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Article by DailyStocks_admin    (02-16-09 07:56 AM)

HarteHanks Inc. CEO FRANKLIN LARRY bought 100000 shares on 2-10-2009 at $6.1

BUSINESS OVERVIEW

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

Marketing today is under intense focus in many organizations. Many corporations have a chief-level executive charged with marketing who is under pressure to utilize a combination of data, technology, channels and resources to demonstrate a return on marketing investment. This has led many to use direct and targeted marketing, as accountability and measurability are hallmarks of the discipline, allowing customer insight to be leveraged to create and accelerate value. Direct Marketing, which represented 63% of our total revenues in 2007, is a leader in the movement toward highly targeted marketing. Our Shoppers business applies geographic targeting principles. Our strategy is based on six key elements:

-Being a market leader in each of our businesses;
-Increasing revenues through growing our base businesses;
-Introducing new services, products and innovations;
-Entering new markets and making acquisitions;
-Using technology to create competitive advantages; and
-Employing people who understand our clients’ businesses and markets;

Harte-Hanks is the successor to a newspaper business begun in Texas in the early 1920s by Houston Harte and Bernard Hanks. In 1972, Harte-Hanks went public and was listed on the New York Stock Exchange (NYSE). We became private in a leveraged buyout initiated by management in 1984. In 1993, we again went public and listed our common stock on the NYSE. In 1997, we sold all of our remaining traditional media operations (consisting of newspapers, television and radio companies) in order to focus all of our efforts on two business segments—Direct Marketing and Shoppers. See segment financial information in Note O “Business Segments” in the Notes to Consolidated Financial Statements.

Harte-Hanks provides public access to all reports filed with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (the 1934 Act). These documents may be accessed free of charge on our website at the following address: http://www.harte-hanks.com . Since November 15, 2002, these documents have been provided as soon as practical after they are filed with the SEC. The documents may also be found at the SEC’s website at http://www.sec.gov . Additionally, we have adopted and posted on our website a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer. Our website also includes our corporate governance guidelines and the charters for each of our audit, compensation, and nominating and corporate governance committees. We will provide a printed copy of any of the aforementioned documents to any requesting stockholder.

DIRECT MARKETING

General

Direct marketing services are targeted to specific industries or markets with services and software products tailored to each industry or market. Our Direct Marketing clients include many of the largest retailers; financial companies including banks, financing companies, mutual funds and insurance companies; high-tech and telecommunications companies; and pharmaceutical companies and healthcare organizations. Direct Marketing

clients are also from such selected markets as automotive, consumer packaged goods, government/not-for-profit , business services, energy, publishing, travel/hospitality and utilities. We believe that we generally have the ability to provide services to new industries and markets by modifying our services and applications as opportunities are presented. In 2007, 2006 and 2005, Harte-Hanks Direct Marketing had revenues of $732.5 million, $709.7 million, and $694.6 million, respectively, which accounted for approximately 63%, 60%, and 61% of our total revenues, respectively.

Depending on the needs of our clients, our Direct Marketing capabilities are provided in an integrated approach through more than 30 facilities worldwide, more than 10 of which are located outside of the United States. Each of these centers possesses some specialization and is linked with others to support the needs of our clients.

We use various capabilities and technologies to enable our clients to identify, reach, influence and nurture their customers. Harte-Hanks Direct Marketing improves the return on its clients’ marketing investment by increasing their prospect and customer value through solutions and services organized around five groupings of integrated activities:


•

Information (data collection/management);


•

Opportunity (data access/utilization);


•

Insight (data analysis/interpretation);


•

Engagement (program and campaign creation and development); and


•

Interaction (program execution).

Harte-Hanks Direct Marketing uses various capabilities and technologies as enablers to capture, analyze and disseminate customer and prospect data across all points of customer contact. Using both proprietary software and open software solutions, we build contact databases for our clients using the information gained from the client’s marketing and communication activities across different media such as mail, websites, e-mail, inbound and outbound teleservices, trade shows, point-of-sale and other sources. We believe that these databases enable clients to measure the return on their marketing communications investments and make more informed decisions about future marketing efforts. We help clients manage the inquiries they receive from a myriad of sources related to their marketing efforts. These inquiries, or leads, are qualified, tracked and distributed both to appropriate sales channels and to client management for analysis, decision-making and/or additional interaction in order for clients to manage their customer and prospect relationships more effectively. These leads are also developed for business-to-business clients through our CI Technology Database and through research efforts of our Aberdeen business.

Our Direct Marketing activities often start with the development of a roadmap, followed by building customized marketing databases for specific clients and providing them with easy-to-use tools to perform analysis and to target their best customers and prospects. Using our proprietary name and address matching software, the Trillium Software System ® , we investigate and standardize large numbers of customer records from multiple sources, integrate them into a single database for each client and, if needed, append demographic and lifestyle information.

Our Allink ® databases are built for clients and tailored to specific market segments. These databases are moved to the client’s site or maintained at Harte-Hanks with online access from client locations. In addition to building a client’s database and providing solutions for analytics and campaign management, we perform regular database updates.

These solutions are linked to our service bureau. Our service bureau services include preparing list selections, maximizing deliverability and reducing clients’ mailing costs through our Advanced Data Quality services, including Trillium Software and Global Address capabilities in addition to sophisticated postal coding, hygiene and address updates through a non-exclusive National Change of Address license with the U.S. Postal Service.

