfinancial reporting could have a negative impact on our reputation and business. Fluctuation in our revenue and operating results and other factors may impact the volatility of our stock price. The price at which our common stock has traded in recent years has fluctuated greatly and has declined significantly. Our common stock price maycontinue to be volatile due to a number of factors including the following (some of which are beyond our control): •the impact of the uneven and lackluster economic recovery from the last recession, the overall strength of the economies of the markets weserve and general market volatility;•variations in our operating results from period to period and variations between our actual operating results and the expectations ofsecurities analysts, investors, and the financial community;•unanticipated developments with client engagements or client demand, such as variations in the size, budget, or progress toward thecompletion of engagements, variability in the market demand for our services, client consolidations, and the unanticipated termination ofseveral major client engagements;17Table of Contents•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.Our certificate of incorporation and bylaws contain anti-takeover protections that may discourage or prevent strategic transactions,including a takeover of our company, even if such a transaction would be beneficial to our stockholdersProvisions contained in our certificate of incorporation and bylaws, in conjunction with provisions of the Delaware General Corporation Law, coulddelay or prevent a third party from entering into a strategic transaction with us, even if such a transaction would benefit our stockholders. Forexample, our certificate of incorporation and bylaws provide for a staggered board of directors, do not allow written consents by stockholders, andhave strict advance notice and disclosure requirements for nominees and stockholder proposals.War or terrorism could affect our business. War, terrorism, or the threat thereof involving a market we serve could have a significant impact on our business, financial position, or operatingresults. War or the threat of war could substantially affect the levels of marketing expenditures by clients in each of our businesses, whether due toeconomic declines, decreased or slowed international trade, reactions to security risks, or other factors. In addition, each of our businesses could beaffected 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 business is conducted in facilities worldwide containing aggregate space of approximately 1.7 million square feet. All facilities are held underleases, which expire at dates through 2025.ITEM 3.     LEGAL PROCEEDINGS Information regarding legal proceedings is set forth in Note I, Commitments and Contingencies , of the “Notes to Consolidated Financial Statements”and is incorporated herein by reference.ITEM 4.     MINE SAFETY DISCLOSURES Not applicable.18Table of ContentsPART IIITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES Common Stock Our common stock is listed on the NYSE (symbol: HHS). The reported high and low quarterly sales price ranges for 2015 and 2014 were as follows:  2015 2014  High Low High LowFirst Quarter $8.10 $7.27 $8.84 $6.71Second Quarter 7.79 5.96 8.89 6.66Third Quarter 6.00 3.40 7.27 6.37Fourth Quarter 4.31 3.23 7.74 5.68 We paid a quarterly dividend of 8.5 cents per share in each quarter of 2015 and 2014 . Any actual dividend declaration can be made only upon, andsubject to, approval of our Board of Directors, based on its business judgment. As of January 31, 2016 , there are approximately 2,010 holders of record. Issuer Purchases of Equity Securities The following table contains information about our purchases of equity securities during the fourth quarter of 2015 :Period Total Numberof SharesPurchased (1) Average PricePaid perShare Total Numberof SharesPurchased asPart of aPubliclyAnnouncedPlan (2) MaximumDollar Amountthat May YetBe SpentUnder thePlanOctober 1 - 31, 2015 21,600 $3.56 21,600 $11,437,538November 1 - 30, 2015 — $— — $11,437,538December 1 - 31, 2015 — $— — $11,437,538Total 21,600 $3.56 21,600  (1) Total number of shares purchased includes shares, if any, (i) purchased as part of our publicly announced stock repurchase program, and(ii) pursuant to our 2005 Omnibus Incentive Plan and 2013 Omnibus Incentive Plan, withheld to pay withholding taxes and the exercise price incertain cashless exercises of stock options, and withheld to offset withholding taxes upon the vesting shares.(2) During the fourth quarter of 2015 , we purchased 21,600 shares of our common stock through our stock repurchase program that was publiclyannounced in August 2014. Under this program, from which shares can be purchased in the open market, our Board of Directors has authorized usto spend up to $20.0 million to repurchase shares of our outstanding common stock. As of December 31, 2015 , we have repurchased 1,506,679shares and spent $8.6 million under this authorization. Through December 31, 2015 , we had repurchased a total of 67,887,989 shares at anaverage price of $18.13 per share under this program and previously announced programs. 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 anyfiling under the 1933 Act or the 1934 Act, whether made before or after the date hereof and irrespective of any general incorporation language insuch filing. The following graph compares the cumulative total return of our common stock during the period December 31, 2010 to December 31, 2015 with theStandard & Poor’s 500 Stock Index (S&P 500 Index) and with our peer group. 19Table of ContentsOur current peer group includes: Acxiom Corporation, Cenveo, Inc., Convergys Corp., Conversant, Inc., Dex Media, Inc., Digital River, Inc., Dun &Bradstreet Corporation, Forrester Research, Inc., Gartner, Inc., Informatica Corp., MDC Partners, Inc., Meredith Corp., Reach Local, Inc., SykesEnterprises, Inc., and TeleTech Holdings, Inc. The S&P Index includes 500 U.S. companies in the industrial, transportation, utilities, and financial sectors and is weighted by marketcapitalization. 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 31,2010 and assumes the reinvestment of dividends.  ANNUAL RETURN PERCENTAGEYears EndingCompany Name / Index Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015Harte Hanks, Inc. -26.35 -30.94 36.62 3.88 -55.17S&P 500 Index 2.11 16.00 32.39 13.69 1.38Peer Group -14.68 9.55 51.30 1.36 5.1220Table of ContentsITEM 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 thefollowing 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, 2015 , 2014 , and2013 is derived from audited financial statements contained in this Form 10-K. Information for the years ended December 31, 2012 and 2011 wasderived from previously filed Annual Reports on Form 10-K. All financial information presented below excludes amounts related to our discontinuedShoppers operations.In thousands, except per share amounts 2015 2014 2013 2012 2011Statement of Comprehensive Income Data          Revenues $495,301 $553,676 $559,609 $581,091 $614,270Operating expenses          Labor, production and distribution 404,163 446,094 443,524 450,771 476,086Advertising, selling, general and administrative 54,530 51,900 54,937 51,729 50,483Impairment of other intangible assets 209,938 — 2,750 — —Depreciation and amortization 14,245 14,920 15,737 15,922 15,442Total operating expenses 682,876 512,914 516,948 518,422 542,011Operating income (loss) (187,575) 40,762 42,661 62,669 72,259Interest expense, net 4,759 2,559 2,998 3,484 2,941Loss on sale 9,501 — — — —Other, net 1,007 897 46 2,993 781Income tax expense (benefit) (31,914) 13,315 15,176 20,796 26,477Income (loss) from continuing operations $(170,928) $23,991 $24,441 $35,396 $42,060Earnings (loss) from continuing operations per commonshare—diluted $(2.77) $0.38 $0.39 $0.56 $0.67Weighted-average common and common equivalentshares outstanding—diluted 61,643 62,658 62,812 63,148 63,552Other Data          Cash dividends per share $0.34 $0.34 $0.26 $0.43 $0.32Capital expenditures $11,574 $11,265 $15,873 $13,461 $22,336Balance sheet data (at end of period)          Current assets $151,706 $201,417 $239,305 $205,014 $248,968Property, plant and equipment, net $33,913 $36,913 $40,711 $44,091 $46,842Goodwill and other intangibles, net $223,095 $400,441 $400,467 $403,423 $403,668Total assets $414,621 $644,177 $685,536 $706,212 $703,997Total debt $77,313 $82,687 $98,000 $110,250 $179,438Total stockholders’ equity $140,316 $326,676 $349,054 $328,164 $446,35521Table of ContentsITEM 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 Item1A 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 resultsmay vary materially from what is expressed in or indicated by the forward-looking statements.OverviewThe following MD&A section is intended to help the reader understand the results of operations and financial condition of Harte Hanks, Inc. (HarteHanks). This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notesto the financial statements contained elsewhere in this report and our MD&A section, financial statements, and accompanying notes to financialstatements in our 2015 Form 10-K. Our 2015 Form 10-K contains a discussion of other matters not included herein, such as disclosures regardingcritical accounting policies and estimates, and contractual obligations.Harte Hanks partners with clients to deliver relevant, connected, and quality customer interactions. Our approach starts with discovery and learning,which leads to customer journey mapping, creative and content development, analytics, and data management, and ends with execution andsupport in a variety of digital and traditional channels. We do something powerful: we produce engaging and memorable customer interactions todrive business results for our clients, which is why Harte Hanks is famous for developing better customer relationships and experiences and defininginteraction-led marketing.Our Customer Interaction services offer a wide variety of integrated, multi-channel, data-driven solutions for top brands around the globe. We helpour clients gain insight into their customers’ behaviors from their data and use that insight to create innovative multi-channel marketing programs todeliver a return on marketing investment. We believe our clients’ success is determined not only by how good their tools are, but how well we helpthem use the tools to gain insight and analyze their consumers. This results in a strong and enduring relationship between our clients and theircustomers. We offer a full complement of capabilities and resources to provide a broad range of marketing services, in media from direct mail toemail, including:•agency and digital services;•database marketing solutions and business-to-business lead generation;•direct mail; and•contact centers.Revenues from the Customer Interaction segment represented approximately 90% of our total revenues for the year ended December 31, 2015 . Trillium Software is a leading global enterprise data quality solutions provider. Our data quality specialists help organizations achieve increasedbusiness from their data management initiatives and existing business-critical processes by providing enterprise data profiling and data cleansingsoftware and services. Trillium Software offers industry-specific business solutions that help solve data problems experienced by financial services,banking, retail, healthcare, manufacturing, and risk professionals. Our full complement of technologies and services includes global data profiling,data cleansing, enrichment, and data linking for e-business, Big Data, customer relationship management, data governance, enterprise resourceplanning, supply chain management, data warehouse, and other enterprise applications. Revenues from the Trillium Software segment arecomprised primarily of perpetual software licenses, annual maintenance, and professional services, and represented approximately 10% of our totalrevenues for the year ended December 31, 2015 . We derive revenues by providing Customer Interaction services and Trillium Software licensing sales and services. 22Table of ContentsGeneral corporate expense consists primarily of pension and workers compensation expense related to employees of business operations we nolonger own. Previously, Harte Hanks also provided shopper advertising opportunities through our Shoppers segment, which operated in certain Californiamarkets. On September 27, 2013 we sold the assets of our Shoppers operations, The Pennysaver, for gross proceeds of $22.5 million. Thistransaction resulted in an after-tax loss of $12.4 million. Because Shoppers represented a distinct business unit with operations and cash flows thatcan clearly be distinguished, both operationally and for financial purposes, from the rest of Harte Hanks, the results of the Shoppers operations arereported as discontinued operations for all periods presented. Results of the remaining Harte Hanks business are reported as continuingoperations. After this sale, Harte Hanks no longer has any Shoppers operations or circulation. We are affected by the general, national, and international economic and business conditions in the markets where we and our customersoperate. Marketing budgets are often discretionary in nature, and are easier to reduce in the short-term than other expenses in response to weakeconomic conditions. Our revenues are also affected by the economic fundamentals of each industry that we serve, various market factors,including the demand for services by our clients, and the financial condition of and budgets available to specific clients, among other factors. Weremain committed to making the investments necessary to execute our multichannel strategy while also continuing to adjust our cost structure toreduce costs in the parts of the business that are not growing as fast. We believe these actions will improve our profitability in future periods. Our principal operating expense items are labor, outsourced costs, and mail supply chain management.Results of Continuing Operations As discussed in Note O, Discontinued Operations , we sold the assets of our California Shoppers operations on September 27, 2013. Therefore, theoperating results of our California Shoppers, including the loss on the sale, are reported as discontinued operations in the Consolidated FinancialStatements, and are excluded from management’s discussion and analysis of financial condition and results of operations below. Operating results from our continuing operations were as follows:  Year Ended December 31,In thousands, except per share amounts 2015 % Change 2014 % Change 2013Revenues $495,301 -10.5 % $553,676 -1.1 % $559,609Operating expenses 682,876 33.1 % 512,914 -0.8 % 516,948Operating income (loss) $(187,575) -560.2 % $40,762 -4.5 % $42,661           Operating Margin N/M   7.4%   7.6%           Income (loss) from continuing operations $(170,928) -812.5 % $23,991 -1.8 % $24,441           Diluted EPS from continuing operations $(2.77) -828.9 % $0.38 -2.6 % $0.39 (N/M = Not Meaningful)23Table of ContentsYear ended December 31, 2015 vs. Year ended December 31, 2014 Revenues Overall revenues decrease d $58.4 million , to $495.3 million , in the year ended December 31, 2015 compared to the year ended December 31,2014 . These results reflect the impact of decreased revenue from all of our verticals, with automotive and consumer brands representing the largestdollar decrease. Revenue from our retail and select markets verticals decreased $15.4 million , or 11.0% , and $7.3 million , or 13.5% , respectively,as the result of clients reducing mail volumes and database losses. Our auto and consumer brands vertical decreased $16.9 million , or 17.1% ,compared to the prior year, primarily from the loss of agency work with a luxury auto manufacturer. The decline of $14.2 million , or 10.9% , in ourtechnology vertical was primarily driven by the sale of our B2B research business. Our healthcare and pharmaceutical vertical decreased $2.2million , or 4.4% , and our financial services vertical decreased $2.4 million , or 3.0% , compared to the year ended December 31, 2014 .Future revenue performance will depend on, among other factors, the overall strength of the national and international economies and howsuccessful we are at maintaining and growing business with existing clients, acquiring new clients, and meeting client demands. We believe that, inthe long-term, an increasing portion of overall marketing and advertising expenditures will be moved from other advertising media to the targetedmedia space, and that our business will benefit as a result. Targeted media advertising results can be more effectively tracked, enablingmeasurement of the return on marketing investment. Operating Expenses Overall operating expenses were $682.9 million in 2015 , compared to $512.9 million in 2014 . This $170.0 million year over year increase is a resultof an impairment loss of $209.9 million related to goodwill associated with our Customer Interaction segment recorded in the third quarter of 2015.Excluding impairment, operating expenses decrease d $40.0 million , or 7.8% , compared to 2014 . Labor costs decrease d $18.3 million , or 6.6% ,primarily due to reductions in expense from wages and severance costs recorded in 2014. Production and distribution costs decrease d $23.6million , or 14.2% , primarily driven by decreased lease expense, decreased fuel costs, and decreased outsourced costs resulting from decreasedvolumes. General and administrative expense increased $2.6 million , or 5.1% , compared to the prior year, due to an increase in sales andmarketing expense related to employment of additional sales force personnel. Depreciation and intangible asset and software amortization expensedecreased slightly compared to the prior year. Our largest cost components are labor, outsourced costs, and mail supply chain costs. Each of these costs is somewhat variable and tends tofluctuate with revenues and the demand for our services. Mail supply chain rates have increased over the last few years due to demand and supplyissues within the transportation industry. Future changes in mail supply chain rates will continue to impact our total production costs and totaloperating expenses, and may have an impact on future demand for our supply chain management. Postage costs of mailings are borne by our clients and are not directly reflected in our revenues or expenses.Year ended December 31, 2014 vs. Year ended December 31, 2013RevenuesRevenues decreased $5.9 million, to $553.7 million, in 2014 compared to 2013. These results reflect the impact of decreased revenues from all ofour verticals except for select markets and automotive and consumer brands, with the retail vertical representing the largest dollar decrease.Revenues from our retail vertical declined 12.1% compared to the prior year, reflecting changes by two large customers to less expensive mailingformats. Compared to 2013, our healthcare and pharmaceutical vertical decreased 0.6%, high-tech declined 0.2% and our financial verticaldecreased 3.4% over the prior year. Our select markets vertical increased 29.3%, primarily due to non-recurring streaming enrollment services froman existing contact center customer. Automotive and consumer brands increased 4.3%.24Table of ContentsOperating ExpensesOverall operating expenses were $512.9 million in 2014, compared to $516.9 million in 2013. The $4.0 million decrease includes a $2.8 milliondecrease in labor costs, a $5.8 million decrease in selling, general and administrative, and a $0.6 million decrease in depreciation expense. Thesedecreases are offset by an increase of $5.4 million in production and distribution expenses, compared to 2013.Labor costs decreased $2.8 million, or 1.0%, primarily due to increased compensation expense in 2013 related to the retirement of our formerChairman and CEO. Production and distribution costs increased $5.4 million, or 3.3%, due to increased repairs and maintenance, lease terminationexpense, and pass through expenses. General and administrative expense, excluding the impairment charge, decreased $3.0 million, or 5.3%,compared to prior year, reflecting a decrease in professional services and workers’ compensation expense. Promotion expenses also decreasedrelated to rebranding expense recorded in 2013. Depreciation and intangible asset and software amortization expense decreased slightly comparedto the prior year.Customer Interaction Customer Interaction operating results were as follows:  Year Ended December 31,In thousands 2015 % Change 2014 % Change 2013Revenues $444,166 -11.1 % $499,444 -0.9 % $503,760Operating expenses 641,186 36.5 % 469,664 -0.4 % 471,739Operating income (loss) $(197,020) N/M $29,780 -7.0 % $32,021           Operating margin N/M   6.0%   6.4%Year ended December 31, 2015 vs. Year ended December 31, 2014 Revenues Customer Interaction revenues decrease d $55.3 million , to $444.2 million , in the year ended December 31, 2015 compared to the year endedDecember 31, 2014 . These results reflect the impact of decreased revenue from all of our verticals. Revenue from our retail and select marketsverticals decreased $15.3 million , or 11.2% , and $6.7 million , or 14.1% , respectively, as the result of clients reducing mail volumes and databaselosses. Our auto and consumer brands vertical decreased $14.5 million , or 17.0% , compared to the prior year, primarily from the loss of agencywork with a luxury auto manufacturer. The decline of $15.5 million , or 13.1% , in our technology vertical was primarily driven by the sale of our B2Bresearch business. Our healthcare and pharmaceutical vertical decreased $2.0 million , or 4.3% , and our financial services vertical decreased $1.2million , or 1.9% , compared to the year ended December 31, 2014 .Revenues from our vertical markets are impacted by, among other things, the economic fundamentals of each industry, various market factors,including the demand for services by our clients, and the financial condition of and budgets available to specific clients. Future revenue performance will depend on, among other factors, the overall strength of the national and international economies and howsuccessful we are at maintaining and growing business with existing clients, acquiring new clients and meeting client demands. We believe that, inthe long-term, an increasing portion of overall marketing and advertising expenditures will be moved from other advertising media to the targetedmedia space, and that our business will benefit as a result. Targeted media advertising results can be more effectively tracked, enablingmeasurement of the return on marketing investment. Operating Expenses Overall operating expenses were $641.2 million in 2015 , compared to $469.7 million in 2014 . This $171.5 million year over year increase is a resultof an impairment loss of $209.9 million related to goodwill recorded in the third quarter of 2015. Excluding impairment, operating expensesdecreased $38.4 million , or 8.2% , compared to 2014 . Labor costs decrease d $17.2 million , or 6.9% , primarily due to reductions in headcountand severance costs recorded in25Table of Contents2014. Production and distribution costs decrease d $23.4 million , or 14.1% , primarily driven by decreased lease expense, decreased fuel costs,and decreased outsourced costs resulting from decreased volumes. General and administrative expense increase d $2.7 million , or 6.4% ,compared to the prior year, due to an increase in sales and marketing expense related to employment of additional sales force personnel.Depreciation and intangible asset and software amortization expense decreased slightly compared to the prior year. Customer Interaction’s largest cost components are labor, outsourced costs, and mail supply chain costs. Each of these costs is somewhat variableand tends to fluctuate with revenues and the demand for our services. Mail supply chain rates have increased over the last few years due todemand and supply issues within the transportation industry. Future changes in mail supply chain rates will continue to impact our total productioncosts and total operating expenses, and may have an impact on future demand for our supply chain management. Year ended December 31, 2014 vs. Year ended December 31, 2013RevenuesCustomer Interaction revenues decreased $4.3 million, or 0.9%, in the year ended 2014 compared to the year ended 2013. These results reflect theimpact of our retail vertical decreasing by $19.9 million, or 12.8%, compared to the year ended December 2013, as the result of our clientscontinuing to change to lighter and less expensive print formats in response to postal service rate increases, client mail and database losses, andreduced contact center support services from an online retailer. In addition, our technology, auto and consumer brands, and select market verticalsincreased by $2.3 million, or 2.0%, $2.3 million, or 2.8%, and $11.9 million, or 32.1%, respectively. These increases were offset by a decrease inrevenues in our financial services vertical of $1.0 million, or 1.5% primarily due to revenue from credit card and retail banking customers.Operating ExpensesCustomer Interaction operating expenses were $469.7 million in 2014, compared to $471.7 million in 2013. Labor costs decrease d $0.5 million , or0.2% , primarily due to reduced headcount and bonus expense. General and Administrative expense decreased $6.1 million , or 12.7% , reflecting adecrease in professional services and workers comp expense. Depreciation and amortization expense decrease d $0.8 million , or 5.8% , comparedto 2013. Production and distribution costs increase d $5.4 million , or 3.4% , due to increased repairs and maintenance, lease termination expense,and pass through expenses.Trillium Software Trillium Software operating results were as follows:  Year Ended December 31,In thousands 2015 % Change 2014 % Change 2013Revenues $51,135 -5.7 % $54,232 -2.9 % $55,849Operating expenses 37,096 -9.3 % 40,885 1.1 % 40,453Operating income $14,039 5.2 % $13,347 -13.3 % $15,396           Operating Margin 27.5%   24.6%   27.6%Year ended December 31, 2015 vs. Year ended December 31, 2014 Revenues Trillium Software revenues decrease d $3.1 million , or 5.7% , for the year ended December 31, 2015 compared to the year ended December 31,2014 . This decrease was primarily related to decreased revenue from sales of software licenses and the related professional services andmaintenance fees associated with those license sales. Operating Expenses Trillium Software operating expenses were $37.1 million in the year ended December 31, 2015 , compared to $40.9 million in the year endedDecember 31, 2014 . The decrease of $3.8 million reflected a decrease in labor expense of26Table of Contents$3.4 million , or 12.6% , primarily due to decreased employee headcount. Production and distribution, general and administrative, and depreciationand amortization expense all decreased slightly compared to the prior year. Trillium Software’s largest cost component is software development, which is comprised primarily of labor. Year ended December 31, 2014 vs. Year ended December 31, 2013RevenuesTrillium Software revenues decreased $1.6 million, or 2.9%, for the year ended December 2014 compared to the year ended December 2013. Thisdecrease was primarily related to decreased revenue from sales of software licenses and professional services from two large software licensessold in the fourth quarter of 2013 to banks.Operating Expenses Trillium Software operating expenses were $40.9 million in the year ended December 31, 2014 , compared to $40.5 million in the year endedDecember 31, 2013 . The increase of $0.4 million reflects an increase in general and administration of $0.9 million , or 9.8% , compared to the prioryear, primarily due to increased professional services and an increase in bad debt expense. This was offset by decreases in labor, production, anddepreciation and amortization expense.Interest Expense, Net Year ended December 31, 2015 vs. Year ended December 31, 2014 Interest expense increased $2.2 million , or 86.0% , in 2015 compared to 2014 . This was due to the interest accretion for the contingentconsideration liability related to the purchase of 3Q Digital, Inc. See Note N, Acquisition and Disposition , in the Notes to Consolidated FinancialStatements for further discussion on the purchase of 3Q Digital, Inc. This was offset slightly by a decreased debt balance as a result of scheduledprincipal payments on the 2011 Term Loan Facility.Our debt at December 31, 2015 and 2014 is described in Note C, Long-Term Debt , in the Notes to Consolidated Financial Statements. Year ended December 31, 2014 vs. Year ended December 31, 2013Interest expense decreased $0.4 million, or 14.6%, in 2014 compared to 2013, due to a decreased debt balance as a result of scheduled principalpayments on the 2011 Term Loan Facility, as well as an increase in offsetting interest income due to an increased investment balance.Other Income and Expense Year ended December 31, 2015 vs. Year ended December 31, 2014 Other expense, net, increased $0.1 million , or 12.3% , compared to 2014 . This change was primarily due to net foreign currency transaction gainsrecognized in 2014 . Year ended December 31, 2014 vs. Year ended December 31, 2013Other expense, net, increased $0.9 million compared to 2013. This change is primarily due to a $0.9 million gain on the sale of our facility in Belgiumin 2013.Income Taxes Year ended December 31, 2015 vs. Year ended December 31, 2014 Our 2015 income tax benefit of $31.9 million resulted in an effective income tax rate of 15.7% . Unfavorably impacting our benefit is nondeductiblegoodwill associated with our impairment loss, nondeductible basis on the sale of operations, and foreign tax credit limitations on the dividends paidfrom foreign subsidiaries, the impact of which were $36.7 million ,27Table of Contents$0.7 million , and $0.6 million , respectively. Lastly, the unfavorable impact of state income taxes was principally offset by our ability to use taxcredits, and to a lesser extent, the lower tax rates applied to our foreign operations. This compares to our 2014 income tax expense of $13.3 millionthat resulted in an effective income tax rate of 35.7% . Benefiting our 2014 rate was a valuation allowance reversal associated with a recovery ofpreviously remitted foreign tax, and having a greater proportion of our income in jurisdictions outside the United States having tax rates below 35%. Year ended December 31, 2014 vs. Year ended December 31, 2013Our 2014 income tax expense of $13.3 million resulted in an effective income tax rate of 35.7% . Benefiting our expense was the reversal of $0.5million of our prior year valuation allowance. This reversal was principally associated with the recovery of previously remitted foreign tax. Our ratealso benefited from having a greater proportion of our income in jurisdictions outside of the United States having tax rates below 35%. Thiscompares to our 2013 income tax expense of $15.2 million that resulted in an effective tax rate of 38.3% . Unfavorably impacting our 2013 rate werestate income taxes, the extent of which was reduced by favorable enacted legislation and the incremental tax resulting from our limitation in usingforeign tax credits to fully offset the tax on foreign subsidiary dividends paid to our U.S. operations.Income/Earnings Per Share from Continuing OperationsYear ended December 31, 2015 vs. Year ended December 31, 2014We recorded a loss from continuing operations of $170.9 million and diluted loss per share from continuing operations of $2.77 . These resultscompare to income from continuing operations of $24.0 million and diluted earnings per share from continuing operations of $0.38 in 2014 . Thedecrease in income from continuing operations is primarily the result of an impairment loss of $209.9 million related to goodwill recorded in 2015.Year ended December 31, 2014 vs. Year ended December 31, 2013We recorded income from continuing operations of $24.0 million and diluted earnings per share from continuing operations of $0.38. These resultscompare to income from continuing operations of $24.4 million and diluted earnings per share from continuing operations of $0.39 in 2013. Thedecrease in income from continuing operations, excluding the impairment charge, is primarily a result of decreased operating income and generalcorporate expense.Economic Climate and Impact on our Financial StatementsAs discussed above, we sold the assets of the California Shoppers operations on September 27, 2013. The business and economic climate inCalifornia had a negative impact on our Shoppers’ operations and cash flows, and therefore, the cash proceeds received at sale. The loss on sale ofthese assets is reflected in the discontinued operations results throughout our financial statements. In addition, as a result of a significant decreasein forecasted revenues, management completed an evaluation of the Aberdeen Group trade name intangible asset as of September 30, 2013. Adiscounted cash flow model was used to calculate the fair value of the Aberdeen Group trade name. The significant assumptions used in thismethod included the (i) revenue growth rates for the Aberdeen Group, (ii) discount rate, (iii) tax rate, and (iv) royalty rate. As a consequence, werecorded a non-cash trade name intangible asset impairment charge of $2.8 million . The impairment charge is included in Intangible AssetImpairment in the Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2013.As a result of a sustained decline in our market capitalization below our book value of equity and recent operating performance, the companycompleted an evaluation of the Customer Interaction and Trillium Software goodwill during the third quarter of 2015. The fair value of each reportingunit was estimated using both the income approach and market approach models. The fair value of our Customer Interaction reporting unit wasestimated to be less than the carrying value, including goodwill. As a result, we recorded a non-cash goodwill impairment charge of $209.9 million .The impairment charge is included in Intangible Asset Impairment in the Consolidated Statements of Comprehensive Income (Loss) for the yearended December 31, 2015.We cannot predict the impact on our business performance of the economic climate in the U.S. and other economies in which we operate, nor canwe predict the impact of the economic climate in the industry in which we operate. Economic downturns and turmoil severely affect the marketingservices industry. A deep or enduring economic recession in the U.S. or other markets we or our clients serve could have a material adverse effecton our business, financial position, or operating results.28Table of ContentsLiquidity and Capital ResourcesSources and Uses of CashAs of December 31, 2015 , cash and cash equivalents were $17.6 million , decreasing from $56.7 million at December 31, 2014 . This net decreasewas a result of net cash provided by operating activities of $30.9 million , net cash used in investing activities of $36.2 million , net cash used infinancing activities of $31.9 million , and the negative effect of exchange rate changes of $2.0 million . Operating Activities Net cash provided by operating activities in 2015 was $30.9 million , compared to $25.6 million for 2014 . The $5.4 million year-over-year increasewas attributable to an increase of $24.5 million in net income excluding the impairment loss and loss on sale, a $21.6 million increase in changeswithin working capital assets, $6.3 million net increase in other, offset by a $47.0 million decrease in deferred income taxes. For 2015 , our principal working capital changes, which directly affected net cash provided by operating activities, were as follows: •A decrease in accrued payroll attributable to the timing of normal payroll as well as a decrease in bonus and commission accruals;•A decrease in customer postage and program discounts attributable to customers utilizing lower postage cost alternatives;•An decrease in accounts receivable, net attributable to year to date revenue decline;•A decrease in deferred revenue and customer advances attributable to lower postage volume and deferred income related to database andsoftware maintenance;Investing Activities Net cash used in investing activities was $36.2 million in 2015 compared to $11.1 million in 2014 . The $25.1 million decrease is primarily the resultof the $29.9 million of net cash used for acquisitions, offset by proceeds of $5.0 million from the disposition of the B2B research business.Financing ActivitiesNet cash used in financing activities was $31.9 million in 2015 compared to $44.6 million in 2014 . The $12.7 million decrease is attributable to a$13.0 million increase in borrowings and $4.0 million decrease in purchases of treasury stock, offset by $3.1 million in increased debt payments in2015 . Credit FacilitiesOn August 16, 2011, we entered into a five-year $122.5 million term loan facility (2011 Term Loan Facility) with Bank of America, N.A., asAdministrative Agent. The 2011 Term Loan Facility matures on August 16, 2016. For each borrowing under the 2011 Term Loan Facility, we cangenerally choose to have the interest rate for that borrowing calculated based on either (i) the LIBOR rate (as defined in the 2011 Term LoanFacility) for the applicable interest period, plus a spread (ranging from 2.00% to 2.75% per annum) based on our total net funded debt-to-EBITDAratio (as defined in the 2011 Term Loan Facility) then in effect; or (ii) the highest of (a) the Agent’s prime rate, (b) the BBA daily floating rate LIBOR,as determined by Agent for such date, plus 1.00%, and (c) the Federal Funds Rate plus 0.50%, plus a spread (ranging from 1.00% to 1.75% perannum) based on our total net funded debt-to-EBITDA ratio then in effect. We may elect to prepay the 2011 Term Loan Facility at any time withoutincurring any prepayment penalties. At December 31, 2015 , we had $64.3 million outstanding under the 2011 Term Loan Facility.On August 8, 2013, we entered into a three-year $80 million revolving credit facility with a $25 million letter of credit sub-facility and a $5 millionswing line loan sub-facility (2013 Revolving Credit Facility) by amending and restating a similar revolving credit facility originally entered in 2010(2010 Revolving Credit Facility). The 2013 Revolving Credit29Table of ContentsFacility permits us to request up to a $15 million increase in the total amount of the facility, and matures on August 16, 2016. The 2013 RevolvingCredit Facility replaced the 2010 Revolving Credit Facility, under which Harte Hanks had no borrowings as of August 8, 2013, except for letters ofcredit totaling approximately $9.5 million. For each borrowing under the 2013 Revolving Credit Facility, we can generally choose to have the interestrate for that borrowing calculated on either (i) the Eurodollar rate for the applicable interest period plus a spread which is determined based on ourtotal net debt-to-EBITDA ratio then in effect, which ranges from 2.25% to 3.00% per annum; or (ii) the highest of (a) the Agent’s prime rate, (b) theFederal Funds Rate plus 0.50% per annum, and (c) Eurodollar rate plus 1.00% per annum, plus a spread which is determined based on our totaldebt-to-EBITDA ratio then in effect, which spread ranges from 1.25% to 2% per annum. We are also required to pay a quarterly commitment feeunder the 2013 Revolving Credit Facility. The rate of which is applied to the amount equal to the difference of the total commitment amount underthe 2013 Revolving Credit Facility less the aggregate amount of outstanding obligations under such facility. The commitment fee rate ranges from0.50% to 0.55% per annum, depending on our total net debt-to-EBITDA ratio then in effect. In addition, we pay a letter of credit fee with respect tooutstanding letters of credit. That fee is calculated by applying a rate equal to the spread applicable to Eurodollar based loans plus a fronting fee of0.125% per annum to the average daily undrawn amount of the outstanding letters of credit. We may elect to prepay the 2013 Revolving CreditFacility at any time without incurring any prepayment penalties.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 ofnot more than 2.25 to 1. The credit facilities also contain customary covenants restricting our and our subsidiaries’ ability to: •authorize distributions, dividends, stock redemptions, and repurchases if a payment event of default has occurred and is continuing;•enter into certain merger or liquidation transactions;•grant liens;•enter into certain sale and leaseback transactions;•have foreign subsidiaries account for more than 20% of the consolidated revenue, consolidated EBITDA, or assets of Harte Hanks and itssubsidiaries, in the aggregate;•enter into certain transactions with affiliates; and•allow the total indebtedness of Harte Hanks’ subsidiaries to exceed $20.0 million.The credit facilities each also include customary covenants regarding reporting obligations, delivery of notices regarding certain events, maintainingour corporate existence, payment of obligations, maintenance of our properties and insurance thereon at customary levels with financially sound andreputable insurance companies, maintaining books and records and compliance with applicable laws. The credit facilities each also provide forcustomary events of default including nonpayment of principal or interest, breach of representations and warranties, violations of covenants, failureto pay certain other indebtedness, bankruptcy and material judgments and liabilities, certain violations of environmental laws or ERISA or theoccurrence of a change of control. Our material domestic subsidiaries have guaranteed the performance of Harte Hanks under our credit facilities.As of December 31, 2015 , we were in compliance with all of the covenants of our credit facilities.On March 10, 2016 , we entered into a secured credit facility with Wells Fargo Bank, N.A. as Administrative Agent. This facility consists of amaximum $65.0 million revolving credit facility, and a $45.0 million term loan facility (collectively, the 2016 Secured Credit Facilities). A portion of theproceeds from the 2016 Secured Credit Facilities was used to pay off the remaining obligation related to the 2011 Term Loan Facility and the 2013Revolving Credit Facility. See Note C, Long Term Debt, of the Notes to Consolidated Financial Statements for further discussion.30Table of ContentsContractual Obligations Contractual obligations at December 31, 2015 are as follows:In thousands Total 2016 2017 2018 2019 2020 ThereafterDebt $77,313 $77,313 $— $— $— $— $—Interest on term debt (1) 934 934 — — — — —Interest on revolver debt (2) 393 393 — — — — —Operating leases 43,021 11,565 10,676 7,686 5,343 3,121 4,630Capital leases 336 132 100 58 32 14 —Unfunded pension plan benefitpayments 16,958 1,542 1,611 1,603 1,593 1,685 8,924Other long-term obligations 1,456 803 537 116 — — —Total contractual cash obligations $140,411 $92,682 $12,924 $9,463 $6,968 $4,820 $13,554(1) Future interest amounts were estimated using the December 31, 2015 effective rate on our outstanding term facility debt of 2.4239%.(2) Future interest amounts were estimated using the December 31, 2015 effective rate on our outstanding revolver facility debt of 4.7500%.At December 31, 2015 , we had total letters of credit in the amount of $6.4 million . No amounts were drawn against these letters of credit atDecember 31, 2015 . These letters of credit renew annually and exist to support insurance programs relating to workers’ compensation, automobileand general liability as well as facility lease obligations. We had no other off-balance sheet arrangements at December 31, 2015 . Dividends We paid a quarterly dividend of 8.5 cent s per share in each quarter of 2015 . Any actual dividend declaration can be made only upon, and subjectto, approval of our Board of Directors, based on its business judgment. Except for the one-time acceleration of the first quarter 2013 dividend, wehave paid consecutive quarterly dividends since the first quarter of 1995. Share Repurchase During 2015 , we repurchased 0.9 million shares of our common stock for $4.6 million under our current stock repurchase program that was publiclyannounced in August 2014. Under our current program we are authorized to spend up to $20.0 million to repurchase shares of our outstandingcommon stock. At December 31, 2015 , we had authorization of $11.4 million under this program. From 1997 through December 31, 2015 , we haverepurchased 67.9 million shares for an aggregate of $1.2 billion . Outlook We consider such factors as total cash and cash equivalents, current assets, current liabilities, total debt, revenues, operating income, cash flowsfrom operations, investing activities and financing activities when assessing our liquidity. Our primary sources of liquidity have been cash and cashequivalents on hand, cash generated from operating activities, and borrowings from our 2013 Revolving Credit Facility. Our management of cash isdesigned to optimize returns on cash balances and to ensure that it is readily available to meet our operating, investing, and financing requirementsas they arise. Additional capital resources are also available from and provided through our 2013 Revolving Credit Facility, subject to the terms andconditions of that facility. The amount of cash on hand and borrowings available under our 2013 Revolving Credit Facility are influenced by a number of factors, includingfluctuations in our operating results, revenue growth, accounts receivable collections, working capital changes, capital expenditures, tax payments,share repurchases, pension plan contributions, acquisitions, and dividends. As of December 31, 2015 , we had $60.6 million of unused borrowing capacity under our 2013 Revolving Credit Facility (which matures onAugust 16, 2016) and a cash balance of $17.6 million . Based on our current operational plans, we31Table of Contentsbelieve that our cash on hand, cash provided by operating activities, and availability under the 2016 Secured Credit Facilities will be sufficient to fundoperations, anticipated capital expenditures, payments of principal and interest on our borrowings for the next 12 months. Nevertheless, we cannotpredict the impact on our business performance of the economic climate in the U.S. and other economies in which we operate. A deep or enduringeconomic recession in the U.S. or other markets we or our clients serve could have a material adverse effect on our business, financial position oroperating results.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 andresults of operations and which require complex or subjective judgments or estimates. The areas that we believe involve the most significantmanagement estimates and assumptions are detailed below. Actual results could differ materially from those estimates under different assumptionsand conditions. Historically, actual results have not differed significantly from our estimates. Revenue Recognition We recognize revenue when all of the following criteria are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed ordeterminable; (iii) collectability is reasonably assured; and (iv) the service has been performed or the product has been delivered. Payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as theservices 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 thepart of management. 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, werequire either a purchase order, a statement of work signed by the client, a written contract, or some other form of written authorization from theclient. Revenue from agency and creative services, analytical services, and market research is typically billed based on time and materials. Revenue from email marketing, social media marketing, digital techniques such as search engine maximization ("SEM"), and other digital solutionsis recognized as the work is performed. Revenue from these services is typically based on a fixed price or rate given to the client. Revenue associated with new marketing database builds is deferred until complete or until client acceptance. Upon completion or acceptance,revenue and direct build costs are then recognized over the term of the related arrangement as the services are provided. Revenue from databaseand website hosting services is recognized ratably over the contractual hosting period. Pricing for database builds are typically based on a fixedprice and hosting fees are typically based on a fixed price per month or per contract. Revenue from database subscriptions is based on a fixed price and is recognized ratably over the term of the subscription. Revenue from stand-alone technology data sales is recognized at the time of delivery. Revenue from services such as data processing, printing, personalization of communication pieces using laser and inkjet printing, targeted mail, andtransportation logistics is recognized as the work is performed. Revenue from these services is typically based on a fixed price or rate given to theclient. Postage costs of mailings in our direct mail business are borne by our clients and are not directly reflected in our revenues or expenses. Revenue related to fulfillment and contact centers, including inbound and outbound calling, and email management, is also typically based on a fixedprice per transaction or service provided. Revenue from these services is recognized as the service or activity is performed. Revenue from software arrangements involving multiple elements is allocated to each element based on the vendor-specific objective evidence offair values of the respective elements. For software sales with multiple elements (for example, software licenses with undelivered post-contractcustomer support or “PCS”), we allocate revenue to each32Table of Contentscomponent of the arrangement using the residual value method based on the fair value of the undelivered elements. This means we defer revenuefrom 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 otherclients. 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 asthe services are performed. The revenue allocated to software products, including time-based software licenses, is recognized, if collection isprobable, upon execution of a licensing agreement and shipment of the software, or ratably over the term of the license, depending on the structureand 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 thePCS revenue ratably over the term of the license. For certain non-software arrangements, we enter into contracts that include delivery of a combination of two or more of our service offerings. Sucharrangements are divided into separate units of accounting, provided that the delivered element(s) has stand-alone value and objective and reliableevidence of the fair value of the undelivered element(s) exist(s). When we are able to un-bundle the arrangement into separate units of accounting, revenue from each service is recognized separately, and inaccordance with our revenue recognition policy for each element. If we are unable to un-bundle the arrangement into separate units of accounting,we apply one of the revenue recognition policies to the entire arrangement. This might impact the timing of revenue recognition, but would notchange the total revenue recognized from the arrangement. 