As a further extension of the client’s marketing arm, we provide customer insight by using marketing research and analytics services. Specific capabilities include tracking and reporting, media analysis, modeling, database profiling, primary data collection, marketing applications, consulting and program development.

We engage with our client’s customers by offering direct marketing agency services that combine information-based strategy and brand-building creative efforts that are channel independent, using both traditional direct and interactive media.

In addition, Harte-Hanks provides a variety of services to help clients develop and execute targeted marketing communication programs. These include services such as telephone, email using our proprietary Postfuture ® offering, website development and search marketing, personalization of communication pieces using laser and inkjet printing, targeted mail and fulfillment, transportation logistics, and print-on-demand as well as traditional printing.

Our mail tracking capability and long-standing relationship with the U.S. Postal Service assist our customer’s mailings to reach their destinations on time. By controlling the final stage of the print distribution process through its logistics operations, we facilitate the delivery of our clients’ materials while also managing costs.

Customers

Direct marketing services are marketed to specific industries or markets with services and software products tailored to each industry or market. We believe that we are generally able to provide services to new industries and markets by modifying our existing services and applications. We currently provide direct marketing services to the retail, high-tech/telecom, financial services and pharmaceutical/healthcare vertical markets, in addition to a range of selected markets. Our Direct Marketing business is not overly dependent on any one client or any group of clients. The largest client, measured in revenue, comprised 8% of total Direct Marketing revenues in 2007 and 5% of our total revenues in 2007. The largest 25 clients, measured in revenue, comprised 41% of total Direct Marketing revenues in 2007 and 26% of our total revenues in 2007.

Sales and Marketing

Our national direct marketing sales force is headquartered in Cincinnati, Ohio, with additional offices maintained throughout the United States. There are also product specific sales forces and sales groups in Europe, Australia, South America and Asia. The sales forces, with industry-specific knowledge and experience, emphasize the cross-selling of a full range of direct marketing services and are supported by employees in each sector. The overall sales focus is to position Harte-Hanks as a marketing partner offering various services and solutions (including end-to-end) as required to meet our client’s targeted marketing needs.

Direct Marketing Facilities

Direct marketing services are provided at the following facilities:




National Offices
Shawnee, Kansas

Austin, Texas
Texarkana, Texas

Baltimore, Maryland
Troy, Michigan

Billerica, Massachusetts
Wilkes-Barre, Pennsylvania

Bloomfield, Connecticut
Yardley, Pennsylvania

Boston, Massachusetts


Cincinnati, Ohio
National Markets Headquarters

Clearwater, Florida
Cincinnati, Ohio

Deerfield Beach, Florida


East Bridgewater, Massachusetts
International Offices

Fort Worth, Texas
Aldermaston, United Kingdom

Fullerton, California
Böblingen, Germany

Glen Burnie, Maryland
Bristol, United Kingdom

Grand Prairie, Texas
Frenchs Forest (Sydney), Australia

Jacksonville, Florida
Hasselt, Belgium

Lake Mary, Florida
Iasi, Romania

Langhorne, Pennsylvania
Les Ulis, France

Monroe Township, New Jersey
Madrid, Spain

New York, New York
Manila, Philippines

Ontario, California
Melbourne, Australia

Pennsauken, New Jersey
SĂŁo Paulo, Brazil

Richardson, Texas
Uxbridge, United Kingdom

San Diego, California


For more information please refer to Item 2 - Properties.

Competition

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

Seasonality

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

SHOPPERS

General

Harte-Hanks Shoppers is North America’s largest owner, operator and distributor of shopper publications, based on weekly circulation and revenues. Shoppers are weekly advertising publications delivered free by Standard Mail to households and businesses in a particular geographic area. Shoppers offer advertisers a targeted, cost-effective local advertising system, with virtually 100% penetration in their area of distribution. Shoppers are particularly effective in large markets with high media fragmentation in which major metropolitan newspapers generally have low penetration.

As of December 31, 2007, Shoppers delivered approximately 13 million shopper packages in five major markets each week covering the greater Los Angeles market (Los Angeles County, Orange County, Riverside County, San Bernardino County, Ventura County and Kern County), the greater San Diego market, Northern California (San Jose, Sacramento, Stockton and Modesto), South Florida (Dade County and Broward County) and the greater Tampa market. Two editions of the shopper publication are delivered to approximately 239,000 households and businesses in South Orange County where both an “early” and “late” edition PennySaverUSA.com are published each week. Our California publications account for approximately 80% of Shoppers’ weekly circulation.

Harte-Hanks publishes 1,077 individual shopper editions each week distributed to zones with circulation of approximately 12,000 each. This allows single-location, local advertisers to saturate a single geographic zone, while enabling multiple-location advertisers to saturate multiple zones. This unique delivery system gives large and small advertisers alike a cost-effective way to reach their target markets. We believe that our zoning capabilities and production technologies have enabled us to saturate and target areas in a number of ways including geographic, demographic, lifestyle, behavioral and language allowing our advertisers to effectively target their customers. Our strategy is to increase our share of local advertising in our existing circulation areas, and, over time, to increase circulation through internal expansion into contiguous areas. In 2007, 2006, and 2005, Harte-Hanks Shoppers had revenues of $430.4 million, $475.0 million, and $440.4 million, respectively, accounting for approximately 37%, 40%, and 39% of our total revenues, respectively.