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 berealized upon collection. The methodology used to determine the minimum allowance balance is based on our prior collection experience and isgenerally related to the accounts receivable balance in various aging categories. The balance is also influenced by specific clients’ financial strengthand circumstance. Accounts that are determined to be uncollectible are written off in the period in which they are determined to beuncollectible. Periodic changes to the allowance balance are recorded as increases or decreases to bad debt expense, which is included in the“Advertising, selling, general, and administrative” line of our Consolidated Statements of Comprehensive Income (Loss). We recorded bad debtexpense of $0.6 million , $0.5 million, and $0.0 million for the years ended December 31, 2015 , 2014 , and 2013 , respectively. At December 31,2015 and 2014 , our allowance for doubtful accounts was $1.2 million and $1.2 million , respectively. While we believe our reserve estimate to beappropriate, we may find it necessary to adjust the allowance for doubtful accounts if future bad debt expense exceeds the estimated reserve. Giventhe significance of accounts receivable to the consolidated financial statements, the determination of net realizable values is considered to be acritical accounting estimate. 33Table of ContentsReserve for Healthcare, Workers’ Compensation, Automobile and General LiabilityWe are self-insured for our workers’ compensation, automobile, general liability, and a portion of our healthcare insurance. We make varioussubjective judgments about a number of factors in determining our reserve for healthcare, workers’ compensation, automobile, and general liabilityinsurance, and the related expense. Our deductible for individual healthcare claims is $0.3 million . Our deductible for workers’ compensation is $0.5million . We have a $0.3 million deductible for automobile and general liability claims. Our insurance administrator provides us with estimated lossreserves, based upon its experience dealing with similar types of claims, as well as amounts paid to date against these claims. We apply actuarialfactors to both insurance estimated loss reserves and to paid claims and then determine reserve levels, taking into account these calculations. AtDecember 31, 2015 and 2014 , our reserve for healthcare, workers’ compensation, net, automobile, and general liability was $6.1 million and $7.8million , respectively. If ultimate losses were 10% higher than our estimate at December 31, 2015 , net income would be impacted by approximately$0.4 million , net of taxes. The amount that earnings would be impacted is dependent on the claim year and our deductible levels for that planyear. Periodic changes to the reserve for workers’ compensation, automobile, and general liability are recorded as increases or decreases toinsurance expense, which is included in the “Advertising, selling, general, and administrative” line of our Consolidated Statements of ComprehensiveIncome (Loss). Periodic changes to the reserve for healthcare are recorded as increases or decreases to employee benefits expense, which isincluded in the “Labor” line of our Consolidated Statements of Comprehensive Income (Loss). Goodwill and Other Intangible AssetsGoodwill is recorded to the extent that the purchase price of an acquisition exceeds the fair value of the identifiable net assets acquired. Otherintangibles with definite and indefinite useful lives are recorded at fair value at the date of the acquisition. Under the provisions of FASB ASC 350,Intangibles-Goodwill and Other (ASC 350), goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicatethat it is "more likely than not" that goodwill might be impaired. We assess the impairment of our goodwill and other intangible assets by determiningthe fair value of each of our reporting units and comparing the fair value to the carrying value for each reporting unit. Determining fair value requiresthe exercise of significant judgments, including judgments about appropriate discount rates, the amount and timing of expected future cash flows,and perpetual growth rates. We monitor potential triggering events, including changes in the business climate in which we operate, attrition of key personnel, the current volatilityin the capital markets, the company’s market capitalization compared to our book value, our recent operating performance, and financial projections.During the third quarter of 2015 as a result of a sustained decline in our market capitalization below our book value of equity and recent operatingperformance, the company determined that a triggering event had occurred. In accordance with ASC 350, we determined that an interim Step Oneimpairment test of Customer Interaction and Trillium Software goodwill was warranted. The fair value of each reporting unit was estimated usingboth the income approach and market approach models. The fair value of our Customer Interaction reporting unit was estimated to be less than thecarrying value, including goodwill. The fair value of our Trillium Software reporting unit was estimated to be more than the carrying value, includinggoodwill. The company determined that the goodwill balance with respect to the Customer Interaction reporting unit was impaired and Step Twotesting on that reporting unit balance was deemed necessary.Step Two of the goodwill test consists of performing a hypothetical purchase price allocation, under which the estimated fair value of the reportingunit is allocated to its tangible and intangible assets based on their estimated fair values, with any residual amount being assigned to goodwill.During the Step Two analysis, book value was estimated to approximate fair value for all working capital items, as well as a number of insignificantassets and liabilities. Intangible assets related to trade names, customer relationships, and non-compete agreements were identified and the fairvalue of these intangible assets was estimated.The models used to value the Customer Interaction reporting unit in Step One and the identified intangible assets in Step Two relied onmanagement’s assumptions. These assumptions, which are significant to the calculated fair values, are considered Level 3 inputs under the fairvalue hierarchy established by ASC 350, as they are unobservable. The assumptions in the Step One test include discount rate, revenue growthrates, tax rates, and operating margins. In addition to these assumptions, the Step Two assumptions include customer attrition rates and royaltyrates.The impairment analysis indicated an impairment of Customer Interaction goodwill that is recorded in the Consolidated Statements ofComprehensive Income (Loss) in the third quarter of 2015 of $209.9 million and a corresponding $36.8 million tax benefit resulting in a net incomeimpact of $173.1 million . 34Table of ContentsOn April 14, 2015 the company sold its B2B research businesses, Aberdeen Group and Harte Hanks Market Intelligence (the "B2B researchbusiness”). The B2B research business asset group was a part of our Customer Interaction segment (see Note M, Business Segments, in the Notesto Consolidated Financial Statements). The allocated fair value to the B2B research business within the net book value of Customer Interactiongoodwill was $11.1 million . In addition, $2.3 million of intangible assets with indefinite useful lives related to the Aberdeen Group trade name waswritten-off in conjunction with the sale of the B2B research business. These amounts were written-off and are reflected in the Loss on sale in theOther expenses section of the Condensed Consolidated Statements of Income (Loss). See Note N, Acquisition and Disposition, in the Notes toConsolidated Financial Statements for further discussion.On March 16, 2015 the company acquired the stock of a privately-owned digital marketing agency. The company paid some consideration uponclosing, with additional consideration payable upon the achievement of revenue performance goals over the three-year period following the closing.The company performed a valuation to determine the estimate of the total purchase consideration and to estimate values for the tangible andidentifiable intangible assets. As a result of the calculation, we recorded $41.8 million in goodwill and $4.8 million of identified intangible assets withdefinite lives for customer relationships, trade names, and non-compete agreements.During the second quarter of 2014, we determined our reporting units as Customer Interaction and Trillium Software. In this analysis, our goodwillwas allocated to each reporting unit based on the estimated fair value of the reporting unit. We performed an impairment test immediately beforeand after the change in reporting units, utilizing this same methodology as our November 30 annual impairment test and no indication of impairmentwas identified.On September 30, 2013, as a result of a significant decrease in forecasted revenues and an overall strategic assessment of the related operations,management completed an evaluation of the Aberdeen Group trade name. A discounted cash flow model was used to calculate the fair value of theAberdeen trade name. The significant assumptions used in this method included the (i) revenue growth rates for Aberdeen, (ii) discount rate, (iii) taxrate, and (iv) royalty rate. These assumptions are considered Level 3 inputs under the fair value hierarchy established by FASB ASC 820, Fair ValueMeasurements and Disclosures . Harte Hanks recorded a non-cash trade name intangible asset impairment charge of $2.8 million . The impairmentcharge is included in Goodwill and intangible assets impairment in the Consolidated Statements of Comprehensive Income (Loss) in 2013. We performed our annual goodwill impairment testing as of November 30, 2013. In 2013, overall fair value was compared to overall marketcapitalization. In addition, and consistent with prior periods, fair value was determined using a discounted cash flow model and a cash flow multiplemodel analysis. Based on the results of our November 30, 2013 impairment tests, we did not record any additional impairment losses in 2013related to goodwill and other intangible assets.At December 2015 , 2014 , and 2013 , the net book value of our goodwill was allocated to our reporting units as follows:In thousands 2015 2014 2013Operations      Customer Interaction $69,699 $248,891 $377,854Trillium Software 149,273 149,273 20,310Total Goodwill $218,972 $398,164 $398,164The company continues to monitor potential triggering events, including changes in the business climate in which it operates, attrition of keypersonnel, the current volatility in the capital markets, the company’s market capitalization compared to its book value, the company’s recentoperating performance, and the company’s financial projections. The occurrence of one or more triggering events could require additionalimpairment testing, which could result in additional impairment charges. A summary of the critical assumptions utilized for our impairment testing in 2015 are outlined above. We believe this information provides relevantinformation to understand our goodwill impairment testing and evaluate our goodwill balances.For the annual goodwill impairment tests performed in 2015 , because of the recent goodwill impairment analysis, and because no additionaltriggering events are considered to have occurred, the company determined that performing a qualitative assessment (Step Zero analysis) as ofNovember was sufficient to determine if there were any indicators of impairment and whether further analysis was necessary. Managementconsidered the following additional key35Table of Contentscircumstances in its qualitative assessment to conclude that it was more likely than not that the fair value of the reporting units was greater than thecarrying amounts, including goodwill for Customer Interaction and Trillium Software: •Macroeconomic conditions - no significant changes have occurred in the general economic conditions•Industry and market considerations - no significant changes have occurred in the environment in which Customer Interaction or TrilliumSoftware operates•Cost Factors - no significant increases in labor, or other costs for Customer Interaction or Trillium Software that have had a negative effect onearnings and cash flows•Other events - the change in key leadership of Harte Hanks is not considered to have a negative impact on Customer Interaction or TrilliumSoftware, and there have been no significant litigation or regulatory issues•Decrease in share price - there has been no significant decrease in the share price of Harte Hanks since the third quarter 2015 valuation•Balance sheet/book value - there have been no significant changes to Customer Interaction or Trillium Software balance sheet or book valuesince the third quarter 2015 valuationThe determination of the recoverability of goodwill requires significant judgment and estimates regarding future cash flows and fair values. Theseestimates are subject to change and could result in impairment losses being recognized in the future. If different reporting units or different valuationmethodologies had been used, the impairment test results could have differed. Income TaxesWe are subject to income taxes in the United States and numerous other jurisdictions. Significant judgment is required in determining our provisionfor income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex taxlaws. We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liabilitymethod. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differencesbetween the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assetsand liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities areexpected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is morelikely than not to be realized. We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained onexamination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for ouruncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We makeadjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To theextent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes inthe period in which such determination is made and could have a material impact on our financial condition and operating results. The provision forincome taxes includes the effects of any reserves that we believe are appropriate, as well as the related net interest and penalties. Stock-based CompensationStock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisiteservice 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 actualresults differ significantly from some of these estimates, stock-based compensation expense, and our results of operations could be materiallyimpacted. For the years ended December 31, 2015 , 2014 , and 2013 , we recorded total stock-based compensation expense of $5.7 million , $4.1million , and $5.7 million , respectively.36Table of ContentsAccounting for Contingent ConsiderationAs of December 31, 2015 , in conjunction with the completion of the acquisition of 3Q Digital, Inc. (as described in Note N, Acquisition andDisposition, in the Notes to Consolidated Financial Statements), we recognize that the estimates and assumptions around management’sapplication of the earnout liability require that we add accounting for contingent consideration as a critical accounting policy. Management appliesASC 805 Business Combinations, (Subtopic 30-25) Goodwill Recognition, Contingent Consideration. We recognized the acquisition-date fair valueof the contingent consideration as part of the consideration transferred in the exchange. The fair value of the contingent consideration arrangementwas estimated by applying a multiple scenario approach. At December 31, 2015 , our earnout liability was $20.3 million .Recent Accounting PronouncementsAs discussed in Note A, Significant Accounting Policies, of the Notes to Consolidated Financial Statements, certain new financial accountingpronouncements have been issued which either have already been reflected in the accompanying consolidated financial statements, or will becomeeffective for our financial statements at various dates in the future. The adoptions of these new accounting pronouncements have not and are notexpected 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 variationsand to foreign exchange rate variations. From time to time, we may utilize derivative financial instruments to manage our exposure to such risks. We are exposed to market risk for changes in interest rates related to our credit facilities. Our earnings are affected by changes in short-terminterest rates as a result of our credit facilities, which bear interest at variable rates based on LIBOR rates (effective 30 day LIBOR rate of 0.42% atDecember 31, 2015). Our five-year 2011 Term Loan Facility has a maturity date of August 16, 2016. At December 31, 2015, our debt balancerelated to the 2011 Term Loan Facility was $64.3 million. Our three-year $80 million 2013 Revolving Credit Facility also has a maturity date ofAugust 16, 2016. At December 31, 2015 , our debt balance related to the 2013 Revolving Credit Facility was $13.0 million. Assuming the actual level of borrowings throughout 2015 , and assuming a one percentage point change in the average interest rates, we estimatethat our net income for 2015 would have changed by approximately $0.5 million. Under our 2016 Revolving Credit Facility and 2016 Term Loan, weestimate that a one percentage point change in the average interest rate would have the same impact on our net income. Due to our overall debtlevel and cash balance at December 31, 2015 , anticipated cash flows from operations, and the various financial alternatives available to us shouldthere be an adverse change in interest rates, we do not believe that we currently have significant exposure to market risks associated with changinginterest rates. At this time we have not entered into any interest rate swap or other derivative instruments to hedge the effects of adversefluctuations in interest rates. Our earnings are also affected by fluctuations in foreign currency exchange rates as a result of our operations in foreign countries. Our primaryexchange rate exposure is to the Euro, British Pound Sterling, Australian Dollar and Philippine Peso. We monitor these risks throughout the normalcourse of business. The majority of the transactions of our U.S. and foreign operations are denominated in the respective local currencies. Changesin exchange rates related to these types of transactions are reflected in the applicable line items making up operating income in our ConsolidatedStatements of Comprehensive Income (Loss). Due to the current level of operations conducted in foreign currencies, we do not believe that theimpact of fluctuations in foreign currency exchange rates on these types of transactions is significant to our overall annual earnings. A smallerportion of our transactions are denominated in currencies other than the respective local currencies. For example, intercompany transactions thatare 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 therespective local currency, any transactions denominated in other currencies are accounted for in the respective local currency at the time of thetransaction. Any foreign currency gain or loss from these transactions, whether realized or unrealized, results in an adjustment to income, which isrecorded in “Other, net” in our Consolidated Statements of Comprehensive Income (Loss). Transactions such as these amounted to $0.2 million and$0.3 million in pre-tax currency transaction gains in 2015 and 2014, respectively. At this time we are not entered into any foreign currency forwardexchange contracts or other derivative instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. 37Table of ContentsWe 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 theretobeginning at page 43 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 ourdisclosure controls and procedures (as defined in Rule 13a-15(e) under the 1934 Act). It should be noted that, because of inherent limitations, ourdisclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that theobjectives of the disclosure controls and procedures are met. Based upon that evaluation, the Chief Executive Officer, Chief Financial Officer, andChief Accounting Officer concluded that the design and operation of these disclosure controls and procedures were effective, at the “reasonableassurance” 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 todetermine whether any changes occurred during the fourth quarter of 2015 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 inother factors that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. We may makechanges in our internal control processes from time to time in the future. It should also be noted that, because of inherent limitations, internal controlover financial reporting may not prevent or detect misstatements, and controls may become inadequate because of changes in conditions or in thedegree of compliance with the policies or procedures. Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm on theConsolidated Financial Statements and Internal Control Over Financial Reporting are set forth in the Consolidated Financial Statements beginningon page 43.ITEM 9B.     OTHER INFORMATION None.38Table of ContentsPART 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 forour 2016 annual meeting of stockholders ( 2016 Proxy Statement), as indicated below. Our 2016 Proxy Statement will be filed with the SEC not laterthan 120 days after December 31, 2015 . Because the 2016 Proxy Statement has not yet been finalized and filed, there may be certaindiscrepancies between the currently anticipated section headings specified below and the final section headings contained in the 2016 ProxyStatement.ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors and Executive OfficersThe information required by this item regarding our directors and executive officers will be set forth in our 2016 Proxy Statement under the caption“Directors and Executive Officers” which information is incorporated herein by reference. Section 16(a) ComplianceThe information to appear in our 2016 Proxy Statement under the caption “General Information - Section 16(a) Beneficial Ownership ReportingCompliance” is incorporated herein by reference. Code of Ethics and Other Governance InformationThe information required by this item regarding the Supplemental Code of Ethics for our Senior Financial Officers (Code of Ethics), audit committeefinancial experts, audit committee members and procedures for stockholder recommendations of nominees to our Board of Directors will be set forthin our 2016 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.HarteHanks.com “Corporate Governance” section of the “Investors” tab, and a printedcopy of our Code of Ethics will be furnished without charge, upon written request to Harte Hanks, Inc., Attn: Corporate Secretary, 9601 McAllisterFreeway, Suite 610, San Antonio, Texas 78216. In accordance with the rules of the NYSE and the SEC, we currently intend to disclose any futureamendments to our Code of Ethics, or waivers from our Code of Ethics for our Chief Executive Officer, Chief Financial Officer and Chief AccountingOfficer, by posting such information on our website ( www.HarteHanks.com ) within the time period required by applicable SEC and NYSE rules. Management CertificationsIn accordance with the Sarbanes-Oxley Act of 2002 and SEC rules thereunder, our Chief Executive Officer and Chief Financial Officer have signedcertifications under Sarbanes-Oxley Section 302, which have been filed as exhibits to this Form 10-K. In addition, our Chief Executive Officersubmitted the most recent annual certification to the NYSE under Section 303A.12(a) of the NYSE listing standards on June 9, 2015.ITEM 11.     EXECUTIVE COMPENSATION The information required by this item regarding the compensation of our “named executive officers” and directors and other required information willbe set forth in our 2016 Proxy Statement under the captions “Executive Compensation,” and “Director Compensation,” which information isincorporated herein by reference. In accordance with the rules of the SEC, information to be contained in the 2016 Proxy Statement under thecaption “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 TablesThe information required by this item regarding security ownership of certain beneficial owners, management and directors will be set forth in our2016 Proxy Statement under the caption “Security Ownership of Management and Principal Stockholders,” which information is incorporated hereinby reference. Equity Compensation Plan InformationThe information required by this item regarding securities authorized for issuance under equity compensation plans will be set forth in our 2016Proxy Statement under the caption “Executive Compensation - Equity Compensation Plan Information at Year-End 2015 ,” which information isincorporated herein by reference.39Table of ContentsITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Transactions with Related PersonsThe information required by this item regarding transactions with related persons, including our policies and procedures for the review, approval orratification of related person transactions that are required to be disclosed under the SEC’s rules and regulations, will be set forth in our 2016 ProxyStatement under the caption “Corporate Governance—Certain Relationships and Related Transactions,” which information is incorporated herein byreference. Director IndependenceThe information required by this item regarding director independence will be set forth in our 2016 Proxy Statement under the caption “CorporateGovernance—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 ourprincipal independent auditor will be set forth in our 2016 Proxy Statement under the caption “Audit Committee and Independent Registered PublicAccounting Firm,” which information is incorporated herein by reference.40Table of ContentsPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES15(a)(1) Financial Statements The financial statements filed as part of this report and referenced in Item 8 are presented in the Consolidated FinancialStatements and the notes thereto beginning at page 43 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 theschedules are not required under the related instructions, are not applicable, or the information required thereby is set forthin 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 filedor furnished, as applicable, as part of this Form 10-K.41Table of ContentsSIGNATURES 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 tobe signed on its behalf by the undersigned, thereunto duly authorized.HARTE HANKS, INC. By: /s/ Karen A. Puckett  Karen A. Puckett  President and Chief Executive Officer     Date:March 14, 2016 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalfof the registrant and in the capacities and on the dates indicated./s/ Karen A. Puckett /s/ Douglas C. ShepardKaren A. Puckett Douglas C. ShepardDirector; President and Executive Vice President andChief Executive Officer Chief Financial OfficerDate: March 14, 2016 Date: March 14, 2016 /s/ Carlos M. Alvarado /s/ Christopher M. HarteCarlos M. Alvarado Christopher M. Harte, ChairmanVice President, Finance and Date: March 14, 2016Corporate Controller Date: March 14, 2016  /s/ Stephen E. Carley /s/ Scott C. KeyStephen E. Carley, Director Scott C. Key, DirectorDate: March 14, 2016 Date: March 14, 2016 /s/ David L. Copeland /s/ Judy C. OdomDavid L. Copeland, Director Judy C. Odom, DirectorDate: March 14, 2016 Date: March 14, 2016 /s/ William F. Farley  William F. Farley, Director  Date: March 14, 2016  42Table of ContentsHarte Hanks, Inc. and SubsidiariesIndex to Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm on the Consolidated Financial Statements and Internal Control Over FinancialReporting44 Management’s Report on Internal Control Over Financial Reporting46 Consolidated Balance Sheets as of December 31, 2015 and 201448 Consolidated Statements of Comprehensive Income (Loss) for each of the years in the three-year period ended December 31, 201549 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 201550 Consolidated Statements of Changes in Equity for each of the years in the three-year period ended December 31, 201551 Notes to Consolidated Financial Statements52All schedules for which provision is made in the applicable rules and regulations of the SEC have been omitted as the schedules are not requiredunder the related instructions, are not applicable, or the information required thereby is set forth in the consolidated financial statements or notesthereto.43Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersHarte Hanks, Inc.:We have audited the accompanying consolidated balance sheets of Harte Hanks, Inc. and subsidiaries as of December 31, 2015 and 2014 , and therelated consolidated statements of comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year periodended December 31, 2015 . We also have audited Harte Hanks, Inc.'s internal control over financial reporting as of December 31, 2015 , based oncriteria established in Internal Control — Integrated Framework (2013) , issued by the Committee of Sponsoring Organizations of the TreadwayCommission. Harte Hanks, Inc.’s management is responsible for these consolidated financial statements, for maintaining effective internal controlover financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financialstatements and an opinion on Harte Hanks, Inc.’s internal control over financial reporting based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatementand whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financialstatements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit ofinternal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that amaterial weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Ouraudits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide areasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance thattransactions 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 thecompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany’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 anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HarteHanks, Inc. and subsidiaries as of December 31, 2015 and 2014 , and the results of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2015 , in conformity with U.S. generally accepted accounting principles. Also in our opinion, HarteHanks, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015 , based on criteriaestablished in Internal Control — Integrated Framework (2013) , issued by the Committee of Sponsoring Organizations of the TreadwayCommission.As discussed in Note A to the consolidated financial statements, Harte Hanks, Inc. has changed its method of accounting for deferred income taxeseffective January 1, 2014 due to the adoption of FASB ASU 2015-17, Balance Sheet Classification of Deferred Taxes.Harte Hanks, Inc. acquired 3Q Digital, Inc. during 2015, and management excluded from its assessment of the effectiveness of Harte Hanks, Inc.'sinternal control over financial reporting as of December 31, 2015, 3Q Digital, Inc.'s internal control over financial reporting associated with totalassets of $7.0 million and total revenues of $17.9 million44Table of Contentsincluded in the consolidated financial statements of Harte Hanks, Inc. and subsidiaries as of, and for, the year ended December 31, 2015. Our auditof internal control over financial reporting of Harte Hanks, Inc. also excluded an evaluation of the internal control over financial reporting of 3QDigital, Inc./s/ KPMG LLP San Antonio, TexasMarch 14, 201645Table of ContentsManagement’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 consolidatedfinancial statements were prepared in conformity with U.S. Generally Accepted Accounting Principles and include amounts based on management’sestimates and judgments. All other financial information in this report has been presented on a basis consistent with the information included in theconsolidated financial statements. We are also responsible for establishing and maintaining adequate internal control over financial reporting. We maintain a system of internal controlthat is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements, aswell 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 includesfactors such as integrity and ethical values. Our internal control over financial reporting is supported by formal policies and procedures that arereviewed, 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, theinternal auditors and the independent auditors to review and discuss internal controls over financial reporting and accounting and financial reportingmatters. Our independent registered public accounting firm and internal auditors report to the Audit Committee and accordingly have full and freeaccess 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 (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).This evaluation includedreview of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and aconclusion on this evaluation. Our evaluation of, and conclusion regarding, the effectiveness of our internal control over financial reporting excludes the internal control overfinancial reporting of 3Q Digital, Inc., which we acquired on March 16, 2015 (as described in Note N, Acquisition and Disposition , of the Notes to theConsolidated Financial Statements). The exclusion of 3Q Digital, Inc.'s internal control over financial reporting in our evaluation is associated withtotal assets of $7.0 million as of December 31, 2015 and total revenues of $17.9 million included in our consolidated financial statements as of andfor the year ended December 31, 2015 . We plan to fully integrate 3Q Digital, Inc. into our internal control over financial reporting in 2016. Based onour evaluation, we concluded that our internal control over financial reporting was effective as of December 31, 2015 . KPMG LLP, an independent registered public accounting firm, has issued an audit report on our consolidated financial statements and theeffectiveness of the company’s internal control over financial reporting, which is contained in this Annual Report on Form 10-K. 46Table of ContentsMarch 14, 2016 /s/ Karen A. Puckett Karen A. Puckett President and Chief Executive Officer /s/ Douglas C. Shepard Douglas C. Shepard Executive Vice President and Chief Financial Officer /s/ Carlos M. Alvarado Carlos M. Alvarado Vice President, Finance and Corporate Controller47Table of ContentsHarte Hanks, Inc. and Subsidiaries Consolidated Balance Sheets  December 31,In thousands, except per share and share amounts 2015 2014ASSETS    Current assets    Cash and cash equivalents $17,613 $56,749Accounts receivable (less allowance for doubtful accounts of $1,249 at December 31, 2015 and $1,224 atDecember 31, 2014) 115,155 125,295Inventory 963 1,235Prepaid expenses 9,548 9,000Prepaid income tax 1,760 1,185Other current assets 6,667 7,953Total current assets $151,706 $201,417Property, plant and equipment    Buildings and improvements 17,207 17,112Software 84,780 88,422Equipment and furniture 101,083 102,688Software development and equipment installations in progress 2,258 2,390Gross property, plant and equipment 205,328 210,612Less accumulated depreciation and amortization (171,415) (173,699)Net property, plant and equipment 33,913 36,913Goodwill 218,972 398,164Other intangible assets (less accumulated amortization of $650 at December 31, 2015 and $9,774 atDecember 31, 2014) 4,123 2,277Other assets (including deferred income taxes of $3,000 at December 31, 2015 and $2,055 at December 31,2014) 5,907 5,406Total assets $414,621 $644,177     LIABILITIES AND STOCKHOLDERS’ EQUITY    Current liabilities    Current maturities of long-term debt $3,000 $18,375Accounts payable 38,287 36,478Accrued payroll and related expenses 8,340 9,773Deferred revenue and customer advances 27,426 33,631Income taxes payable 1,246 2,462Customer postage and program deposits 12,513 17,120Other current liabilities 6,628 6,430Total current liabilities 97,440 124,269Long-term debt 74,313 64,312Pensions 55,491 65,156Contingent consideration 20,277 —Other long-term liabilities (including deferred income taxes of $20,672 at December 31, 2015 and $56,510 atDecember 31, 2014) 26,784 63,764Total liabilities $274,305 $317,501     Stockholders’ equity    Common stock, $1 par value, 250,000,000 shares authorized 120,146,720 shares issued at December 31,2015 and 119,606,551 shares issued at December 31, 2014 120,147 119,607Additional paid-in capital 353,050 346,239Retained earnings 973,538 1,165,707Less treasury stock, 58,879,742 shares at cost at December 31, 2015 and 57,832,362 shares at cost atDecember 31, 2014 (1,262,859) (1,257,648)Accumulated other comprehensive loss (43,560) (47,229)Total stockholders’ equity 140,316 326,676Total liabilities and stockholders’ equity $414,621 $644,177See Accompanying Notes to Consolidated Financial Statements.48Table of ContentsHarte Hanks, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss)   Years Ended December 31,In thousands, except per share amounts 2015 2014 2013Operating revenues $495,301 $553,676 $559,609Operating expenses      Labor 260,839 279,135 281,924Production and distribution 143,324 166,959 161,600Advertising, selling, general and administrative 54,530 51,900 54,937Goodwill and intangible assets impairment 209,938 — 2,750Depreciation, software and intangible asset amortization 14,245 14,920 15,737Total operating expenses 682,876 512,914 516,948Operating income (loss) (187,575) 40,762 42,661Other expenses      Interest expense, net 4,759 2,559 2,998Loss on sale 9,501 — —Other, net 1,007 897 46  15,267 3,456 3,044Income (loss) from continuing operations before income taxes (202,842) 37,306 39,617Income tax expense (benefit) (31,914) 13,315 15,176Income (loss) from continuing operations (170,928) 23,991 24,441       Income from discontinued operations, net of income taxes — — 1,284Loss on sales of discontinued operations, net of income taxes — — (12,355)Loss from discontinued operations — — (11,071)       Net income (loss) $(170,928) $23,991 $13,370       Basic earnings (loss) per common share      Continuing operations $(2.77) $0.38 $0.39Discontinued operations — — (0.18)Basic earnings (loss) per common share $(2.77) $0.38 $0.21       Weighted-average common shares outstanding 61,643 62,444 62,503       Diluted earnings (loss) per common share      Continuing operations $(2.77) $0.38 $0.39Discontinued operations — — (0.18)Diluted earnings (loss) per common share $(2.77) $0.38 $0.21       Weighted-average common and common equivalent shares outstanding 61,643 62,658 62,812       Other comprehensive income (loss), net of tax      Adjustment to pension liability $5,645 $(17,281) $22,152Foreign currency translation adjustments (1,976) (1,830) (536)Total other comprehensive income (loss), net of tax 3,669 (19,111) 21,616Comprehensive income (loss) $(167,259) $4,880 $34,986See Accompanying Notes to Consolidated Financial Statements.49Table of ContentsHarte Hanks, Inc. and Subsidiaries Consolidated Statements of Cash Flows  Years Ended December 31,In thousands 2015 2014 2013Cash Flows from Operating Activities      Net income (loss) $(170,928) $23,991 $13,370Adjustments to reconcile net income (loss) to net cash provided by operating activities      Loss on sale 9,501 — —Income from discontinued operations — — (1,284)Loss on sale of discontinued operations — — 12,355Impairment of goodwill and intangible assets 209,938 — 2,750Depreciation and software amortization 13,586 14,894 15,530Intangible asset amortization 659 26 206Stock-based compensation 5,733 4,055 5,744Excess tax benefits from stock-based compensation (14) — (42)Net pension cost (payments) (257) (2,860) 784Interest accretion on contingent consideration 2,337 — —Deferred income taxes (41,235) 5,798 1,744Other, net 333 — (2,606)Changes in operating assets and liabilities, net of acquisitions: 0 -5173 7630Decrease (increase) in accounts receivable, net 10,187 (5,173) 7,630Decrease (increase) in inventory 272 51 (507)Decrease (increase) in prepaid expenses and other current assets 802 3,316 (2,536)Increase (decrease) in accounts payable 2,141 (278) (1,336)(Decrease) increase in other accrued expenses and liabilities (12,550) (20,055) 9,398Other, net 438 1,796 (17,089)Net cash provided by continuing operations 30,943 25,561 44,111Net cash provided by discontinued operations — — 15,461Net cash provided by operating activities 30,943 25,561 59,572       Cash Flows from Investing Activities      Acquisitions, net of cash acquired (29,862) — —Dispositions, net of cash transferred 4,974 — —Purchases of property, plant and equipment (11,574) (11,265) (15,873)Proceeds from the sale of property, plant and equipment 297 169 3,723Net cash flows from investing activities within discontinued operations — — 22,500Net cash provided by (used in) investing activities (36,165) (11,096) 10,350       Cash Flows from Financing Activities      Borrowings 13,000 — —Repayment of borrowings (18,375) (15,313) (12,250)Debt financing costs — — (581)Issuance of common stock (910) (481) 512Excess tax benefits from stock-based compensation 14 — 42Purchase of treasury stock (4,619) (8,661) (1,760)Issuance of treasury stock 193 1,307 135Dividends paid (21,241) (21,485) (16,121)Net cash used in financing activities (31,938) (44,633) (30,023)       Effect of exchange rate changes on cash and cash equivalents (1,976) (1,830) (536)Net increase (decrease) in cash and cash equivalents (39,136) (31,998) 39,363Cash and cash equivalents at beginning of year 56,749 88,747 49,384Cash and cash equivalents at end of year $17,613 $56,749 $88,747 See Accompanying Notes to Consolidated Financial Statements.50Table of ContentsHarte Hanks, Inc. and Subsidiaries Consolidated Statements of Changes in EquityIn thousands, except per share amounts CommonStock AdditionalPaid-inCapital RetainedEarnings TreasuryStock AccumulatedOtherComprehensiveIncome(loss) TotalStockholders’EquityBalance at December 31, 2012 $118,737 $341,586 $1,165,952 $(1,248,377) $(49,734) $328,164Exercise of stock options and release ofunvested shares 450 469 — (407) — 512Net tax effect of stock options exercisedand release of unvested shares — (2,606) — — — (2,606)Stock-based compensation — 5,744 — — — 5,744Dividends paid ($0.225 per share) — — (16,121) — — (16,121)Treasury stock issued — (98) — 135 — 37Purchase of treasury stock — — — (1,662) — (1,662)Net income — — 13,370 — — 13,370Other comprehensive income — — — — 21,616 21,616Balance at December 31, 2013 $119,187 $345,095 $1,163,201 $(1,250,311) $(28,118) $349,054Exercise of stock options and release ofunvested shares 420 (151) — (750) — (481)Net tax effect of stock options exercisedand release of unvested shares — (1,993) — — — (1,993)Stock-based compensation — 4,055 — — — 4,055Dividends paid ($0.34 per share) — — (21,485) — — (21,485)Treasury stock issued — (767) — 1,307 — 540Purchase of treasury stock — — — (7,894) — (7,894)Net income — — 23,991 — — 23,991Other comprehensive loss — — — — (19,111) (19,111)Balance at December 31, 2014 $119,607 $346,239 $1,165,707 $(1,257,648) $(47,229) $326,676Exercise of stock options and release ofunvested shares 540 (329) — (1,120) — (909)Net tax effect of stock options exercisedand release of unvested shares — 1,742 — — — 1,742Stock-based compensation — 5,733 — — — 5,733Dividends paid ($0.34 per share) — — (21,241) — — (21,241)Treasury stock issued — (335) — 528 — 193Purchase of treasury stock — — — (4,619) — (4,619)Net loss — — (170,928) — — (170,928)Other comprehensive income — — — — 3,669 3,669Balance at December 31, 2015 $120,147 $353,050 $973,538 $(1,262,859) $(43,560) $140,316See Accompanying Notes to Consolidated Financial Statements.51Table of ContentsHarte Hanks, Inc. and Subsidiaries Notes to Consolidated Financial StatementsNote A — Significant Accounting Policies ConsolidationThe accompanying consolidated financial statements present the financial position and the results of operations and cash flows of Harte Hanks, Inc.and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. As used in this report, the terms “Harte Hanks,” “we,” “us,” or “our” may refer to Harte Hanks, Inc., one or more of our consolidated subsidiaries, orall of them taken as a whole. Discontinued OperationsAs discussed in Note O, Discontinued Operations , we sold the assets of our California Shoppers operations on September 27, 2013. The operatingresults and related balances of Shoppers, including the loss on the sale, are being reported as discontinued operations in the Consolidated FinancialStatements. Unless otherwise stated, amounts related to the Shoppers operations are excluded from the Notes to Consolidated FinancialStatements for all years presented. Reclassification of Prior Year AmountsCertain prior year amounts have been reclassified for comparative purposes. All 2013 amounts related to discontinued operations have beenreclassified for comparative purposes. The retrospective early adoption of ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, resulted in thereclassification of current deferred tax assets to non-current on the company's consolidated balance sheet as of December 31, 2014. Use of EstimatesThe preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated 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. Such estimates include, but are not limited to, estimates related topension accounting; estimates related to fair value for purposes of assessing goodwill, long-lived assets and intangible assets for impairment;estimates related to income taxes; and estimates related to contingencies. On an ongoing basis, management reviews its estimates based oncurrently available information. Changes in facts and circumstances could result in revised estimates and assumptions. Operating Expense Presentation in Consolidated Statements of Comprehensive Income (Loss)The “Labor” line in the Consolidated Statements of Comprehensive Income (Loss) includes all employee payroll and benefits, including stock-basedcompensation, along with temporary labor costs. The “Production and distribution” and “Advertising, selling, general and administrative” lines do notinclude labor, depreciation or amortization. Revenue RecognitionWe recognize revenue when all of the following criteria are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed ordeterminable; (iii) collectability is reasonably assured; and (iv) the service has been performed or the product has been delivered. Payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as theservices 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 thepart of management. 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, werequire either a purchase order, a statement of work signed by the client, a written contract, or some other form of written authorization from theclient. 52Table of ContentsRevenue from agency and creative services, analytical services, and market research is typically billed based on time and materials. Revenue from email marketing, social media marketing, digital marketing techniques such as search engine maximization ("SEM"), and other digitalsolutions is recognized as the work is performed. Revenue from these services is typically based on a fixed price or rate given to the client. Revenue associated with new marketing database builds is deferred until complete or until client acceptance. Upon completion or acceptance,revenue and direct build costs are then recognized over the term of the related arrangement as the services are provided. Revenue from databaseand website hosting services is recognized ratably over the contractual hosting period. Pricing for database builds are typically based on a fixedprice and hosting fees are typically based on a fixed price per month or per contract. Revenue from technology database subscriptions is based on a fixed price and is recognized ratably over the term of the subscription. Revenuefrom stand-alone technology data sales is recognized at the time of delivery. Revenue from services such as data processing, printing, personalization of communication pieces using laser and inkjet printing, targeted mail, andtransportation logistics is recognized as the work is performed. Revenue from these services is typically based on a fixed price or rate given to theclient. Postage costs of mailings in our direct mail business are borne by our clients and are not directly reflected in our revenues or expenses. Revenue related to fulfillment and contact centers, including inbound and outbound calling and email management, is also typically based on a fixedprice per transaction or service provided. Revenue from these services is recognized as the service or activity is performed. Revenue from software arrangements involving multiple elements is allocated to each element based on the vendor-specific objective evidence offair values of the respective elements. For software sales with multiple elements (for example, software licenses with undelivered post-contractcustomer support or “PCS”), we allocate revenue to each component of the arrangement using the residual value method based on the fair value ofthe undelivered elements. This means we defer revenue from the software sale equal to the fair value of the undelivered elements. The fair value ofPCS is based upon separate sales of renewals to other clients. The fair value of services, such as training and consulting, is based upon separatesales 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 asthe services are performed. The revenue allocated to software products, including time-based software licenses, is recognized, if collection isprobable, upon execution of a licensing agreement and shipment of the software or ratably over the term of the license, depending on the structureand terms of the arrangement. If the licensing agreement is for a term of a year or less and includes PCS, we recognize the software and the PCSrevenue ratably over the term of the license. For certain non-software arrangements, we enter into contracts that include delivery of a combination of our service offerings. Such arrangementsare divided into separate units of accounting, provided that the delivered element(s) has stand-alone value and objective and reliable evidence ofthe fair value of the undelivered element(s) exist(s). When we are able to un-bundle the arrangement into separate units of accounting, revenue from each service is recognized separately, and inaccordance with our revenue recognition policy for each element. If we are unable to un-bundle the arrangement into separate units of accounting,we apply one of the revenue recognition policies to the entire arrangement. This might impact the timing of revenue recognition, but would notchange the total revenue recognized from the arrangement. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from ourrevenues and expenses. Cash EquivalentsAll highly liquid investments with an original maturity of 90 days or less at the time of purchase are considered to be cash equivalents. Cashequivalents are carried at cost, which approximates fair value.53Table of ContentsAllowance for Doubtful AccountsWe maintain our allowance for doubtful accounts at a balance adequate to reduce accounts receivable to the amount of cash expected to berealized upon collection. The methodology used to determine the minimum allowance balance is based on our prior collection experience and isgenerally related to the accounts receivable balance in various aging categories. The balance is also influenced by specific clients’ financial strengthand circumstances and current market conditions. Accounts that are determined to be uncollectible are written off in the period in which they aredetermined to be uncollectible. Periodic changes to the allowance balance are recorded as increases or decreases to bad debt expense, which isincluded in the “Advertising, selling, general and administrative” line of our Consolidated Statements of Comprehensive Income (Loss). The changesin the allowance for doubtful accounts consisted of the following:  Year Ended December 31,In thousands 2015 2014 2013Balance at beginning of year $1,224 $1,729 $2,574Increase in allowance charged to expense 630 (68) 47Account charges against the expense (605) (437) (892)Balance at end of year $1,249 $1,224 $1,729 InventoryInventory, consisting primarily of print materials and operating supplies, is stated at the lower of cost (first-in, first-out method) or market. Property, Plant and EquipmentProperty, plant and equipment are stated on the basis of cost. Depreciation is computed using the straight-line method over the estimated usefullives of the assets. The general ranges of estimated useful lives are:Buildings and improvements10to40 yearsSoftware3to10 yearsEquipment and furniture3to20 yearsLong-lived assets such as property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset group is not recoverable if it exceeds the sum ofthe undiscounted cash flows expected to result from the use and eventual disposition of the asset group. We did not record an impairment of long-lived assets in 2015 , 2014 , or 2013 . Property, plant and equipment includes capital lease assets. Capital lease assets at December 31, 2015 and 2014 consisted of:  December 31,In thousands 2015 2014Equipment and furniture $1,088 $1,351Less accumulated amortization (767) (980)Net book value $321 $371 Amortization expense related to capital lease assets was $0.1 million , $0.2 million , and $0.3 million for the years ended December 31, 2015 , 2014, and 2013 , respectively. Depreciation and amortization on property, plant and equipment was $13.6 million , $14.7 million and $15.4 million for the years endedDecember 31, 2015 , 2014 , and 2013 , respectively. Goodwill and Other Intangible AssetsGoodwill is not subject to amortization but is tested for impairment on an annual basis (or more frequently if impairment indicators arise). We haveestablished November 30 as the date for our annual test for impairment of goodwill. Reporting units with goodwill are tested for impairment by firstassessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that is more likely than not thatthe fair value of the reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, or based onmanagement's judgment, we determine it is more likely that not that the fair value of a reporting unit is less than its carrying amount,54Table of Contentsa two-step impairment test is performed. The first step compares the fair value of the reporting unit (measured as the present value of expectedfuture cash flows) to its carrying amount. If the fair value of the reporting units is less than its carrying amount, a second step is performed. In thisstep, the fair value of the reporting unit is less than its carrying amount, a second step is performed. In this step, the fair value of the reporting unit isallocated to its assets and liabilities to determine the implied fair value of goodwill, which is used to measure the impairment loss.Our indefinite life intangibles are evaluated for impairment using a qualitative assessment. If it is more likely than not that the asset is impaired, theamount by which the carrying value exceeds the fair value is recorded as impairment expense.Our acquired intangible assets are amortized on a straight-line basis over their estimated useful lives, which generally range from 7 to 40 years. Ouracquired intangible assets do not have indefinite lives. Intangible assets are reviewed for impairment whenever events or changes in circumstancesindicate the carrying amount of the intangible asset may not be recoverable. The carrying amount of an intangible asset is not recoverable if itexceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that animpairment loss has occurred, the loss is measured as the amount by which the carrying amount of the intangible asset exceeds its fair value.Goodwill is recorded to the extent that the purchase price of an acquisition exceeds the fair value of the identifiable net assets acquired. Otherintangibles with definite and indefinite useful lives are recorded at fair value at the date of the acquisition. The company tests its goodwill and otherintangible assets with indefinite useful lives for impairment as of November 30 of each year and as of an interim date should factors or indicatorsbecome apparent that would require an interim test. We have two reportable segments, which also represent our reporting units — CustomerInteraction and Trillium Software. The company performs a qualitative assessment to determine whether fair value may be less than carrying valueand, if necessary, assesses the impairment of its goodwill by determining the fair value of each of its reporting units and comparing the fair value tothe carrying value for each reporting unit. Fair values of our reporting units and other intangibles with indefinite useful lives have been determinedusing discounted cash flow and cash flow multiple methodologies. Our overall market capitalization also was considered when evaluating the fairvalues of our reporting units. Intangible assets with definite useful lives are amortized over their respective estimated useful lives and reviewed forimpairment if we believe that changes or triggering events have occurred that could have caused the carrying value of the intangible assets toexceed its fair value.Under the provisions of FASB ASC 350, Intangibles-Goodwill and Other (ASC 350), goodwill is tested for impairment at least annually, or morefrequently if events or circumstances indicate that it is “more likely than not” that goodwill might be impaired. Such events could include a significantchange in business conditions, a significant negative regulatory outcome or other events that could negatively affect our business and financialperformance. We perform our annual goodwill impairment assessment as of November 30th of each year for each of our reportable segments.Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective taxbasis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply totaxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances have beenestablished where we have assessed that it is more likely than not that certain deferred tax assets will not be realized. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The company recognized theeffect of income tax positions only if those positions are more likely than not of being sustained. Earnings Per ShareBasic earnings per common share are based upon the weighted-average number of common shares outstanding during the period. Diluted earningsper common share are based upon the weighted-average number of common shares and dilutive common stock equivalents outstanding during theperiod. Dilutive common stock equivalents are calculated based on the assumed exercise of stock options and vesting of unvested shares using thetreasury stock method. 55Table of ContentsStock-Based CompensationAll share-based awards are recognized as operating expense in the “Labor” line of the Consolidated Statements of Comprehensive Income(Loss). Calculated expense is based on the fair values of the awards on the date of grant and is recognized over the requisite service period. Reserve for Healthcare, Workers’ Compensation, Automobile and General LiabilityWe are self-insured for our workers’ compensation, automobile, general liability and the majority of our healthcare insurance. We make varioussubjective judgments about a number of factors in determining our reserve for healthcare, workers’ compensation, automobile and general liabilityinsurance, and the related expense. Our deductible for individual healthcare claims is $0.3 million . Our deductible for workers’ compensation is $0.5million . We have a $0.3 million deductible for automobile and general liability claims. Our insurance administrator provides us with estimated lossreserves, based upon its experience dealing with similar types of claims, as well as amounts paid to date against these claims. We apply actuarialfactors to both insurance estimated loss reserves and to paid claims and then determine reserve levels, taking into account these calculations. AtDecember 31, 2015 and 2014 , our reserve for healthcare, workers’ compensation, net, automobile and general liability was $6.1 million and $7.8million , respectively. Periodic changes to the reserve for workers’ compensation, automobile and general liability are recorded as increases ordecreases to insurance expense, which is included in the “Advertising, selling, general and administrative” line of our Consolidated Statements ofComprehensive Income (Loss). Periodic changes to the reserve for healthcare are recorded as increases or decreases to employee benefitsexpense, which is included in the “Labor” line of our Consolidated Statements of Comprehensive Income (Loss). Foreign CurrenciesIn most instances the functional currencies of our foreign operations are the local currencies. Assets and liabilities recorded in foreign currencies aretranslated in U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchangeprevailing during a given month. Adjustments resulting from this translation are charged or credited to other comprehensive loss.Geographic ConcentrationsDepending on the needs of our clients, our services are provided in an integrated approach through more than 30 facilities worldwide, of which 6 arelocated outside of the U.S. Information about the operations in different geographic areas:  Year Ended December 31,In thousands 2015 2014 2013Revenue  (1)      United States $411,775 $463,752 $469,596Other countries 83,526 89,924 90,013Total revenue $495,301 $553,676 $559,609  December 31,In thousands 2015 2014Property, plant and equipment  (2)    United States $29,437 $33,134Other countries 4,476 3,779Total property, plant and equipment $33,913 $36,913(1)Geographic revenues are based on the location of the service being performed.(2)Property, plant and equipment are based on physical location. Recent Accounting PronouncementsIn November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes , which requiresentities with a classified balance sheet to present all deferred tax assets and liabilities as non-current. The ASU is effective for public businessentities for interim and annual periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. On December 31, 2015, weelected to early adopt retrospectively, thus reclassifying $3.7 million and $5.1 million of current deferred tax assets to non-current at December 31,2015 and 2014, respectively.56Table of ContentsIn September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments . TheASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period after an acquisitionwithin the reporting period they are determined. This is a change from the previous requirement that the adjustments be recorded retrospectively.The ASU also requires disclosure of the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of theadjustment to the provisional amounts, calculated as if the accounting had been completed at the acquisition dates. The ASU is effective for interimand annual periods beginning after December 15, 2015. Early adoption is permitted. The company has early adopted the ASU as of September 30,2015. The adoption did not have a material impact on our consolidated financial statements.In August 2015, the FASB issued ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans, Defined Contribution Pension Plans, Health andWelfare Benefit Plans. (Part II), Plan Investment Disclosures , reduces complexities for employee benefit plan financial reporting and disclosurerequirements. The ASU is effective for annual periods beginning after December 15, 2015. The company has early adopted the ASU as ofDecember 31, 2015. The adoption did not have a material impact on our consolidated financial statements.In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting forFees Paid in a Cloud Computing Arrangement , which provides explicit guidance to help companies evaluate the accounting for fees paid by acustomer in a cloud computing arrangement. This ASU is effective for interim and annual periods beginning after December 15, 2015. An entity canelect to adopt the amendments either prospectively for all arrangements entered into or materially modified after the effective date, orretrospectively. Early adoption is permitted. The company has not yet selected a transition method nor has it determined the effect of the standardon its ongoing financial reporting; however, we do not expect the adoption to have a material impact on our consolidated financial statements. In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from thecarrying amount of that debt liability, consistent with debt discounts. The ASU is effective for annual periods beginning after December 15, 2015,and interim periods within those annual periods. The impact on the company will be a reclassification of debt issuance costs; however, we do notexpect the adoption to have a significant impact on our consolidated financial statements.In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying IncomeStatement Presentation by Eliminating the Concept of Extraordinary Items , which eliminates the concept of extraordinary items from U.S. GAAP aspart of its simplification initiative. The ASU does not affect disclosure guidance for events or transactions that are unusual in nature or infrequent intheir occurrence. The ASU is effective for interim and annual periods in fiscal years beginning after December 15, 2015. The ASU allowsprospective or retrospective application. Early adoption is permitted if applied from the beginning of the fiscal year of adoption. The effective date isthe same for both public entities and all other entities. The impact on the company will be dependent on any transaction or event that is within thescope of the new guidance.On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , which requires an entity to recognize the amountof revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenuerecognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effecttransition method. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The new effective date isfor fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted beginning January 1,2017 (original effective date of the ASU). The company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statementsand related disclosures. The company has not yet selected a transition method nor has it determined the effect of the standard on its ongoingfinancial reporting.Note B — Fair Value of Financial Instruments FASB ASC 820, Fair Value Measurements and Disclosures , (ASC 820) defines fair value as the price that would be received to sell an asset orpaid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair valuehierarchy that prioritizes the inputs used in valuation methodologies into three levels: Level 1                       Quoted prices in active markets for identical assets or liabilities.57Table of Contents Level 2                       Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are notactive; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3                       Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Because of their maturities and/or variable interest rates, certain financial instruments have fair values approximating their carrying values. Theseinstruments include cash and cash equivalents, accounts receivable, and trade payables. The fair value of our outstanding debt is disclosed in NoteC, Long-Term Debt. The fair value of the assets in our funded pension plan is disclosed in Note F, Employee Benefit Plans. The assumptions usedto determine the fair value of our reporting units in Step One of our goodwill impairment test, the identified theoretical intangibles assets of ourCustomer Interaction reporting unit in Step Two of our goodwill impairment test, and the discounted cash flow model used to calculate the fair valueof our Aberdeen Group trade name are disclosed in Note E, Goodwill and Other Intangible Assets. The summary of our acquisition relatedcontingent consideration accounted for at fair value on a recurring basis is disclosed in Note N, Acquisition and Disposition. Note C — Long-Term Debt Our long-term debt obligations at year-end were as follows:  December 31,In thousands 2015 20142013 Revolving Credit Facility ($60.6 million capacity), due August 16, 2016    Various interest rates based on Eurodollar rate (effective rate of 2.67% at December 31, 2015) — —Various interest rates based on the highest of (a) the Agent's prime rate, (b) the Federal Funds Rateplus 0.50% per annum, (c) Eurodollar rate plus 1.00% per annum, plus a spread with is determinedbased on our total debt-to-EBITDA ratio then in effect (effective rate of 4.75% at December 31, 2015) 13,000 —2011 Term Loan Facility, various interest rates based on LIBOR (effective rate of 2.42% at December 31,2015), due August 16, 2016 64,313 82,687Total debt $77,313 $82,687Less current maturities 3,000 18,375Total long-term debt $74,313 $64,312 The carrying values and estimated fair values of our outstanding debt at year-end were as follows:  December 31,  2015 2014In thousands CarryingValue FairValue CarryingValue FairValueTotal debt $77,313 $77,313 $82,687 $82,687 The estimated fair values were calculated using market quotes for debt of the same remaining maturity and characteristics. These current rates areconsidered Level 2 inputs under the fair value hierarchy established by ASC 820, Fair Value Measurement . 58Table of ContentsCredit FacilitiesOn August 16, 2011 , we entered into a five -year $122.5 million term loan facility (2011 Term Loan Facility) with Bank of America, N.A., asAdministrative Agent. For each borrowing under the 2011 Term Loan Facility, we can generally choose to have the interest rate for that borrowingcalculated based on either (i) the LIBOR rate (as defined in the 2011 Term Loan Facility) for the applicable interest period, plus a spread (rangingfrom 2.00% to 2.75% per annum) based on our total net funded debt-to-EBITDA ratio (as defined in the 2011 Term Loan Facility) then in effect; or(ii) the highest of (a) the Agent’s prime rate , (b) the BBA daily floating rate LIBOR , as determined by Agent for such date, plus 1.00% , and (c) theFederal Funds Rate plus 0.50% , plus a spread (ranging from 1.00% to 1.75% per annum) based on our total net funded debt-to-EBITDA ratio thenin effect. We may elect to prepay the 2011 Term Loan Facility at any time without incurring any prepayment penalties. On August 8, 2013 , we entered into a three -year $80 million revolving credit facility, which includes a $25 million letter of credit sub-facility and a $5million swing line loan sub-facility (2013 Revolving Credit Facility) with Bank of America, N.A. (as Administrative Agent, Swing Line Lender and L/CIssuer) and the other lenders party thereto. The 2013 Revolving Credit Facility permits us to request up to a $15 million increase in the total amountof the facility. The 2013 Revolving Credit Facility matures on August 16, 2016. We may elect to prepay the 2013 Revolving Credit Facility at any timewithout incurring any prepayment penalties. For each borrowing under the 2013 Revolving Credit Facility, we can generally choose to have the interest rate for that borrowing calculated oneither (i) the Eurodollar rate for the applicable interest period plus a spread which is determined based on our total net debt-to-EBITDA ratio then ineffect, which ranges from 2.25% to 3.00% per annum; or (ii) the highest of (a) the Agent’s prime rate , (b) the Federal Funds Rate plus 0.50% perannum or (c) Eurodollar rate plus 1.00% per annum, plus a spread which is determined based on our total debt-to-EBITDA ratio then in effect,which spread ranges from 1.25% to 2.00% per annum. We also pay a quarterly commitment fee under the 2013 Revolving Credit Facility, which is based on a rate applied to the difference between totalcommitment amount under the 2013 Revolving Credit Facility and the aggregate amount of outstanding obligations under such facility. Thecommitment fee rate ranges from 0.50% to 0.55% per annum, depending on our total net debt-to-EBITDA ratio then in effect. In addition, we pay a letter of credit fee with respect to outstanding letters of credit. That fee is calculated by applying a rate equal to the spreadapplicable to Eurodollar based loans plus a fronting fee of 0.125% per annum to the average daily undrawn amount of the outstanding letters ofcredit. At December 31, 2015 we had letters of credit totaling $6.4 million issued under the 2013 Revolving Credit Facility, decreasing the amount availablefor borrowing to $60.6 million . At December 31, 2014 we had letters of credit totaling $6.2 million issued under the 2013 Revolving Credit Facility,decreasing the amount available for borrowing to $73.8 million . Under both of our credit facilities, we are required to maintain an interest coverage ratio of not less than 2.75 to 1, and we must maintain a totaldebt-to-EBITDA ratio of not more than 2.25 to 1 under the 2013 Revolving Credit Facility and 3.00 to 1 under the 2011 Term Loan Facility. Thecredit facilities also contain customary covenants restricting our and our subsidiaries’ ability to:•authorize distributions, dividends, stock redemptions and repurchases if a payment event of default has occurred and is continuing;•enter into certain merger or liquidation transactions;•grant liens;•enter into certain sale and leaseback transactions;•have foreign subsidiaries account for more than 20% of the assets, revenue, and earnings of Harte Hanks and its subsidiaries, in theaggregate;•enter into certain transactions with affiliates; and•allow the total indebtedness of Harte Hanks’ subsidiaries to exceed $20.0 million .59Table of ContentsThe credit facilities each also include customary covenants regarding reporting obligations, delivery of notices regarding certain events, maintainingour corporate existence, payment of obligations, maintenance of our properties and insurance thereon at customary levels with financially sound andreputable insurance companies, maintaining books and records and compliance with applicable laws. The credit facilities each also provide forcustomary events of default including nonpayment of principal or interest, breach of representations and warranties, violations of covenants, failureto pay certain other indebtedness, bankruptcy and material judgments and liabilities, certain violations of environmental laws or ERISA or theoccurrence of a change of control. Our material domestic subsidiaries have guaranteed the performance of Harte Hanks under our credit facilities.As of December 31, 2015 , 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, 2015 are as follows:In thousands  2016 $77,3132017 —2018 —2019 —2020 —Thereafter —  $77,313 See below for discussion of current maturities of long-term debt reflected on the consolidated balance sheet for the period ending December 31,2015 .Cash payments for interest were $1.7 million , $2.5 million , and $2.8 million for the years ended December 31, 2015 , 2014 , and 2013 ,respectively.On March 10, 2016 , we entered into a secured credit facility with Wells Fargo Bank, N.A. as Administrative Agent, consisting of a maximum $65.0million revolving credit facility (the 2016 Revolving Credit Facility), and a $45.0 million term loan facility (the 2016 Term Loan, and collectively withthe 2016 Revolving Credit Facility, the Secured Credit Facilities). The 2016 Secured Credit Facilities are secured by substantially all of thecompany's assets and its material domestic subsidiaries. The Secured Credit Facilities will be used for general corporate purposes, and was used toreplace, and repay remaining outstanding balances on, the company's (i) 2013 Revolving Credit Facility, and (ii) 2011 Term Loan Facility. The creditand guarantee agreements related to the 2013 Revolving Credit Facility and 2011 Term Loan Facility will likewise be terminated.The 2016 Revolving Credit Facility allows for loans up to the lesser of (a) $65.0 million or (b) 85.0% of eligible domestic accounts receivable plus,subject to certain sublimits, 85.0% of eligible foreign accounts receivable plus the lower of (i) $15.0 million or (ii) 85.0% of eligible unbilled accountsreceivable, all of which are subject to customary reserves and eligibility criteria. The outstanding amount of the 2016 Term Loan will be repayable,on a monthly basis, in an amount equal to 1/120th of the original principal amount of the 2016 Term Loan. Any amount remaining unpaid will be dueand payable in full on the Maturity Date March 10, 2021 . So long as an established amount of availability under the 2016 Revolving Credit Facility ismaintained (described below), the 2016 Term Loan may be prepaid in whole or in part at any time, subject to prior written notice and payment of aprepayment premium ( 3.0% in the first year, 2.0% in the second year, and 1.0% in the third year) of the outstanding principal balance of the amountof the 2016 Term Loan prepaid during such year.The Term Loan is subject to mandatory prepayments from the net proceeds of certain asset dispositions (subject to customary reinvestmentexceptions), and the incurrence of certain indebtedness, which prepayments are subject to the prepayment premium. Additionally, if the leverageratio is greater than 2.0 to 1 in 2016 or 1.75 to 1 in any subsequent year, the Term Loan is subject to mandatory prepayments in an amount equal to50.0% of the excess cash flow of Harte Hanks and its subsidiaries. Prepayments made with respect to excess cash flow are not subject to theprepayment premium. Voluntary prepayments of the 2016 Term Loan and mandatory prepayments of the 2016 Term Loan from excess cash floware not permitted if availability under the 2016 Revolving Credit Facility is less