CEO BACKGROUND

The current number of members of the Board of Directors is ten (10). The Board of Directors is divided into three classes, each of which serves for a three-year term. One class of directors is elected each year. The term of the Company’s three Class II directors will expire at the Annual Meeting. The Class II directors elected in 2004 will serve for a term of three years, which expires at the Annual Meeting of Stockholders in 2007 or when their successors are elected and qualified. The election of directors will be decided by a plurality of the votes cast.



The nominees for Class II directors are Larry Franklin, William F. Farley and William K. Gayden. James L. Johnson will not stand for re-election. The Board may fill this vacancy at a later date after selecting an appropriate nominee. Each nominee is a member of the present Board of Directors. The Board believes that each nominee will be available and able to serve as a director. If a nominee is unable to serve, the shares represented by all valid proxies will be voted for the election of such substitute as the Board may recommend, or the Board may reduce the number of directors to eliminate the vacancy consistent with the requirement to maintain nearly equal classes, or the Board may fill the vacancy at a later date after selecting an appropriate nominee.



Information with respect to the nominees is set forth in the section of this Proxy Statement entitled “Management — Directors and Executive Officers.”



THE BOARD OF DIRECTORS URGES STOCKHOLDERS TO VOTE “FOR”

EACH OF THE NOMINEES FOR DIRECTOR SET FORTH ABOVE.



MANAGEMENT DISCUSSION FROM LATEST 10K

The current number of members of the Board of Directors is ten (10). The Board of Directors is divided into three classes, each of which serves for a three-year term. One class of directors is elected each year. The term of the Company’s three Class II directors will expire at the Annual Meeting. The Class II directors elected in 2004 will serve for a term of three years, which expires at the Annual Meeting of Stockholders in 2007 or when their successors are elected and qualified. The election of directors will be decided by a plurality of the votes cast.



The nominees for Class II directors are Larry Franklin, William F. Farley and William K. Gayden. James L. Johnson will not stand for re-election. The Board may fill this vacancy at a later date after selecting an appropriate nominee. Each nominee is a member of the present Board of Directors. The Board believes that each nominee will be available and able to serve as a director. If a nominee is unable to serve, the shares represented by all valid proxies will be voted for the election of such substitute as the Board may recommend, or the Board may reduce the number of directors to eliminate the vacancy consistent with the requirement to maintain nearly equal classes, or the Board may fill the vacancy at a later date after selecting an appropriate nominee.



Information with respect to the nominees is set forth in the section of this Proxy Statement entitled “Management — Directors and Executive Officers.”



THE BOARD OF DIRECTORS URGES STOCKHOLDERS TO VOTE “FOR”

EACH OF THE NOMINEES FOR DIRECTOR SET FORTH ABOVE.

•

Events management including registration and promotion;


•

Website design, management and hosting services;


•

Loyalty program management;


•

Sales lead management;


•

Web-based database marketing;


•

Technology databases;


•

Creative services;


•

Traditional and interactive media planning, placement and buying;


•

Fulfillment and distribution;


•

Graphics and printing solutions;


•

Inbound and outbound telemarketing including telesales and order processing;


•

Lettershop services including laser personalization;


•

Logistics; and


•

Email marketing.

Harte-Hanks Shoppers is North America’s largest owner, operator and distributor of shopper publications, based on weekly circulation and revenues. Shoppers are weekly advertising publications delivered free by Standard Mail to households and businesses in a particular geographic area. Shoppers offer advertisers a targeted, cost-effective local advertising system, with virtually 100% penetration in their area of distribution. Shoppers are particularly effective in large markets with high media fragmentation in which major metropolitan newspapers generally have low penetration. Our Shoppers segment also provides advertising and other services online through our websites, ThePennySaverUSA.com and TheFlyer.com . PennySaverUSA.com displays the ads published in the print versions of the PennySaverUSA.com (California) and TheFlyer.com (Florida) publications, and is a leader in the aggregation of online classified ads from free community papers and shoppers across the country. In 2007, our Shoppers segment had revenues of $430.4 million, which represented 37% of our total revenue.

As of December 31, 2007, our Shoppers are zoned into 1,077 separate editions with total circulation of approximately 13 million in California and Florida each week. As a result of the difficult economic environment in California, we shut down approximately 600,000 of unprofitable circulation at the end of June 2007. This consisted of approximately 380,000 of circulation in the greater Los Angeles market and approximately 220,000 of circulation in the Northern California market. We will continue to evaluate all of our circulation performance, but do not currently anticipate further circulation reductions of this magnitude in the near future. Despite this recent circulation reduction, we continue to believe that future expansions may provide increased revenue opportunities in the long term.

We derive revenues from the sale of direct marketing services and shopper advertising services. As a worldwide business, direct marketing is affected by general national and international economic trends. Our Shoppers operate in regional markets in California and Florida and are largely affected by the strength of the local economies.

Our overall strategy is based on six key elements:


•

Being a market leader in each of our businesses;


•

Increasing revenues through growing our base businesses;


•

Introducing new services and products;


•

Entering new markets and making acquisitions;


•

Using technology to create competitive advantages; and


•

Employing people who understand our clients’ business and markets.

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

Year ended December 31, 2007 vs. Year ended December 31, 2006

Revenues

Consolidated revenues decreased 1.8%, to $1,162.9 million, in 2007 when compared to 2006. Our overall results reflect decreased revenues of 9.4% from our Shoppers segment, partially offset by increased revenues of 3.2% from our Direct Marketing segment. The revenue performance from Shoppers was the result of decreased sales in established markets, primarily attributable to the challenging economic environments in the California and Florida geographies in which we operate, circulation reductions, and the discontinuation of commercial printing operations in our Tampa facility. Direct Marketing comparisons were affected by $7.0 million of revenue recognized in the second quarter of 2006 relating to a contract termination fee received from one of our customers in the financial vertical. Excluding revenues from this contract termination, Direct Marketing’s revenues in 2007 were up $29.7 million, or 4.2%, and consolidated revenues would have been down 1.3% compared to 2006.

Operating Expenses

Overall operating expenses decreased 0.1%, to $998.0 million, in 2007 compared to 2006. This year-over-year change includes $8.4 million of restructuring and transition costs, including compensation costs recognized during the third quarter of 2007 associated with the announced retirement of our former President and Chief Executive Officer, severance in both businesses and approximately $1.0 million recognized in our Shoppers segment in the second quarter of 2007 related to the shut down of approximately 600,000 of unprofitable circulation at the end of June 2007. The remaining overall decrease in operating expenses was driven by decreased production and labor costs in Shoppers, attributable to the decline in Shoppers revenues. Direct Marketing operating expenses increased $23.4 million, or 3.9%, and general corporate expense increased $2.4 million or 19.9%, while Shoppers operating expenses decreased $26.5 million or 6.9%. Direct Marketing’s results were impacted by $2.4 million of operating expense recognized in the second quarter of 2006 as a result of the contract termination discussed above.

Net Income/Earnings Per Share

Net income decreased 17.1%, to $92.6 million, while diluted earnings per share were down 9.4%, to $1.26 per share, in 2007 when compared to 2006. The decrease in net income was a result of decreased operating income, increased interest expense, and a higher effective tax rate in 2007 when compared to 2006.

On a consolidated basis, we incurred $8.4 million of expenses in 2007 related to actions designed to improve short-term performance and better position us for longer-term growth in revenue and profits. In Direct Marketing, actions were aimed at flattening our organizational structure to improve efficiency and bring our sales, marketing and operations closer to our customers. In Shoppers, in addition to the circulation shut down, actions were taken to reduce fixed costs and headcount, and included streamlining our structure from six operating units into three operating units: the California PennySaver unit, the Florida Flyer unit and the Shopper digital unit. For the full year 2007, these costs exceeded the overall benefit we experienced as a result of these initiatives.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Cautionary Note Regarding 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 this cautionary note, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may also be included in our other public filings, press releases, our website and oral and written presentations by management. Statements other than historical facts are forward-looking and may be identified by words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “seeks,”

“could,” “intends,” or words of similar meaning. Examples include statements regarding (1) our strategies and initiatives, (2) our financial outlook, (3) planned adjustments to our cost structure and other actions designed to respond to market conditions and improve our performance, (4) expectations for our businesses and for the industries in which we operate, including with regard to the negative performance trends in our Shoppers business, (5) competitive factors, (6) acquisition and development plans, (7) our stock repurchase program, (8) expectations regarding legal proceedings and other contingent liabilities, and (9) other statements regarding future events, conditions or outcomes. These forward-looking statements are based on current information, expectations and estimates and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to vary materially from what is expressed in or indicated by the forward-looking statements. In that event, our business, financial condition, results of operations or liquidity could be materially adversely affected and investors in our securities could lose part or all of their investments. Some of these risks, uncertainties, assumptions and other factors can be found in our filings with the Securities and Exchange Commission, including the factors discussed under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007 (2007 Form 10-K) and any updates thereto in our Forms 10-Q. The forward-looking statements included in this report and those included in our other public filings, press releases, our website and oral and written presentations by management are made only as of the respective dates thereof, and we undertake no obligation to update publicly any forward-looking statement in this report or in other documents, our website or oral statements for any reason, even if new information becomes available or other events occur in the future.

Overview

The following MD&A section is intended to help the reader understand the results of operations and financial condition of Harte-Hanks, Inc. (Harte-Hanks). This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements contained elsewhere in this report and our MD&A section, financial statements and accompanying notes to financial statements in our 2007 Form 10-K. Our 2007 Form 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates, and contractual obligations.

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

Direct Marketing services are targeted to specific industries or markets with services and software products tailored to each industry or market. Currently, our Direct Marketing business services various vertical markets including retail, high-tech/telecom, financial services, pharmaceutical/healthcare , and a wide range of selected markets. We believe that we are generally able to provide services to new industries and markets by modifying our services and applications as opportunities are presented. Depending on the needs of our clients, our Direct Marketing capabilities are provided in an integrated approach through more than 30 facilities worldwide, more than 10 of which are located outside of the United States. Each of these centers possesses some specialization and is linked with others to support the needs of our clients.

We use various capabilities and technologies to enable our Direct Marketing clients to identify, reach, influence and nurture their customers. Our Direct Marketing business improves the return on our clients’ marketing investment by increasing their prospect and customer value through solutions and services organized around five groupings of integrated activities:


•

Information (data collection/management);


•

Opportunity (data access/utilization);

•

Insight (data analysis/interpretation);


•

Engagement (program and campaign creation and development); and


•

Interaction (program execution).