than established amounts the greater of (1) 13.5% of the maximumamount of the 2016 Revolving Credit Facility and (2) $14.9 million with respect to voluntary prepayments, and the greater of 10.0% of the maximumamount of the 2016 Revolving Credit Facility and $11.0 million with respect to excess cash flow payments.60Table of ContentsThe loans under the Secured Credit Facilities will accrue interest at a rate equal to, at the company's option, (a) the base rate plus the applicablemargin, or (b) the LIBOR rate (as defined and limited in the Secured Credit Facilities) plus the applicable margin. The base rate is the greatest of (a)the prime lending rate as publicly announced from time to time by Wells Fargo, (b) the federal funds rate plus 0.5% , and (c) the LIBOR rate for onemonth interest plus 1.0% per annum. The applicable margin for the 2016 Revolving Credit Facility is determined based upon the amount available tobe borrowed under the 2016 Revolving Credit Facility in excess of trade payables aged in excess of historical levels and book overdrafts and rangesbetween 1.0 to 1.5% for loans accruing interest at the base rate and 2.0 to 2.5% for loans accruing interest at the LIBOR rate. The applicable marginfor the 2016 Term Loan is 7.22% for loans accruing interest at the LIBOR rate and 6.22% for loans accruing interest at the base rate. We also payan unused line of credit fee in an amount between 0.25 and 0.375% on the unused capacity on the 2016 Revolving Credit Facility outstandingamount.Under the Secured Credit Facilities, we are required to maintain certain financial covenants: a fixed charge coverage ratio of at least 1.0 to 1 for the12 month period at each month through June 30, 2016 and 1.1 to 1 for the 12 month period at each month end thereafter; a leverage ratio of 2.25 to1.0 at each month end from March 31, 2016 to December 31, 2016 and 2.0 to 1 at each month end thereafter; a minimum rolling four quarter periodending recurring revenue amount of $35.0 million at each quarter end from March 31, 2016 to September 30, 2016 , and increasing quarterly from$35.2 million to $42.8 million each quarter thereafter; and capital expenditures not to exceed $14.0 million for the period from March 10, 2016 toDecember 31, 2016 , and each fiscal year thereafter.The Secured Credit Facilities also contain customary covenants restricting the company and its subsidiaries’ ability to create, incur, assume orbecome liable to indebtedness; create, incur or assume liens; consummate acquisitions; liquidate, dissolve, suspend, or cease subsidiaries or asubstantial portion of the business; convey, sell, lease, license, assign, transfer or dispose of assets; change the nature of business; makeprepayments and amendments to other obligations and indebtedness; pay dividends and distributions and repurchase capital stock; modifyaccounting methods (other than as required by GAAP); make or acquire investments; enter into certain transactions with affiliates; use proceeds;issue equity interests; and amend, increase, fail to pay amounts due to, or terminate certain employee benefits, including a pension plan or multi-employer plan.The Secured Credit Facilities include certain customary representations and warranties, affirmative covenants and events of default, includingpayment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy,certain events under ERISA, material judgments and a change of control. If an event of default occurs, the administrative agent, at the direction ofthe lenders under the Secured Credit Facilities, will be entitled to take various actions, including the acceleration of all amounts due under theSecured Credit Facilities and all actions permitted to be taken by a secured creditor.Due to the financial covenants and other terms of the Secured Credit Facilities, Harte Hanks anticipates that it will no longer declare dividends orrepurchase stock for the foreseeable future.In accordance with ASC 470-10-45, Debt, Other Presentation Matters, because the Consolidated Balance Sheet is issued subsequent to March 10,2016 , and because a portion of the Secured Credit Facilities proceeds were used to pay off the 2011 Term Loan Facility and 2013 Revolving CreditFacility, total debt is reclassified to long-term debt as of December 31, 2015 , except for the $3.0 million in current-maturities of long-term debt(which represents payments due in the next 12 months under the 2016 Secured Credit Facilities).61Table of ContentsNote D — Income Taxes The components of income tax expense (benefit) are as follows:  Year Ended December 31,In thousands 2015 2014 2013Current      Federal $6,998 $5,836 $8,689State and Local 1,177 619 3,554Foreign 1,146 1,062 1,189Total Current $9,321 $7,517 $13,432       Deferred      Federal $(38,278) $2,862 $3,532State and local (2,912) 2,177 (2,142)Foreign (45) 759 354Total Deferred $(41,235) $5,798 $1,744       Total income tax expense $(31,914) $13,315 $15,176The U.S. and foreign components of income from continuing operations before income taxes were as follows:  Year Ended December 31,In thousands 2015 2014 2013United States $(205,435) $29,962 $33,143Foreign 2,593 7,344 6,474Total income (loss) from continuing operations before income taxes $(202,842) $37,306 $39,617 The differences between total income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate to incomebefore income taxes were as follows:  Year Ended December 31,In thousands 2015 Rate 2014 Rate 2013 RateComputed expected income tax expense (benefit) $(70,995) 35.0 % $13,057 35.0 % $13,866 35.0 %Goodwill impairment basis difference 36,664 -18.1 % — — % — — %Sold operations basis difference 686 -0.3 % — — % — — %Net effect of state income taxes 857 -0.4 % 1,817 4.9 % 918 2.3 %Foreign subsidiary dividend inclusions 557 -0.3 % 135 0.4 % 1,125 2.8 %Foreign tax rate benefit (90) — % (749) -2.0 % (570) -1.4 %Change in beginning of year valuation allowance (153) 0.1 % (537) -1.4 % (87) -0.2 %Non deductible interest 715 -0.4 % — — % — — %Other, net (155) 0.1 % (408) -1.2 % (76) -0.2 %Income tax expense (benefit) for the period $(31,914) 15.7 % $13,315 35.7 % $15,176 38.3 % Total income tax expense (benefit) was allocated as follows:  Year Ended December 31,In thousands 2015 2014 2013Continuing operations $(31,914) $13,315 $15,176Discontinued operations — — (7,822)Stockholders’ equity 2,021 (9,527) 17,373Total $(29,893) $3,788 $24,72762Table of ContentsThe tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:  Year Ended December 31,In thousands 2015 2014Deferred tax assets    Deferred compensation and retirement plan $22,884 $25,432Accrued expenses not deductible until paid 3,612 3,925Employee stock-based compensation 3,709 1,182Accrued payroll not deductible until paid 707 948Accounts receivable, net 1,208 1,175Other, net 417 280Federal net operating loss carryforwards — 130Foreign net operating loss carryforwards 2,657 2,805State net operating loss carryforwards 1,956 2,010Foreign tax credit carryforwards 785 739Capital loss carryforwards 6,278 7,182Total gross deferred tax assets 44,213 45,808Less valuation allowances (9,958) (10,933)Net deferred tax assets $34,255 $34,875     Deferred tax liabilities    Property, plant and equipment $(6,154) $(6,484)Goodwill and other intangibles (45,212) (82,702)Other, net (561) (144)Total gross deferred tax liabilities (51,927) (89,330)Net deferred tax liabilities $(17,672) $(54,455) In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assetswill not be realized. Based on the expectation of future taxable income and that the deductible temporary differences will offset existing taxabletemporary differences, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existingvaluation allowances, at December 31, 2015 and 2014 . As discussed in Note A, Significant Accounting Policies , the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, whichrequires that deferred tax assets and liabilities be classified as non-current on the balance sheet rather than being separately presented as currentand non-current portions. On December 31, 2015 , we elected to early adopt ASU No. 2015-17 retrospectively, thus reclassifying $3.7 million and$5.1 million of deferred tax assets to non-current at December 31, 2015 and 2014 , respectively. We or one of our subsidiaries files income tax returns in the U.S. federal, U.S. state, and foreign jurisdictions. For U.S. federal, U.S. state, andforeign returns, we are no longer subject to tax examinations for years prior to 2011 .63Table of ContentsA reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:In thousands  Balance at January 1, 2014 $27Additions for current year tax positions —Additions for prior year tax positions —Reductions for prior year tax positions —Lapse of statute (27)Settlements —Balance at December 31, 2014 $—   Additions for current year tax positions $—Additions for prior year tax positions 761Reductions for prior year tax positions —Lapse of statute —Settlements —Balance at December 31, 2015 $761Included in the balance as of December 31, 2015 are $0.8 million of unrecognized tax benefits that, if recognized, would impact the effective taxrate. We anticipate that it is reasonably possible that we will have a reduction in the liability of up to $0.8 million during 2016 as a result ofsettlements.We have elected to classify any interest and penalties related to income taxes within income tax expense in our Consolidated Statements ofComprehensive Income (Loss). We did not recognize any tax benefits for the reduction of accrued interest and penalties associated with thereduction of the liability for unrecognized tax benefits during the years ended December 31, 2015 and 2014 . We did not have any interest andpenalties accrued at December 31, 2015 or 2014 . As of December 31, 2015 , we had net operating loss carryforwards that are available to reduce future taxable income and that will begin to expire in2030. Our capital loss carryforwards that are available to reduce future capital gains will expire in 2018. The valuation allowance for deferred tax assets was $10.0 million and $10.9 million at December 31, 2015 and 2014 . The net change in valuationallowance was a decrease of $0.9 million in 2015 and an increase $0.2 million in 2014 . The valuation allowance at December 31, 2015 and 2014relates to net operating loss, capital loss, and foreign tax credit 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 undercurrent plans will continue to be, permanently reinvested in these subsidiaries. As of December 31, 2015 , the net cumulative undistributed earningsof these subsidiaries were approximately $3.7 million . If those earnings were not considered permanently reinvested, U.S. federal deferred incometaxes would have been recorded, after consideration of U.S. foreign tax credits. However, it is not practicable to estimate the amount of additionaltaxes which may be payable upon the distribution of their cumulative earnings. As of December 31, 2015 approximately $4.5 million of cash islocated within certain foreign subsidiaries that if repatriated would require that we accrue and pay approximately $2.1 million in additional tax.Cash payments for income taxes were $10.1 million , $4.9 million , and $11.3 million in 2015 , 2014 , and 2013 , respectively.64Table of ContentsNote E — Goodwill and Other Intangible Assets Goodwill is recorded to the extent that the purchase price of an acquisition exceeds the fair value of the identifiable net assets acquired. Otherintangibles with definite and indefinite useful lives are recorded at fair value at the date of the acquisition. Under the provisions of FASB ASC 350,Intangibles-Goodwill and Other (ASC 350), goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicatethat it is "more likely than not" that goodwill might be impaired. We assess the impairment of our goodwill and other intangible assets by determiningthe fair value of each of our reporting units and comparing the fair value to the carrying value for each reporting unit. Determining fair value requiresthe exercise of significant judgments, including judgments about appropriate discount rates, the amount and timing of expected future cash flows,and perpetual growth rates. We monitor potential triggering events, including changes in the business climate in which we operate, attrition of key personnel, the current volatilityin the capital markets, the company’s market capitalization compared to our book value, our recent operating performance, and financial projections.During the third quarter of 2015 as a result of a sustained decline in our market capitalization below our book value of equity and recent operatingperformance, the company determined that a triggering event had occurred. In accordance with ASC 350, we determined that an interim Step Oneimpairment test of Customer Interaction and Trillium Software goodwill was warranted. The fair value of each reporting unit was estimated usingboth the income approach and market approach models. The fair value of our Customer Interaction reporting unit was estimated to be less than thecarrying value, including goodwill. The fair value of our Trillium Software reporting unit was estimated to be more than the carrying value, includinggoodwill. The company determined that the goodwill balance with respect to the Customer Interaction was impaired and Step Two testing on thatreporting unit balance was deemed necessary.Step Two of the goodwill test consists of performing a hypothetical purchase price allocation, under which the estimated fair value of the reportingunit is allocated to its tangible and intangible assets based on their estimated fair values, with any residual amount being assigned to goodwill.During the Step Two analysis, book value was estimated to approximate fair value for all working capital items, as well as a number of insignificantassets and liabilities. Intangible assets related to trade names, customer relationships and non-compete agreements were identified and the fairvalue of these intangible assets was estimated.The models used to value the Customer Interaction reporting unit in Step One and the identified intangible assets in Step Two relied onmanagement’s assumptions. These assumptions, which are significant to the calculated fair values, are considered Level 3 inputs under the fairvalue hierarchy established by ASC 350, as they are unobservable. The assumptions in the Step One test include discount rate, revenue growthrates, tax rates, and operating margins. In addition to these assumptions, the Step Two assumptions include customer attrition rates and royaltyrates.The impairment analysis indicated an impairment of Customer Interaction goodwill that is recorded in the Consolidated Statements ofComprehensive Income (Loss) in the third quarter of 2015 of $209.9 million and a corresponding $36.8 million tax benefit resulting in a net incomeimpact of $173.1 million .The changes in the carrying amount of goodwill are as follows:In thousands Customer Interaction Trillium TotalBalance at December 31, 2013 $377,854 $20,310 $398,164Segment reallocation $(128,963) $128,963 $—Balance at December 31, 2014 $248,891 $149,273 $398,164Purchase consideration 41,845 — 41,845Disposition (11,099) — (11,099)Impairment (209,938) — (209,938)Balance at December 31, 2015 $69,699 $149,273 $218,972On April 14, 2015 the company sold its B2B research businesses, Aberdeen Group and Harte Hanks Market Intelligence (the "B2B researchbusiness”). The B2B research business asset group was a part of our Customer Interaction segment (see Note M , Business Segments ). Theallocated fair value to the B2B research business within the net book value of Customer Interaction goodwill was $11.1 million . In addition, $2.3million of intangible assets with indefinite useful lives related to the Aberdeen Group trade name was written off in conjunction with the sale of theB2B research business. These amounts were written off and are reflected in the Loss on sale in the Other expenses section of the65Table of ContentsCondensed Consolidated Statements of Income (Loss). See Note N, Acquisition and Disposition, below for further discussion.On March 16, 2015 the company acquired the stock of a privately-owned digital marketing agency. The company paid some consideration uponclosing, with additional consideration payable upon the achievement of revenue performance goals over the three-year period following the closing.The company performed a valuation to determine the estimate of the total purchase consideration and to estimate values for the tangible andidentifiable intangible assets. As a result of the calculation, we recorded $41.8 million in goodwill and $4.8 million of identified intangible assets withdefinite lives for for customer relationships, trade names and non-compete agreements.During second quarter of 2014, we determined our reporting units as Customer Interaction and Trillium Software. In this analysis, our goodwill wasallocated to each reporting unit based on the estimated fair value of the reporting unit. We performed an impairment test immediately before andafter the change in reporting units, utilizing this same methodology as our November 30 annual impairment test and no indication of impairment wasidentified.On September 30, 2013, as a result of a significant decrease in forecasted revenues and an overall strategic assessment of the related operations,management completed an evaluation of the Aberdeen Group trade name. A discounted cash flow model was used to calculate the fair value of theAberdeen trade name. The significant assumptions used in this method included the (i) revenue growth rates for Aberdeen, (ii) discount rate, (iii) taxrate, and (iv) royalty rate. These assumptions are considered Level 3 inputs under the fair value hierarchy established by FASB ASC 820, Fair ValueMeasurements and Disclosures . Harte Hanks recorded a non-cash trade name intangible asset impairment charge of $2.8 million . The impairmentcharge is included in Impairment of other intangible assets in the Consolidated Statements of Comprehensive Income (Loss) in the third quarter of2013. We performed our annual goodwill impairment testing as of November 30, 2015 . We performed a step zero analysis, and overall fair value wascompared to overall market capitalization. Based on the results of our November 30, 2015 impairment tests, we did not record any additionalimpairment losses in 2015 related to goodwill and other intangible assets. We did not record an impairment loss related to goodwill in 2014.The company continues to monitor potential triggering events, including changes in the business climate in which it operates, attrition of keypersonnel, the current volatility in the capital markets, the company’s market capitalization compared to its book value, the company’s recentoperating performance, and the company’s financial projections. The occurrence of one or more triggering events could require additionalimpairment testing, which could result in additional impairment charges in the future. Other intangibles with indefinite useful lives relate to trade names associated with the Aberdeen Group acquisition in September 2006. Theseintangibles were written-off in conjunction with the sale of the B2B Research Business. The changes in the carrying amount of other intangibles withindefinite lives are as follows:In thousands  Balance at December 31, 2013 $2,250Acquisition —Impairment —Balance at December 31, 2014 $2,250Acquisition —Disposition (2,250)Balance at December 31, 2015 $— Other intangibles with definite useful lives all relate to contact databases, client relationships, and non-compete agreements. Other intangible assetswith definite useful lives are amortized on a straight-line basis over their respective estimated useful lives, typically a period of 2 to 10 years, and arereviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 66Table of ContentsThe changes in the carrying amount of other intangibles with definite lives are as follows:In thousands  Balance at December 31, 2013 $53Acquisition —Amortization (26)Impairment —Balance at December 31, 2014 $27Disposition (18)Acquisition 4,773Amortization (659)Impairment —Balance at December 31, 2015 $4,123Amortization expense related to other intangibles with definite useful lives was $0.7 million , $0.0 million , and $0.2 million for the years endedDecember 31, 2015 , 2014 , and 2013 , respectively. Expected amortization expense for the next five years is as follows:In thousands  2016 $8212017 7072018 6272019 6132020 613Thereafter 742  $4,123Note F — Employee Benefit Plans Prior to January 1, 1999, we maintained a defined benefit pension plan for which most of our employees were eligible (the Qualified PensionPlan). In conjunction with significant enhancements to our 401(k) plan, we elected to freeze benefits under the Qualified Pension Plan as ofDecember 31, 1998. In 1994, we adopted a non-qualified, unfunded, supplemental pension plan (Restoration Pension Plan) covering certain employees, which providesfor incremental pension payments so that total pension payments equal those amounts that would have been payable from the principal pensionplan were it not for limitations imposed by income tax regulation. The benefits under the Restoration Pension Plan were intended to provide benefitsequivalent to our Qualified Pension Plan as if such plan had not been frozen. Effective April 1, 2014, we froze benefits under our Restoration Pension Plan, which was accounted for as a curtailment of the plan in the secondquarter of 2014. The curtailment resulted in a reduction of plan expense of $0.4 million during 2014 and a reduction in the projected benefitobligation of $1.1 million . This curtailment gain offsets the unrecognized loss held by the Restoration Pension Plan. The remaining portion of theunrecognized loss will then be amortized over the average life expectancy of all participants. The overfunded or underfunded status of our defined benefit post-retirement plans is recorded as an asset or liability on our balance sheet. Thefunded status is measured as the difference between the fair value of plan assets and the projected benefit obligation. Periodic changes in thefunded status are recognized through other comprehensive income. We currently measure the funded status of our defined benefit plans as ofDecember 31, the date of our year-end consolidated balance sheets.67Table of ContentsThe status of the defined benefit pension plans at year-end was as follows:  Year Ended December 31,In thousands 2015 2014Change in benefit obligation    Benefit obligation at beginning of year $191,065 $161,370Service cost — 100Interest cost 7,724 7,698Actuarial (gain) loss (10,861) 32,018Benefits paid (9,213) (9,051)Curtailments — (1,070)Benefit obligation at end of year $178,715 $191,065     Change in plan assets    Fair value of plan assets at beginning of year 124,372 120,604Actual return on plan assets 982 6,887Contributions 5,541 5,932Benefits paid (9,213) (9,051)Fair value of plan assets at end of year $121,682 $124,372     Funded status at end of year $(57,033) $(66,693) The following amounts have been recognized in the Consolidated Balance Sheets at December 31:In thousands 2015 2014Other current liabilities $1,542 $1,537Pensions 55,491 65,156  $57,033 $66,693 The following amounts have been recognized in accumulated other comprehensive loss, net of tax, at December 31:In thousands 2015 2014Net loss $43,915 $49,560Prior service cost — —  $43,915 $49,560 We are not required to make and do not intend to make any contributions to our Qualified Pension Plan in 2016 . Based on current estimates we willnot be required to make any contributions to our Qualified Pension Plan until 2018.We are not required to make and do not intend to make any contributions to our Restoration Pension Plan in 2016 other than to the extent needed tocover benefit payments. We expect benefit payments under this supplemental pension plan to total approximately $1.5 million in 2016 . In the eventof a change of control, as defined in the plan document, the Restoration Pension Plan is required to be fully funded.The following information is presented for pension plans with an accumulated benefit obligation in excess of plan assets:In thousands 2015 2014Projected benefit obligation $178,715 $191,065Accumulated benefit obligation $178,715 $191,065Fair value of plan assets $121,682 $124,372 The Restoration Pension Plan had an accumulated benefit obligation of $26.4 million and $28.2 million at December 31, 2015 and 2014 ,respectively. 68Table of ContentsThe following table presents the components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss) forboth plans:  Year Ended December 31,In thousands 2015 2014 2013Net Periodic Benefit Cost (Pre-Tax)      Service cost $— $100 $343Interest cost 7,724 7,698 7,237Expected return on plan assets (8,637) (8,418) (7,383)Amortization of prior service cost — — —Recognized actuarial loss 6,228 3,654 6,687Net periodic benefit cost $5,315 $3,034 $6,884       Amounts Recognized in Other Comprehensive Income (Loss) (Pre-Tax)      Net (gain) loss $(9,408) $28,802 $(36,920)Prior service cost — — —Total (benefit) cost recognized in other comprehensive loss $(9,408) $28,802 $(36,920)       Net (benefit) cost recognized in net periodic benefit cost and other comprehensive(income) loss $(4,093) $31,836 $(30,036) The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodicbenefit cost in 2016 is $2.3 million . The period over which the net loss from the Qualified Pension Plan is amortized into net periodic benefit costhas been changed effective in 2016 from the average future service of active participants (approximately 9 years) to the average future lifetime of allparticipants (approximately 24 years). This change reflects that the Qualified Pension Plan is frozen and that almost all of the plan's participants arenot active employees.The weighted-average assumptions used for measurement of the defined pension plans were as follows:  Year Ended December 31,  2015 2014 2013Weighted-average assumptions used to determine net periodic benefit cost      Discount rate 4.13% 4.94% 4.15%Expected return on plan assets 7.00% 7.00% 7.25%Rate of compensation increase N/A N/A 3.00%  December 31,  2015 2014Weighted-average assumptions used to determine benefit obligations    Discount rate 4.49% 4.13%Rate of compensation increase N/A N/A The discount rate assumptions are based on current yields of investment-grade corporate long-term bonds. The expected long-term return on planassets is based on the expected future average annual return for each major asset class within the plan’s portfolio (which is principally comprised ofequity investments) over a long-term horizon. In determining the expected long-term rate of return on plan assets, we evaluated input from ourinvestment consultants, actuaries, and investment management firms, including their review of asset class return expectations, as well as long-termhistorical asset class returns. Projected returns by such consultants and economists are based on broad equity and bond indices. Additionally, weconsidered our historical 15 -year compounded returns, which have been in excess of the forward-looking return expectations. 69Table of ContentsThe funded pension plan assets as of December 31, 2015 and 2014 , by asset category, are as follows:In thousands  2015 % 2014 %Equity securities $83,185 68% $82,010 66%Debt securities 32,726 27% 32,381 26%Other 5,771 5% 9,981 8%Total plan assets $121,682 100% $124,372 100% The current economic environment presents employee benefit plans with unprecedented circumstances and challenges, which, in some cases overthe last several years, have resulted in large declines in the fair value of investments. The fair values presented have been prepared using valuesand information available as of December 31, 2015 and 2014 .The following tables present the fair value measurements of the assets in our funded pension plan:In thousands December 31, 2015 Quoted Prices in Active Markets for Identical Assets (Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)Equity securities $83,185 $83,301 $— $—Debt securities 32,726 32,726 — —Other 5,771 — 5,771 —Total $121,682 $116,027 $5,771 $—In thousands December 31, 2014 Quoted Prices  in Active Markets for Identical Assets (Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)Equity securities $82,010 $82,010 $— $—Debt securities 32,381 32,381 — —Other 9,981 — 9,981 —Total $124,372 $114,391 $9,981 $— The investment policy for the Qualified Pension Plan focuses on the preservation and enhancement of the corpus of the plan’s assets throughprudent 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 policyestablishes the following investment mix, which is intended to subject the principal to an acceptable level of volatility while still meeting the desiredreturn objectives:  Target Acceptable Range Benchmark IndexDomestic Equities 50.0% 35% -75% S&P 500Large Cap Growth 22.5% 15% -30% Russell 1000 GrowthLarge Cap Value 22.5% 15% -30% Russell 1000 ValueMid Cap Value 5.0% 5% -15% Russell Mid Cap ValueMid Cap Growth 0.0% 0% -10% Russell Mid Cap Growth         Domestic Fixed Income 35.0% 15% -50% LB AggregateInternational Equities 15.0% 10% -25% MSC1 EAFEThe funded pension plan provides for investment in various investment types. Investments, in general, are exposed to various risks, such as interestrate, credit, and overall market volatility risk. Due to the level of risk associated with investments, it is reasonably possible that changes in the valueof investments will occur in the near term and may impact the funded status of the plan. To address the issue of risk, the investment policy placeshigh priority on the preservation of the value of capital (in real terms) over a market cycle. Investments are made in companies with a minimum five -year operating history and sufficient trading volume to facilitate, under most market conditions, prompt70Table of Contentssale without severe market effect. Investments are diversified; reasonable concentration in any one issue, issuer, industry, or geographic area isallowed 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 PensionPlan Committee reviews, on a quarterly basis, the investment portfolio of each manager, which includes rates of return, performance comparisonswith the most appropriate indices, and comparisons of each manager’s performance with a universe of other portfolio managers that employ thesame investment style. The expected future pension benefit payments for the next ten years as of December 31, 2015 are as follows:In thousands  2016 $9,4182017 9,6232018 9,8012019 9,9302020 10,2962021-2025 56,274  $105,342 We also sponsor a 401(k) retirement plan in which we match a portion of employees’ voluntary before-tax contributions. Under this plan, bothemployee and matching contributions vest immediately. Total 401(k) expense recognized in 2015 , 2014 , and 2013 was $3.6 million , $3.8 million ,and $3.9 million , respectively.Note G — Stockholders’ Equity We paid a quarterly dividend of $0.085 per share in each quarter of 2015 .During 2015 , we repurchased 0.9 million shares of our common stock for $4.6 million under our stock repurchase programs that were publiclyannounced in August of 2014 and 2012. Under the program announced in August 2014 our Board of Directors has authorized us to spend up to$20.0 million to repurchase shares of our outstanding common stock. As of December 31, 2015 , we had authorization to spend $11.4 million torepurchase additional shares under this program. From 1997 through December 2015 , we have paid more than $1.2 billion to repurchase 67.9million shares under this program and previously announced programs. During 2015 , we received 170,567 shares of our common stock, with an estimated market value of $1.1 million , in connection with vesting ofshares as shares are returned to treasury to pay for an awardee’s tax obligation. Note H — Stock-Based Compensation Compensation expense for stock-based awards is based on the fair values of the awards on the date of grant and is recognized on a straight-linebasis over the vesting period of the entire award in the “Labor” line of the Consolidated Statements of Comprehensive Income (Loss). For the yearsended December 31, 2015 , 2014 , and 2013 , we recorded total stock-based compensation expense of $5.7 million , $4.1 million , and $5.7 million ,respectively. In September 2015 we granted equity awards to Karen Puckett as a material inducement for her to accept appointment as our Chief ExecutiveOfficer. In addition, in October 2015, we granted equity awards to our Chief Marketing Officer as a material inducement to his acceptance of suchposition. These option, restricted stock, and performance units awards were not submitted for stockholder approval, and were separately listed withthe NYSE.In July 2013 we granted equity awards to Robert Philpott as a material inducement for him to accept appointment as our Chief ExecutiveOfficer. These option, restricted stock, and performance unit awards were not submitted for stockholder approval, and were separately registeredwith the SEC and listed with the NYSE.In May 2013 our stockholders approved the 2013 Omnibus Incentive Plan (2013 Plan), pursuant to which we may issue up to 5.0 million shares ofstock-based awards to directors, employees and consultants. The 2013 Plan replaced the stockholder-approved 2005 Omnibus Incentive Plan(2005 Plan), pursuant to which we issued equity securities to directors, officers, and key employees. No additional stock-based awards will begranted under the 2005 Plan, but71Table of Contentsawards previously granted under the 2005 Plan will remain outstanding in accordance with their respective terms. As of December 31, 2015 , therewere 3.2 million shares available for grant under the 2013 Plan. Stock OptionsOptions granted as inducement awards have an exercise price equal to the market value of the common stock on the grant date. These optionsbecome exercisable in 25% increments on the first through fourth anniversaries of their date of grant, and expire on the tenth anniversary of theirdate of grant. Options to purchase 1.0 million shares were outstanding under the inducement awards at December 31, 2015 , with exercise prices ofeither $3.79 or $4.26 per share.Following the third quarter 2015 resignation of Mr. Philpott, vesting was accelerated on his unvested stock options (pursuant to the terms of hisemployment agreement and inducement award), for which we recognized $0.5 million of accelerated expense in July 2015.Under the 2013 Plan, all options have been and will be granted at exercise prices equal to the market value of the common stock on the grantdate. All such options are exercisable in 25% increments on the first through fourth anniversaries of their date of grant, and expire on the ten thanniversary of their date of grant. As of December 31, 2015 , 2013 Plan options to purchase 1.4 million shares were outstanding with exercise pricesranging from $4.67 to $8.85 per share. All options under the 2005 Plan were granted at exercise prices equal to the market value of the common stock on the grant date. All 2005 Planoptions granted prior to 2011 become exercisable in 25% increments on the second through fifth anniversaries of their date of grant and expire onthe ten th anniversary of their date of grant. All options granted after 2011 become exercisable in 25% increments on the first through fourthanniversaries of their date of grant, and expire on the ten th anniversary of their date of grant. As of December 31, 2015 , 2005 Plan options topurchase 2.3 million shares were outstanding with exercise prices ranging from $6.04 to $27.00 per share.Options issued from January 2013 through March 2015 vest in full (to the extent not previously vested) upon a change in control, as defined in theapplicable equity plan. Options granted to officers since April 2015 or before January 2013 vest in full (to the extent not previously vested) upon achange in control if such options are not assumed or replaced by a publicly-traded successor with an equivalent award (as such terms are defined insuch officers’ change-in-control severance agreements). Additionally, 25% of the inducement options granted to Ms. Puckett will vest (if all are notpreviously vested) in the event her employment is terminated without cause, or if she terminates her employment for good reason (as such termsare defined in her employment agreement).72Table of ContentsThe following summarizes all stock option activity during the years ended December 31, 2015 , 2014 , and 2013 :In thousands Number ofShares Weighted-AverageOptionPrice Weighted-AverageRemainingContractualTerm(Years) AggregateIntrinsicValue(Thousands)Options outstanding at December 31, 2012 5,106,629 $14.32             Granted in 2013 1,138,600 8.30    Exercised in 2013 (151,875) 6.04   $268Unvested options forfeited in 2013 (762,062) 11.97    Vested options expired in 2013 (1,085,580) 13.47    Options outstanding at December 31, 2013 4,245,712 $13.65             Granted in 2014 1,002,955 8.01    Exercised in 2014 (78,125) 6.19   $61Unvested options forfeited in 2014 (437,984) 8.72    Vested options expired in 2014 (268,537) 17.83    Options outstanding at December 31, 2014 4,464,021 $11.50             Granted in 2015 1,973,606 5.73    Exercised in 2015 (35,000) 6.04   $67Unvested options forfeited in 2015 (660,733) 7.96    Vested options expired in 2015 (1,139,148) 14.89    Options outstanding at December 31, 2015 4,602,746 $8.74 6.13 $—         Exercisable at December 31, 2015 1,779,288 $12.73 3.99 $— 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 optionholders if all of the in-the-money options were exercised on December 31, 2015 . The pre-tax intrinsic value is the difference between the closingprice of our common stock on December 31, 2015 and the exercise price for each in-the-money option. This value fluctuates with the changes in theprice of our common stock.The following table summarizes information about stock options outstanding at December 31, 2015 :Range ofExercisePrices NumberOutstanding Weighted-AverageExercisePrice Weighted-AverageRemainingLife (Years) NumberExercisable Weighted-AverageExercisePrice$0.00 -6.99 1,605,866 $4.72 3.54 221,520 $6.10$7.00 -10.99 1,984,405 $8.02 6.58 545,293 $8.41$11.00 -11.99 397,000 $11.90 3.95 397,000 $11.90$12.00 -15.99 306,350 $14.40 3.14 306,350 $14.40$16.00 -24.49 50,000 $17.30 2.00 50,000 $17.30$24.50 -28.85 259,125 $25.90 0.39 259,125 $25.90    4,602,746 $8.74 6.13 1,779,288 $12.73 73Table of ContentsThe 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 2015 , 2014 , and 2013 :  Year Ended December 31,  2015 2014 2013Expected term (in years) 6.24 6.25 6.25Expected stock price volatility 40.60% 47.10% 46.59%Risk-free interest rate 1.58% 1.88% 1.43%Expected dividend yield 5.69% 3.82% 4.74% Expected term is estimated using the simplified method, which takes into account vesting and contractual term. The simplified method is being usedto calculate expected term instead of historical experience due to a lack of relevant historical data resulting from changes in option vestingschedules and changes in the pool of employees receiving option grants. Expected stock price volatility is based on the historical volatility fromtraded 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 aremaining term approximately equal to the expected term. Expected dividend yield is based on historical stock price movement and anticipatedfuture annual dividends over the expected term. Future annual dividends over the expected term are estimated to be $0.34 per share. The weighted-average fair value of options granted during 2015 , 2014 , and 2013 was $1.36 , $2.59 , and $2.35 , respectively. As of December 31,2015 , there was $3.0 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized overa weighted average period of approximately 2.87 years . Unvested SharesUnvested shares granted as inducement awards or under the 2013 Plan vest in three equal increments on the first three anniversaries of their dateof grant. Unvested shares granted from January 2013 through March 2015 vest in full (to the extent not previously vested) upon a change in control,as defined in the applicable equity plan. Unvested shares granted to officers since April 2015 as inducement awards or under the 2013 Plan vest infull (to the extent not previously vested) upon a change in control if such unvested shares are not assumed or replaced by a publically-tradedsuccessor with an equivalent award (as such terms are defined in such officers’ change-in-control severance agreements). Following the third quarter 2015 resignation of Mr. Philpott, vesting was accelerated on his unvested shares (pursuant to the terms of hisemployment agreement and inducement award), for which we recognized $1.2 million of accelerated expense in July 2015. 74Table of ContentsThe following summarizes all unvested share activity during 2015 , 2014 , and 2013 :  Number ofShares Weighted-Average GrantDate Fair ValueUnvested shares outstanding at December 31, 2012 500,453 $10.95     Granted in 2013 591,931 8.02Vested in 2013 (297,375) 11.01Forfeited in 2013 (108,964) 8.94Unvested shares outstanding at December 31, 2013 686,045 $8.72     Granted in 2014 529,426 7.90Vested in 2014 (342,613) 8.98Forfeited in 2014 (82,720) 8.37Unvested shares outstanding at December 31, 2014 790,138 $8.10     Granted in 2015 836,775 6.38Vested in 2015 (504,686) 8.23Forfeited in 2015 (159,781) 7.90Unvested shares outstanding at December 31, 2015 962,446 $6.57 The fair value of each unvested share is estimated on the date of grant as the closing market price of our common stock on the date of grant. As ofDecember 31, 2015 , there was $4.8 million of total unrecognized compensation cost related to unvested shares. This cost is expected to berecognized over a weighted average period of approximately 2.03 years . Performance Stock UnitsUnder the inducement awards, the 2013 Plan, and the 2005 Plan performance stock units are a form of share-based award similar to unvestedshares, except that the number of shares ultimately issued is based on our performance against specific performance goals over a three-yearperiod. At the end of the performance period, the number of shares of stock issued will be determined by adjusting upward or downward from themaximum in a range between 0% and 100% . Unvested performance stock units granted from January 2013 through March 2015 vest in full at the100% performance level upon a change in control, as defined in the applicable equity plan. Unvested performance stock units granted to officerssince April 2015 as inducement awards or under the 2013 Plan vest in full upon a change in control if such unvested performance stock units are notassumed or replaced by a publicly-traded successor with an equivalent award (as such terms are defined in such officers’ change-in-controlseverance agreements).75Table of ContentsThe following summarizes all performance stock unit activity during 2015 , 2014 , and 2013 :  Number ofShares Weighted-Average Grant-Date Fair ValuePerformance stock units outstanding at December 31, 2012 239,700 $10.25     Granted in 2013 333,000 7.76Settled in 2013 — —Forfeited in 2013 (102,000) 9.84Performance stock units outstanding at December 31, 2013 470,700 $8.58     Granted in 2014 308,507 7.09Settled in 2014 — —Forfeited in 2014 (175,533) 9.30Performance stock units outstanding at December 31, 2014 603,674 $7.61     Granted in 2015 669,839 4.30Settled in 2015 — —Forfeited in 2015 (572,129) 7.54Performance stock units outstanding at December 31, 2015 701,384 $4.51 The fair value of each performance stock unit is estimated on the date of grant as the closing market price of our common stock on the date of grant,minus the present value of anticipated dividend payments. Periodic compensation expense is based on the current estimate of future performanceagainst specific performance goals over a three -year period and is adjusted up or down based on those estimates. As of December 31, 2015 , therewas $1.1 million of total unrecognized compensation cost related to performance stock units. This cost is expected to be recognized over a weightedaverage period of approximately 2.83 years .Note I — Commitments and Contingencies At December 31, 2015 , we had letters of credit in the amount of $6.4 million issued under the 2013 Revolving Credit Facility. No amounts weredrawn against these letters of credit at December 31, 2015 . These letters of credit exist to support insurance programs relating to workers’compensation, automobile, and general liability, and to offset liability relating to leasehold obligations. In the normal course of our business, we are obligated under some agreements to indemnify our clients as a result of claims that we infringe on theproprietary rights of third parties. The terms and duration of these commitments vary and, in some cases, may be indefinite, and certain of thesecommitments do not limit the maximum amount of future payments we could become obligated to make there under; accordingly, our actualaggregate maximum exposure related to these types of commitments cannot be reasonably estimated. Historically, we have not been obligated tomake significant payments for obligations of this nature, and no liabilities have been recorded for these obligations in our financial statements. We are also currently subject to various other legal proceedings in the course of conducting our businesses and, from time to time, we may becomeinvolved in additional claims and lawsuits incidental to our businesses. In the opinion of management, after consultation with counsel, none of thesematters is currently considered to be reasonably possible of resulting in a material adverse effect on our consolidated financial position or results ofoperations. Nevertheless, we cannot predict the impact of future developments affecting our pending or future claims and lawsuits and anyresolution of a claim or lawsuit within a particular fiscal quarter may adversely impact our results of operations for that quarter. We expense legalcosts as incurred, and all recorded legal liabilities are adjusted as required as better information becomes available to us. The factors we considerwhen 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.76Table of ContentsNote J — Leases We lease real estate and certain equipment under numerous lease agreements, most of which contain some renewal options. The total rentexpense applicable to operating leases was $14.5 million , $15.4 million , and $14.5 million for the years ended December 31, 2015 , 2014 , and2013 , respectively. Step rent provisions and escalation clauses, normal tenant improvements, rent holidays, and other lease concessions are taken into account incomputing 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, 2015 are asfollows:In thousands  2016 $11,5652017 10,6762018 7,6862019 5,3432020 3,121Thereafter 4,630  $43,021 We also lease certain equipment and software under capital leases. Our capital lease obligations at year-end were as follows:In thousands 2015 2014Current portion of capital leases $132 $134Long-term portion of capital leases 204 185Total capital lease obligation $336 $319 The future minimum lease payments for all capital leases operating as of December 31, 2015 are as follows:In thousands  2016 $1322017 1002018 582019 322020 14Thereafter —  $336Note K — Earnings Per Share In periods in which the company has net income, the company is required to calculate earnings per share using the two-class method. The two-class method is required because the company's unvested shares are considered participating securities. Participating securities have the right toreceive dividends should the company declare dividends on its common stock. Under the two-class method, undistributed and distributed earningsare allocated on a pro-rata basis to the common and restricted stockholders. The weighted-average number of common and restricted sharesoutstanding during the period is then used to calculate EPS for each class of shares.In periods in which the company has a net loss, basic loss per share is calculated using the treasury stock method. The treasury stock method iscalculated by dividing the net loss by the weighted-average number of common shares outstanding during the period. The two-class is method is notused, because the two-class calculation is anti-dilutive.77Table of ContentsReconciliations of basic and diluted earnings per share (EPS) are as follows:In thousands, except per share amounts 2015 2014 2013Net Income (Loss)      Income (loss) from continuing operations $(170,928) $23,991 $24,441Income (loss) from discontinued operations — — (11,071)Net income (loss) $(170,928) $23,991 $13,370       Basic EPS      Weighted-average common shares outstanding used in earnings per sharecomputations 61,643 62,444 62,503       Basic earnings (loss) per share      Continuing operations $(2.77) $0.38 $0.39Discontinued operations — — (0.18)Basic earnings (loss) per share $(2.77) $0.38 $0.21       Diluted EPS      Shares used in diluted earnings per share computations 61,643 62,658 62,812       Basic earnings (loss) per share      Continuing operations $(2.77) $0.38 $0.39Discontinued operations — — (0.18)Basic earnings (loss) per share $(2.77) $0.38 $0.21       Computation of Shares Used in Earnings Per Share Computations      Weighted-average common shares outstanding 61,643 62,444 62,503Weighted-average common equivalent shares- dilutive effect of stock options andawards — 214 309Shares used in diluted earnings per share computations 61,643 62,658 62,812 For the purpose of calculating the shares used in the diluted EPS calculations, 4.2 million , 4.1 million , and 4.2 million anti-dilutive options havebeen excluded from the EPS calculations for the years ended December 31, 2015 , 2014 , and 2013 , respectively. There were no anti-dilutiveunvested shares for the years ended December 31, 2015 and 2013 , respectively, and 0.0 million anti-dilutive unvested for the year endedDecember 31, 2014 .78Table of ContentsNote L — Comprehensive Income (Loss) Comprehensive income (loss) for a period encompasses net income (loss) and all other changes in equity other than from transactions with ourstockholders. Our comprehensive income (loss) was as follows:  Year Ended December 31,In thousands 2015 2014 2013Net income (loss) $(170,928) $23,991 $13,370       Other comprehensive income (loss):      Adjustment to pension liability 9,408 (28,802) 36,920Tax (expense) benefit (3,763) 11,521 (14,768)Adjustment to pension liability, net of tax 5,645 (17,281) 22,152Foreign currency translation adjustment (1,976) (1,830) (536)Total other comprehensive income (loss) $3,669 $(19,111) $21,616       Total comprehensive income (loss) $(167,259) $4,880 $34,986 Changes in accumulated other comprehensive income (loss) by component are as follows:In thousands Defined BenefitPension Items ForeignCurrency Items TotalBalance at December 31, 2013 $(32,279) $4,161 $(28,118)Other comprehensive loss, net of tax, before reclassifications — (1,830) (1,830)Amounts reclassified from accumulated other comprehensive income (loss), netof tax (17,281) — (17,281)Net current period other comprehensive income (loss), net of tax (17,281) (1,830) (19,111)Balance at December 31, 2014 $(49,560) $2,331 $(47,229)Other comprehensive loss, net of tax, before reclassifications — (1,976) (1,976)Amounts reclassified from accumulated other comprehensive income (loss), netof tax 5,645 — 5,645Net current period other comprehensive income (loss), net of tax 5,645 (1,976) 3,669Balance at December 31, 2015 $(43,915) $355 $(43,560) Reclassification amounts related to the defined pension plans are included in the computation of net period pension benefit cost (see Note F,Employee Benefit Plans) .Note M — Business Segments During the second quarter of 2014, Harte Hanks began executing a new strategy causing us to leverage our operational structure by organizing intotwo distinct operating divisions: Customer Interaction and Trillium Software. In accordance with ASC 280, Segment Reporting, we determined thatunder this new organizational structure, we will report the two operating divisions as two reportable segments — Customer Interaction and TrilliumSoftware. Our reportable segments are described below. Customer InteractionOur Customer Interaction services offer a wide variety of integrated, multi-channel, data-driven marketing service solutions for our customers. Wederive revenues by offering a full complement of capabilities and resources to provide these services in media from direct mail to email, including:•agency and digital services;•database marketing solutions and business-to-business lead generation;•direct mail; and79Table of Contents•contact centers.Customer Interaction’s largest cost components are labor, outsourced costs, and mail supply chain costs. 