Revenues from the Direct Marketing segment represented approximately 66% and 67% of our total revenue for the three months and six months ended June 30, 2008, respectively.

Harte-Hanks Shoppers is North America’s largest owner, operator and distributor of shopper publications, with shoppers that are zoned into more than 1,000 separate editions and total circulation of more than 12.5 million each week in California and Florida. Shoppers are weekly advertising publications delivered free by Standard Mail to households and businesses in a particular geographic area. Shoppers offer advertisers a targeted, cost-effective local advertising system, with virtually 100% penetration in their area of distribution. Shoppers are particularly effective in large markets with high media fragmentation in which major metropolitan newspapers generally have low penetration. Our Shoppers segment also provides advertising and other services online through our websites, PennySaverUSA.com and TheFlyer.com . In the first half of 2008, Shoppers continued to integrate its print and online products and formally changed the names of its print publications to PennySaverUSA.com (California) and TheFlyer.com (Florida) . Both PennySaverUSA.com and TheFlyer.com display the ads published in the print versions of both the PennySaverUSA.com and TheFlyer.com publications. Both websites also aggregates online classified ads from free community papers and shoppers across the country. Revenues from the Shoppers segment represented approximately 34% and 33% of our total revenue for the three months and six months ended June 30, 2008.

We derive revenues from the sale of direct marketing services and shopper advertising services. As a worldwide business, Direct Marketing is affected by general national and international economic trends. Our Shoppers operate in regional markets in California and Florida and are largely affected by the strength of the local economies.

Revenues

Consolidated revenues decreased 5.3%, to $274.8 million, and operating income decreased 16.4% to $34.7 million in the second quarter of 2008 compared to the second quarter of 2007. Our overall results reflect decreased revenues of 20.0% from our Shoppers segment, partially offset by increased revenues of 4.4% from our Direct Marketing segment. The revenue performance from Shoppers was the result of decreased sales in established markets, primarily attributable to the difficult economic environment in the California and Florida geographies in which we operate, and circulation reductions that we initiated at the end of June 2007. Direct Marketing results reflect year-over-year double-digit growth in our high tech/telecom and select markets verticals, flat revenues in our retail and financial verticals, and a double-digit revenue decline from our pharma/healthcare vertical.

Operating Expenses

Overall operating expenses decreased 3.4%, to $240.0 million, in the second quarter of 2008 compared to the second quarter of 2007. The overall decrease in operating expenses was driven by decreased operating expenses in Shoppers, attributable to cost cutting measures and the overall decline in Shoppers circulation and insert volumes over the past twelve months. Compared to the second quarter of 2007, Shoppers operating expenses decreased $14.5 million or 15.2%, while Direct Marketing operating expenses increased $6.1 million or 4.1% and general corporate expense decreased $0.2 million or 5.7%. As a result of the continuing weak market conditions, Shoppers workforce was reduced by more than 9% in the first half of 2008.

Net Income/Earnings Per Share

Net income decreased 20.4%, to $18.2 million, and diluted earnings per share decreased 6.5%, to $0.29 per share, in the second quarter of 2008 when compared to the second quarter of 2007. The decrease in net income was a result of decreased operating income from Shoppers and increased interest expense.

First Half 2008 vs. First Half 2007

Revenues

Consolidated revenues decreased 5.2%, to $543.3 million, and operating income decreased 22.1% to $60.6 million in the first half of 2008 when compared to the first half of 2007. Our overall results reflect decreased revenues of 20.0% from our Shoppers segment, partially offset by increased revenues of 4.5% from our Direct Marketing segment. The revenue performance from Shoppers was the result of decreased sales in established markets, primarily attributable to the difficult economic environment in the California and Florida geographies in which we operate, and circulation reductions that we initiated at the end of June 2007. Direct Marketing results reflect year-over-year double-digit growth in our high tech/telecom vertical, mid single-digit growth in our select markets vertical, flat revenues in our retail and financial verticals, and a double-digit revenue decline from our pharma/healthcare vertical.

Operating Expenses

Overall operating expenses decreased 2.6%, to $482.7 million, in the first half of 2008 compared to the first half of 2007. The overall decrease in operating expenses was driven by decreased operating expenses in Shoppers, attributable to cost cutting measures and the overall decline in Shoppers circulation and insert volumes over the past twelve months. Compared to the first half of 2007, Shoppers operating expenses decreased $25.9 million or 13.8%, while Direct Marketing operating expenses increased $13.3 million or 4.4% and general corporate expense decreased $0.1 million or 1.6%. As a result of the continuing weak market conditions, Shoppers workforce was reduced by more than 9% in the first half of 2008.

Net Income/Earnings Per Share

Net income decreased 26.4%, to $31.8 million, and diluted earnings per share decreased 14.0%, to $0.49 per share, in the first half of 2008 when compared to the first half of 2007. The decrease in net income was a result of decreased operating income from Shoppers and increased interest expense, partially offset by a lower effective tax rate in the first half of 2008 when compared to the first half of 2007.

While we continue to believe in the long-term strength and viability of our Shoppers business, the general economic conditions, initially created by weakness in the real estate and associated financing markets in the California and Florida geographies in which we operate remain extremely challenging. In July 2008 we further reduced our Shoppers circulation by approximately 250,000 per week in response to this difficult environment.