2015 results reflect an impairment loss of$209.9 million related to goodwill associated with our Customer Interaction segment in the third quarter of 2015. 2013 results reflect an impairmentloss of $2.8 million related to other intangible assets associated with our Aberdeen Group business recorded in the third quarter of 2013. Trillium SoftwareTrillium Software is a leading enterprise data quality solutions provider. Our full complement of technologies and services includes global dataprofiling, data cleansing, enrichment, and data linking for e-business, customer relationship management, data governance, enterprise resourceplanning, supply chain management, data warehouse, and other enterprise applications. Revenues from the Trillium Software segment arecomprised primarily of software, maintenance and professional services. Trillium Software’s largest cost component is software development, which is comprised primarily of labor. CorporateGeneral corporate expense consists primarily of pension and workers compensation expense related to employees from operations we no longerown.80Table of Contents  Year Ended December 31,In thousands 2015 2014 2013Operating revenues      Customer Interaction $444,166 $499,444 $503,760Trillium Software 51,135 54,232 55,849Total operating revenues $495,301 $553,676 $559,609       Operating income      Customer Interaction $(197,020) $29,780 $32,021Trillium Software 14,039 13,347 15,396Corporate (4,594) (2,365) (4,756)Total operating income $(187,575) $40,762 $42,661       Income from continuing operations before income taxes $(187,575) $40,762 $42,661Interest expense, net 4,759 2,559 2,998Loss on sale 9,501 — —Other, net 1,007 897 46Total income from continuing operations before income taxes $(202,842) $37,306 $39,617       Depreciation      Customer Interaction $11,717 $12,859 $13,477Trillium Software 1,869 2,035 2,053Corporate — — —Total depreciation $13,586 $14,894 $15,530       Other intangible amortization      Customer Interaction $656 $26 $206Trillium Software 3 — —Corporate — — —Total intangible amortization $659 $26 $206       Capital expenditures      Customer Interaction $7,777 $9,341 $14,092Trillium Software 3,644 1,912 1,781Corporate 153 12 —Total capital expenditures $11,574 $11,265 $15,873  Year Ended December 31,In thousands 2015 2014Total assets    Customer Interaction $231,635 $436,561Trillium Software 182,986 207,616Corporate — —Total assets $414,621 $644,177Note N — Acquisition and Disposition On March 16, 2015, we completed the acquisition of 3Q Digital, Inc. The results of 3Q Digital, Inc.’s operations have been included in ourconsolidated financial statements since that date and are reported in the Customer Interaction segment. The initial purchase price was $30.2 millionin cash. In addition, the purchase agreement includes a contingent consideration arrangement that requires us to pay the former owners of 3QDigital, Inc. an additional cash payment depending on achievement of certain revenue growth goals. The potential undiscounted amount of all futurepayments81Table of Contentsthat could be required to be paid under the contingent consideration arrangement is between $0 and $35.0 million in cash in 2018.The intangible assets include customer relationships, trade names, and non-compete agreements.The following tables summarize the consideration paid and the amounts of estimated fair value of the assets acquired and liabilities assumed at theacquisition date.In thousands Cash consideration per purchase agreement$30,245Estimated fair value of contingent consideration17,940Fair value of total consideration$48,185In thousands Recognized amounts of tangible assets and liabilities: Current assets$4,135Property and equipment164Other assets389Current liabilities(822)Other liabilities—Total tangible assets and liabilities$3,866Identifiable intangible assets4,773Goodwill (including deferred tax adjustment of $2,299)41,845Total$50,484The fair value of the tangible net assets, identifiable intangible assets and goodwill recognized on acquisition is $48.2 million . The acquiredintangible assets, which are being amortized, are as follows: customer relationships of $4.3 million (amortized over seven years), trade names andtrademarks of $0.3 million (amortized over two years), and non-compete agreements of $0.2 million (amortized over three years).A reconciliation of the beginning and ending accrued balances of the contingent consideration using significant unobservable inputs (Level 3) for thetwelve months ended December 31, 2015 is as follows:In thousands Contingent consideration at acquisition date$17,940Accretion of interest2,337Accrued earnout liability as of December 31, 2015$20,277The purchase price has been allocated based on the estimated fair values of assets described above and are subject to achievement of revenuegoals. All future changes to the contingent consideration will be included in operations.On April 14, 2015, Harte Hanks sold its B2B research business. The B2B research business represented less than 5% of our total 2014 and 2013revenues. As a result of the sale, the company recognized a pre-tax loss of $9.5 million in the second quarter of 2015. The related asset group doesnot meet the criteria to be classified as a component of an entity. As such, the related loss on sale is included in income before income taxes in theincome statement in other expenses. The assets included both goodwill and intangible assets (see Note E, Goodwill and Other Intangible Assets ).Future expenses are possible in future periods based upon certain working capital settlement provisions.82Table of ContentsNote O — Discontinued Operations We sold the assets of our California Shoppers operations to affiliates of OpenGate Capital Management, LLC (OpenGate) on September 27, 2013for gross proceeds of approximately $22.5 million in cash. In addition, OpenGate agreed to assume certain liabilities associated with the Shoppersdivision. This transaction resulted in a loss on the sale of $12.4 million , net of $9.0 million of income tax benefit. This loss on sale includestransaction costs of approximately $2.6 million .Because the Shoppers operations represented distinct business units with operations and cash flows that can clearly be distinguished, bothoperationally and for financial purposes, from the rest of Harte Hanks, the results of the Shoppers operations are reported as discontinuedoperations for all periods presented. Results of the remaining Harte Hanks marketing services business are reported as continuing operations.Summarized operating results for the Shoppers discontinued operations, through the dates of disposal, are as follows:  Year Ended December 31,In thousands 2015 2014 2013Revenues $— $— $140,834       Income from discontinued operations before impairment charges and income taxes — — 2,509Loss on sale before income taxes — — (21,402)Income tax benefit — — 7,822Loss from discontinued operations $— $— $(11,071)The major components of cash flows for the Shoppers discontinued operations are as follows:  Year Ended December 31,In thousands 2015 2014 2013Loss from discontinued operations $— $— $(11,071)Loss on sale — — 12,355Deferred income taxes — — 10,594Depreciation and software amortization — — 2,592Other, net — — 2,619Net cash provided by discontinued operations $— $— $17,089Note P — Selected Quarterly Data (Unaudited)  2015 Quarter Ended 2014 Quarter EndedIn thousands, except per share amounts December 31 September 30 June 30 March 31 December 31 September 30 June 30 March 31Revenues $129,815 $121,968 $122,345 $121,173 $146,518 $134,121 $140,310 $132,727Operating income (loss) 6,792 (205,438) 8,057 3,015 14,656 10,540 10,987 4,579Net income (loss) 2,543 (170,914) (4,172) 1,615 10,089 6,420 5,637 1,845                 Basic earnings (loss) per share $0.04 $(2.77) $(0.07) $0.03 $0.16 $0.10 $0.09 $0.03                 Diluted earnings (loss) per share $0.04 $(2.77) $(0.07) $0.03 $0.16 $0.10 $0.09 $0.03 Earnings per common share amounts are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earningsper share amounts may not equal the quarterly earnings per share amounts or the annual earnings per share amounts.83Table of ContentsNote Q — Subsequent EventOn March 10, 2016 , we entered into a secured credit facility with Wells Fargo Bank, N.A. as Administrative Agent. This facility consists of amaximum $65.0 million revolving credit facility (the 2016 Revolving Credit Facility) and a $45.0 million term loan facility (the 2016 Term Loan, andcollectively with the 2016 Revolving Credit Facility, the Secured Credit Facilities). See Note C for further discussion.On March 4, 2016, Harte Hanks completed the purchase of substantially all of the assets of Denver-based Aleutian Consulting, Inc. (Aleutian) for$3.5 million . Aleutian, which will operate as Harte Hanks Consulting, provides go-to-market strategy consulting services combined with a proprietaryfact-based, data-driven analytics approach. The historical results of Aleutian are not material to the company.84Table of ContentsINDEX TO EXHIBITS We are incorporating certain exhibits listed below by reference to other Harte Hanks filings with the Securities and Exchange Commission, which wehave identified in parentheses after each applicable exhibit. Exhibit  No. Description of Exhibit Acquisition and Dispositions2.1 Asset Purchase Agreement, dated September 18, 2013, by and among Harte Hanks Shoppers, Inc., Southern Comprint Co.and Harte Hanks, Inc., on the one hand, and Pennysaver USA Publishing, LLC, Pennysaver USA Printing, LLC, OrbiterProperties, LLC and OpenGate Capital Management, LLC, on the other hand (filed as Exhibit 2.1 to the company’s Form 8-Kdated September 19, 2013).   2.2 Agreement and Plan of Merger, dated March 16, 2015, among Harte Hanks, Inc., Harte Hanks Smart, Inc., 3Q Digital, Inc. andMaury Domengeaux, as representative to the stockholders of 3Q Digital, Inc. (filed as Exhibit 2.1 to the company's Form 10-Qdated May 7, 2015).   2.3 Membership Interest Purchase Agreement, dated April 14, 2015, between AMI Intermediate, LLC and Harte Hanks, Inc.relating to the sale of Aberdeen Group and Harte Hanks Market Intelligence (filed as Exhibit 2.2 to the company's Form 10-Qdated May 7, 2015). Charter Documents3(a) Amended and Restated Certificate of Incorporation as amended through May 5, 1998 (filed as Exhibit 3(e) to the company’sForm 10-Q for the six months ended June 30, 1998). 3(b) Fifth Amended and Restated Bylaws (filed as Exhibit 3.1 to the company’s Form 8-K dated December 4, 2015). 3(c) Certificate of Amendment of Incorporation dated January 30, 2015 (filed as Exhibit 3.1 to the company’s Form 8-K datedJanuary 30, 2015). 85Table of ContentsCredit Agreements10.1(a) Term Loan Agreement by and between Harte Hanks, Inc. 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). 10.1(b) Amended and Restated Credit Agreement, dated as of August 8, 2013, between Harte Hanks, Inc., each lender from time totime party thereto, and Bank of America, N. A., as administrative agent (filed as Exhibit 10.1 to the company’s Form 8-K, datedAugust 12, 2013). 10.1(c) First Amendment to Term Loan Agreement dated as of August 12, 2010 between Harte Hanks, Inc., and Wells Fargo Bank, N.A., as Administrative Agent (filed as Exhibit 10.2 to the company’s Form 8-K, dated August 12, 2010). 10.1(d) Term Loan Agreement dated as of August 16, 2011 between Harte Hanks, Inc., each lender from time to time party thereto,and Bank of America, N. A., as administrative agent (filed as Exhibit 10.1 to the company’s Form 8-K, dated August 16, 2011). 10.1(e) First Amendment to Revolving Credit Agreement dated as of August 16, 2011 Between Harte Hanks, Inc., each lender fromtime to time party thereto, and Bank of America, N. A., as administrative agent (filed as Exhibit 10.2 to the company’s Form 8-K, dated August 16, 2011).   10.1(f) Second Amendment to Term Loan Agreement dated as of August 16, 2011 Between Harte Hanks, Inc., each lender from timeto time party thereto and Wells Fargo Bank, N.A., as administrative agent (filed as Exhibit 10.3 to the company’s Form 8-K,dated August 16, 2011). 10.1(g) First Amendment to Term Loan Agreement, dated as of August 8, 2013, between Harte Hanks, Inc., each SubsidiaryGuarantor (as defined in the Existing Term Loan Agreement), each lender from time to time party thereto, and Bank ofAmerica, N.A., as administrative agent (filed as Exhibit 10.2 to the company’s Form 8-K, dated August 12, 2013).   10.1(f) Term Loan Agreement by and between Harte Hanks, Inc. and Wells Fargo Bank, as administrative agent, date March 10, 2016(filed as Exhibit 10.1 to the company's Form 8-K dated March 11, 2016).86Table of ContentsManagement and Director Compensatory Plans and Forms of Award Agreements10.2(a) Harte Hanks, Inc. Restoration Pension Plan (As Amended and Restated Effective January 1, 2008) (filed as Exhibit 10.1 to thecompany’s Form 8-K dated June 27, 2008). 10.2(b) Harte Hanks, Inc. Deferred Compensation Plan (As Amended and Restated Effective January 1, 2008) (filed as Exhibit 10.3 tothe company’s Form 10-K dated June 27, 2008). 10.2(c) Harte Hanks, Inc. 2005 Omnibus Incentive Plan (As Amended and Restated Effective February 13, 2009) (filed as Exhibit 10.1to the company’s Form 8-K dated February 13, 2009). 10.2(d) Amendment to Harte Hanks, Inc. 2005 Omnibus Incentive Plan, dated as of May 12, 2009 (incorporated by reference toExhibit 4.4 to Harte Hanks Registration Statement on Form S-8, filed on May 12, 2009). 10.2(e) Form of 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement (filed as Exhibit 10.2(i) to the company’sForm 10-K dated March 7, 2012).   10.2(f) Form of 2005 Omnibus Incentive Plan Bonus Stock Agreement (filed as Exhibit 10.2(j) to the company’s Form 10-K datedMarch 7, 2012). 10.2(g) Form of 2005 Omnibus Incentive Plan Restricted Stock Award Agreement (filed as Exhibit 10.2(k) to the company’s Form 10-Kdated March 7, 2012). 10.2(h) Form of 2005 Omnibus Incentive Plan Performance Unit Award Agreement (filed as Exhibit 10.2(l) to the company’s Form 10-K dated March 7, 2012). 10.2(i) Summary of Non-Employee Directors’ Compensation (included within the company’s Schedule of 14A proxy statement filedApril 15, 2013). 10.2(j) Harte Hanks, Inc. 2013 Omnibus Incentive Plan (filed as Annex A to the company’s Schedule 14A proxy statement filedApril 15, 2013). 10.2(k) Form of 2013 Omnibus Incentive Plan Non-Qualified Stock Option Agreement (filed as Exhibit 10.4 to the company’sRegistration Statement on Form S-8 dated June 7, 2013).   10.2(l) Form of 2013 Omnibus Incentive Plan Restricted Stock Award Agreement (General) (filed as Exhibit 10.1 to the company’sRegistration Statement on Form S-8 dated June 7, 2013). 10.2(m) Form of 2013 Omnibus Incentive Plan Restricted Stock Award Agreement (Director) (filed as Exhibit 10.2 to the company’sRegistration Statement on Form S-8 dated June 7, 2013).   10.2(n) Form of 2013 Omnibus Incentive Plan Performance Unit Award Agreement (filed as Exhibit 10.3 to the company’s RegistrationStatement on Form S-8 dated June 7, 2013). 10.2(o) Form of Non-Qualified Stock Option Agreement between the company and Robert A. Philpott (filed as Exhibit 10.2 to thecompany’s 8-K dated June 11, 2013).   10.2(p) Form of Restricted Stock Award Agreement between the company and Robert A. Philpott (filed as Exhibit 10.3 to thecompany’s 8-K dated June 11, 2013). 10.2(q) Form of Performance Unit Award Agreement between the company and Robert A. Philpott (filed as Exhibit 10.4 to thecompany’s 8-K dated June 11, 2013).   10.2(r) Form of Non-Qualified Stock Option Agreement between the company and Karen A. Puckett (filed as Exhibit 10.2 to thecompany's 8-K dated September 14, 2015).   10.2(s) Form of Restricted Stock Award Agreement between the company and Karen A. Puckett (filed as Exhibit 10.3 to thecompany's 8-K dated September 14, 2015).   10.2(t) Form of Performance Unit Award Agreement between the company and Karen A. Puckett (filed as Exhibit 10.4 to thecompany's 8-K dated September 14, 2015). 87Table of ContentsExecutive Officer Employment-Related and Separation Agreements10.3(a) Form of Change of Control Severance Agreement between the company and its Corporate Officers (filed as Exhibit 10.1 to thecompany’s Form 8-K, dated March 19, 2015). 10.3(b) Form of Employment Restrictions Agreement signed by the Corporate Officers of the company (filed as Exhibit 10.3 to thecompany’s Form 8-K dated March 15, 2011). 10.3 (c) Transition and Consulting Agreement, dated as of July 25, 2011, Between the company and Peter E. Gorman (filed asExhibit 10.1 to the Company’s Form 8-K dated July 26, 2011). 10.3 (d) Transition Agreement dated July 30, 2012 between the company and Gary J. Skidmore (filed as Exhibit 10.2 to the company’s8-K dated August 2, 2012) 10.3 (e) Form of Indemnification Agreement for Directors and Officers (filed as Exhibit 10.1 to the company’s 8-K dated August 2, 2012) 10.3 (f) Retirement & Consulting Agreement between the company and Larry D. Franklin dated June 7, 2013 (filed as Exhibit 10.5 tothe company’s 8-K dated June 11, 2013). 10.3 (g) Employment Agreement between the company and Robert A. Philpott dated June 8, 2013 (filed as Exhibit 10.1 to thecompany’s 8-K dated June 11, 2013). 10.3 (h) Form of Severance Agreement between the company and certain of its officers (filed as Exhibit 10.6 to the company’s 8-Kdated June 11, 2013). 10.3(i) Executive Severance Policy applicable to the company’s executive officers and certain others (filed as Exhibit 10.1 to thecompany’s Form 8-K, dated January 30, 2015).   10.3(j) Retention Bonus Agreement applicable to the company's executive officers (filed as Exhibit 10.1 to the company's Form 8-K,dated July 9, 2015).   10.3(k) Employment Agreement between the company and Karen A. Puckett dated September 13, 2015 (filed as Exhibit 10.1 to thecompany's Form 8-K, dated September 14, 2015).Other Exhibits*21 Subsidiaries of Harte Hanks, Inc. *23 Consent of KPMG LLP, Independent Registered Public Accounting Firm. *31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1 Furnished Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002. *32.2 Furnished Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002. *101 XBRL Interactive Data Files.  *Filed or furnished herewith, as applicable88Subsidiaries of Harte Hanks, Inc.As of December 31, 2015Name of Entity Jurisdiction ofOrganization % Owned3Q Digital, Inc. Delaware 100%Harte-Hanks Belgium N.V. Belgium 100% (1)Harte-Hanks Data Services LLC Maryland 100%Harte-Hanks Direct, Inc. New York 100% (9)Harte-Hanks Direct Marketing/Baltimore, Inc. Maryland 100%Harte-Hanks Direct Marketing/Cincinnati, Inc. Ohio 100%Harte-Hanks Direct Marketing/Dallas, Inc. Delaware 100%Harte-Hanks Direct Marketing/Fullerton, Inc. California 100%Harte-Hanks Direct Marketing/Jacksonville, LLC Delaware 100% (7)Harte-Hanks Direct Marketing/Kansas City, LLC Delaware 100% (6)Harte-Hanks do Brazil Consultoria e Servicos Ltda. Brazil 100% (4)Harte Hanks Europe B.V. Netherlands 100%Harte-Hanks Florida, Inc. Delaware 100%Harte-Hanks GmbH Germany 100% (3)Harte Hanks Logistics, LLC Florida 100% (7)Harte-Hanks Market Intelligence Espana LLC Colorado 100%Harte-Hanks Philippines, Inc. Philippines 100%Harte-Hanks Print, Inc. New Jersey 100%Harte-Hanks Pty. Limited Australia 100% (2)Harte-Hanks Response Management/Austin, Inc. Delaware 100%Harte-Hanks Response Management/Boston, Inc. Massachusetts 100%Harte-Hanks Shoppers, Inc. California 100%Harte-Hanks SRL Romania 100% (8)Harte-Hanks Strategic Marketing, Inc. Delaware 100% (2)Harte-Hanks STS, Inc. Delaware 100%Harte-Hanks Teleservices, LLC Delaware 100% (5)Harte-Hanks Trillium Software Germany GmbH Germany 100% (10)Harte Hanks Trillium UK Limited United Kingdom 100% (8)Harte Hanks UK Limited United Kingdom 100% (2)HHMIX SAS France 100% (3)NSO, Inc. Ohio 100%Sales Support Services, Inc. New Jersey 100%Southern Comprint Co. California 100%Trillium Software, Inc. Delaware 100%(1) 99.84% Owned by Harte Hanks, Inc. 0.16% Owned by Harte-Hanks Direct, Inc.(2) Owned by Trillium Software, Inc.(3) Owned by Harte Hanks Europe B.V.(4) 99.999% Owned by Trillium Software, Inc. .001% Owned by Harte Hanks, Inc.(5) Owned by Harte-Hanks Direct, Inc.(6) Owned by Sales Support Services, Inc.(7) Owned by Harte-Hanks Florida, Inc.(8) Owned by Harte Hanks UK Limited(9) Owned by Harte-Hanks Print, Inc.(10) Owned by Harte-Hanks GmbHConsent of Independent Registered Public Accounting FirmThe Board of DirectorsHarte Hanks, Inc.:We consent to the incorporation by reference in the registration statements (Nos. 033-54303, 333-03045, 333-30995, 333-63105, 333-41370, 333-90022, 333-127993, 333-159151, and 333-189162) on Form S-8 of Harte Hanks, Inc. of our report dated March 14, 2016 with respect to theconsolidated balance sheets of Harte Hanks, Inc. and subsidiaries as of December 31, 2015 and 2014 , and the related consolidated statements ofcomprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2015 , and theeffectiveness of internal control over financial reporting as of December 31, 2015 , which report appears in the December 31, 2015 annual report onForm 10-K of Harte Hanks, Inc.Our report dated March 14, 2016 on the consolidated financial statements refers to a change in accounting for deferred income taxes./s/ KPMG LLPSan Antonio, TexasMarch 14, 2016Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Karen A. Puckett, 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 tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects 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 (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby 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 underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements 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 aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’sfourth fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control overfinancial 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 arereasonably 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’sinternal control over financial reporting.March 14, 2016 /s/ Karen A. PuckettDate Karen A. Puckett President and Chief Executive OfficerExhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Douglas C. 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 tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects 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 (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby 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 underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements 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 aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’sfourth fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control overfinancial 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 arereasonably 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’sinternal control over financial reporting. March 14, 2016 /s/ Douglas C. ShepardDate Douglas C. Shepard Executive Vice President and Chief Financial OfficerExhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTEDPURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Karen A. Puckett, President and Chief Executive Officer of Harte Hanks, Inc. (the “Company”), hereby certify that the accompanying report onForm 10-K for the year ended December 31, 2015 and filed with the Securities and Exchange Commission on the date hereof pursuant toSection 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Report”) by the Company fully complies with the requirements of thosesections. I further certify that, based on my knowledge, the information contained in the Report fairly presents, in all material respects, the financial conditionand results of operations of the Company. March 14, 2016 /s/ Karen A. PuckettDate Karen A. Puckett 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 extentrequired 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.Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTEDPURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Douglas C. Shepard, Executive Vice President and Chief Financial Officer of Harte Hanks, Inc. (the “Company”), hereby certify that theaccompanying report on Form 10-K for the year ended December 31, 2015 and filed with the Securities and Exchange Commission on the datehereof pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Report”) by the Company fully complies with therequirements 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 conditionand results of operations of the Company. March 14, 2016 /s/ Douglas C. ShepardDate Douglas C. 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 extentrequired 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.

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