2 nd Quarter 2008 vs. 2 nd Quarter 2007

Revenues

Direct Marketing revenues increased $7.7 million, or 4.4%, in the second quarter of 2008 compared to the second quarter of 2007. Our high tech/telecom and select markets verticals had strong year-over-year double-digit revenue growth in the quarter. Our retail and financial verticals were essentially flat compared to the second quarter of 2007. Our pharma/healthcare vertical recorded a double-digit revenue decline compared to the prior year quarter. 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. Revenues for Direct Marketing are affected by a number of factors, including general national and international economic trends.

The acquisition of Mason Zimbler in January 2008 also positively affected our revenues in the second quarter of 2008 compared to the second quarter of 2007.

Future revenues will depend on, among other factors, how successful we are at growing business with existing clients, acquiring new clients, meeting client demands, and the strength of the national and international economies. We believe that in the long-term we will benefit from marketing and advertising expenditures being moved from other advertising media to the targeted media space, the results of which can be more effectively tracked, enabling measurement of the return on marketing investment. Standard postage rates increased in each of the last two calendar years and increased again in May of 2008. Postage rates influence the demand for our Direct Marketing services even though the cost of mailings is borne by our clients and is not directly reflected in our revenues or expenses. While we do not expect the postal rate increases to have a significant impact on our Direct Marketing business, there is no assurance that future postal increases will not have an adverse impact on us.

Operating Expenses

Operating expenses increased $6.1 million, or 4.1%, in the second quarter of 2008 compared to the second quarter of 2007. The acquisition of Mason Zimbler in January 2008 contributed to this increase. Labor costs increased $2.8 million, or 3.5%, due to higher severance, increased incentive compensation expense, increased medical costs and annual salary increases. Production and distribution costs increased $4.1 million, or 8.1%, due to higher logistics-related transportation costs and outsourced costs. General and administrative expense decreased $0.7 million, or 4.9%, due primarily to decreased travel, recruiting, training, and workers’ compensation expense. Depreciation and amortization expense was essentially flat compared to the prior year quarter.

Direct Marketing’s largest cost components are labor, outsourced costs and transportation costs. Each of these costs is somewhat variable and tends to fluctuate with revenues and the demand for our direct marketing services.

First Half 2008 vs. First Half 2007

Revenues

Direct Marketing revenues increased $15.7 million, or 4.5%, in the first half of 2008 compared to the first half of 2007. Our high tech/telecom vertical had strong year-over-year double-digit revenue growth, while our select markets vertical grew in the mid single-digits. Our retail and financial services verticals were essentially flat over the prior year. Our pharma/healthcare vertical recorded a double-digit revenue decline compared to the prior year.

The acquisition of Mason Zimbler in January 2008 also positively affected our revenues in the first half of 2008 compared to the first half of 2007.

Operating Expenses

Operating expenses increased $13.3 million, or 4.4%, in the first half of 2008 compared to the first half of 2007. The acquisition of Mason Zimbler in January 2008 contributed to this increase. Labor costs increased $6.3 million, or 4.0%, in the first half of 2008 compared to the first half of 2007 due to increased severance, increased incentive compensation expense, increased medical costs and annual salary increases. Production and distribution costs increased $7.4 million, or 7.3%, due to higher logistics-related transportation costs and outsourced costs. General and administrative expense decreased $0.1 million, or 0.3%, due primarily to decreased travel, recruiting, training, and bad debt expense due to timing, partially offset by increased outside sales commissions and royalties. Depreciation and amortization expense decreased $0.4 million, or 2.5%, due to intangible assets becoming fully amortized during 2007.

Revenues

Shoppers revenues decreased $23.1 million, or 20.0%, in the second quarter of 2008 compared to the second quarter of 2007. These results reflect the continued impact that the difficult economic environments in California and Florida are having on our Shoppers business. The decrease in revenues was the result of decreased sales in established markets, including declines in virtually every revenue category, and circulation reductions of approximately 600,000 that we initiated in 2007. This unprofitable circulation, which was shut down at the end of June 2007, represented approximately $1.5 million of revenue in the second quarter of 2007. At June 30, 2008 our Shoppers circulation reached approximately 13 million in California and Florida each week. In early July 2008 we further reduced our circulation by approximately 250,000, to approximately 12.8 million per week. This reduction was primarily in California and was concentrated in unprofitable areas. We continue to evaluate all of our circulation performance and at this time we do not anticipate further significant circulation reductions in the near future. Despite the recent circulation reduction and current economic conditions in California and Florida, we continue to believe that future expansions may provide increased revenue opportunities in the long term.

Operating Expenses

Operating expenses decreased $14.5 million, or 15.2%, in the second quarter of 2008 compared to the second quarter of 2007. Total labor costs decreased $5.2 million, or 15.6%. As a result of the continuing weak market conditions, we reduced our Shoppers workforce by more than 9% in the first half of 2008. Total production costs decreased $6.2 million, or 12.3%, due primarily to decreased paper costs resulting from circulation reductions, a decline in ad placements and lower newsprint rates, decreased postage costs due to a decline in distribution revenues and circulation reductions, and decreased offload printing costs due to decreased print-and-deliver volumes. Total general and administrative costs decreased $3.1 million, or 31.8%, due primarily to lower promotion-related expense and lower bad debt expense due to timing. Depreciation and amortization expense decreased $0.1 million, or 4.5%, due to decreased capital expenditures in recent periods. We are continuing to look for ways to further reduce our cost base in this business.

Shoppers’ largest cost components are labor, postage and paper. Shoppers’ labor costs are partially variable and tend to fluctuate with the number of zones, circulation, volumes and revenues. Standard postage rates increased in each of the last two calendar years. However, in 2007 we changed the manner in which we address our Shoppers publications from detached cards to direct labeling on the shopper publication. As a result of this change, our per-piece postage rates remained steady when the May 2007 rates were put into effect. Standard postage rates increased again in May of 2008, which increased Shoppers’ production costs. Paper prices have continued to decline since the third quarter of 2007, contributing to lower production costs. Paper prices are expected to increase from the current levels in the second half of 2008. We do not anticipate recording any significant charges related to the approximately 250,000 circulation reduction that we initiated in July of 2008.

First Half 2008 vs. First Half 2007

Revenues

Shoppers revenues decreased $45.6 million, or 20.0%, in the first half of 2008 compared to the first half of 2007. These results reflect the continued impact that the difficult economic environments in California and Florida are having on our Shoppers business. The decrease in revenues was the result of decreased sales in established markets, including declines in virtually every revenue category, and circulation reductions of approximately 600,000 that we initiated in 2007. This unprofitable circulation, which was shut down at the end of June 2007, represented approximately $3.0 million of revenue in the first half of 2007.

Operating Expenses

Operating expenses decreased $25.9 million, or 13.8%, in the first half of 2008 compared to the first half of 2007. Total labor costs decreased $9.9 million, or 14.5%. As a result of the continuing weak market conditions, we reduced our Shoppers workforce by more than 9% in the first half of 2008. Total production costs decreased $13.0 million, or 13.1%, due primarily to decreased paper costs resulting from circulation reductions, a decline in ad placements and lower newsprint rates, decreased postage costs due to a decline in distribution revenues and circulation reductions, and decreased offload printing costs due to decreased print-and-deliver volumes. Total general and administrative costs decreased $2.9 million, or 17.9%, due primarily to lower promotion-related expense. Depreciation and amortization expense decreased $0.1 million, or 1.4%, due to decreased capital expenditures in recent periods.

General Corporate Expense

General corporate expense decreased $0.2 million, or 5.7%, in the second quarter of 2008 and $0.1 million, or 1.6%, in the first half of 2008 compared to the same periods in 2007. Theses decreases were primarily due to lower stock-based compensation and lower employee expenses including travel and recruiting.

Interest Expense

Interest expense was up $0.3 million, or 9.6%, in the second quarter of 2008 and $1.1 million, or 17.3%, in the first half of 2008 compared to the same periods in 2007. This increase is due to higher outstanding debt levels in 2008 than in 2007, primarily due to share repurchases and the acquisition of Mason Zimbler, and additional expense related to credit agreements entered into in the first quarter of 2008. The increase was partially offset by lower interest rates on borrowings in 2008 than in 2007.

Interest Income

Interest income was down slightly in the second quarter of 2008 and down $0.1 million or 25.7% in the first half of 2008 compared to the same periods in 2007 due to normal variances in cash levels and lower interest rates on investments.

Other Income and Expense

Other net expense increased $0.7 million, or 314.5%, in the second quarter of 2008 and $1.3 million, or 362.7%, in the first half of 2008 compared to the same periods in 2007, primarily due to an increase in foreign currency transaction losses.

Income Taxes

Income tax expense decreased $3.2 million in the second quarter of 2008 and $8.2 million in the first half of 2008 compared to the same periods in 2007. The effective tax rate was 39.9% for the second quarter of 2008, down from 40.1% for the second quarter of 2007. The effective tax rate was 38.6% for the first half of 2008, down from 39.5% for the first half of 2007. This decrease was primarily the result of the recognition of certain tax benefits in the first quarter of 2008.

Liquidity and Capital Resources

Sources and Uses of Cash

As of June 30, 2008, cash and cash equivalents were $23.0 million, increasing $0.1 million from December 31, 2007. This net increase was a result of net cash provided by operating activities of $53.4 million, offset by cash used in investing activities of $20.5 million and net cash used in financing activities of $32.9 million.

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2008 was $53.4 million, compared to $76.5 million for the first six months of 2007. The $23.1 million year-over-year decrease was attributable to lower net income and changes within working capital assets and liabilities.

Investing Activities

Net cash used in investing activities was $20.5 million for the first half of 2008, compared to $13.8 million for the first half of 2007. The difference is primarily the result of the January 2008 acquisition of Mason Zimbler.

Financing Activities

Net cash outflows from financing activities were $32.9 million for the six months ended June 30, 2008 compared to net cash outflows of $67.2 million for the six months ended June 30, 2007. The difference is attributable primarily to $43.3 million higher net borrowings in the first six months of 2008 than in the first six months of 2007.

Outlook

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

The amount of cash on hand and borrowings available under our credit facilities are influenced by a number of factors, including fluctuations in our operating results, revenue growth, accounts receivable collections, capital expenditures, tax payments, share repurchases, acquisitions and dividends.

Based on our current operational plans, we believe that our credit facilities, together with cash provided by operating activities, will be sufficient to fund operations and anticipated capital expenditures, payments of principal and interest on our borrowings, and dividends on our common stock for at least the next twelve months.

Credit Facilities

Our five-year Revolving Credit Facility has a maturity date of August 12, 2010. At June 30, 2008, our debt balance related to the Revolving Credit Facility was $29.0 million. The five-year 2006 Term Loan Facility has a maturity date of September 6, 2011. At June 30, 2008, our debt balance related to the 2006 Term Loan Facility was $180.4 million. The four-year 2008 Term Loan Facility has a maturity date of March 7, 2012. As of June 30, 2008, we had $96.0 million of unused borrowing capacity under our five-year Revolving Credit Facility.

Under all of our credit facilities we are required to maintain an interest coverage ratio of not less than 2.75 to 1 and a total debt-to-EBITDA ratio of not more than 3.0 to 1. The credit facilities also contain covenants restricting our and our subsidiaries’ ability to grant liens and enter into certain transactions and limit the total amount of indebtedness of our subsidiaries to $20 million.

The credit facilities each also include customary covenants regarding reporting obligations, delivery of notices regarding certain events, maintaining our corporate existence, payment of obligations, maintenance of our properties and insurance thereon at customary levels with financially sound and reputable insurance companies, maintaining books and records and compliance with applicable laws. The credit facilities each also provide for customary events of default including nonpayment of principal or interest, breach of representations and warranties, violations of covenants, failure to pay certain other indebtedness, bankruptcy and material judgments and liabilities, certain violations of environmental laws or ERISA or the occurrence of a change of control. As of June 30, 2008, we were in compliance with all of the covenants of our credit facilities.

As we have capacity under our Revolving Credit Facility and the intent to use the Revolving Credit Facility to fund the required quarterly principal payments under the 2006 Term Loan Facility and the 2008 Term Loan Facility through the June 30, 2009, we have classified our entire debt balance at June 30, 2008 as long-term.



CONF CALL

Larry Franklin

Good morning. On the call with me today with us, is our Doug Shepard, our Executive Vice President and Chief Financial Officer, Jessica Huff, our Vice President, Finance & Controller, and Bryan Pechersky, our Senior Vice President of Counsel and Secretary. And before I begin with my remarks, Bryan will make a few statements. Bryan?

Bryan Pechersky

Thanks, Larry. Our call may include forward-looking statements. Examples may include statements about our strategies, initiatives and business plans, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, the economic downturn in the US and other economies and other statements that are not historical facts.

Actual results may differ materially from those projected or implied in these statements, because of various risks and uncertainties including those described in our most recent Form 10-K and other documents filed with the Securities and Exchange Commission and the cautionary statement in today's earnings release.

Our call may also include non-GAAP financial measures. Please refer to today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the investor relations section of our website at www.harte-hanks.com.

I'll now turn the call back over to Larry.

Larry Franklin

Thank you, Bryan. As we mentioned in the press release that you received this morning, the fourth quarter was one of the most difficult that our company has faced. The overall economic climate and more specifically, the fourth quarter financial market events dramatically influenced business and consumer confidence affecting our customers' marketing plans, which impact on our direct marketing revenue.

We mentioned on this call in October that uncertainty and caution were the prevailing themes that we were hearing from clients regarding future spending plans, and that caution became even more pronounced throughout the fourth quarter, resulting in program and volume reductions and delays in spending by our clients.

While our spending decreased across all our vertical markets, it was most pronounced in financial, pharma and healthcare and the retail verticals. In shoppers the negative trends and economic conditions that we've seen since 2007 in California and Florida continued.

Going into the fourth quarter, our operating assumption was that the revenue environment would be difficult and we've not seen any fundamental changes that would indicate that that outlook should be any different. As a result of difficult economic environment, which impacted shoppers throughout 2008 and direct marketing in late 2008, we continued and accelerated our actions across the company in the fourth to adjust our expense base to the new economic realities.

Those actions are outlined and some detailed in the press release and Doug will add some additional details to it in his comments. However, I will say that I am pleased and impressed with the way that our leadership and all of our coworkers have responded to this rapidly changing environment that none of us have participated in before.

And before I turn it over to Doug, I want to make these three or four points. This global business climate and reduced consumer confidence, weakened demand, and disruption in the credit and financial markets, makes it extremely difficult for us to have any real visibility on when things will improve and obviously affects the visibility of our revenue.

I believe there is a bright future for data driven targeted marketing solutions that deliver value and achieve results for our clients. And both of our businesses provide services and products that are even more necessary in this environment, because we help our clients talk directly to their customers and generate revenue for them now.

We also remain focused on conservatively managing our balance sheet and cash flows and we are committed to emerging from this recession as an even stronger company and leader in an industry with great opportunities for long-term success.

And I can't say too much about our coworkers and leadership, because they face some very challenging and difficult decisions, and we'll have more of those. And they have responded with resolve and dedication, because our mission, our vision is clear. We remain intensely focused on keeping our existing customers and adding customers, reducing our costs and conserving our cash, and because of these people at Harte-Hanks I am confident that we will succeed.

Doug, do you want to provide some more details?

Doug Shepard

Thank you Larry and good morning. Here is a companywide overview of fourth quarter and full year 2008. Revenue decreased 11% for the quarter and 6.9% for the year. Direct Marketing decreased 8.1% for the quarter and was flat for the year. Shoppers decreased 17.2% for the quarter and 18.7% for the year.

Operating income decreased 46% for the quarter and 28.9% for the year. For the quarter, Direct Marketing declined 19.2%, while Shoppers declined $14.7 million. For the year, Direct Marketing decreased 5.2% and Shoppers decreased 63.4%. For the quarter our free cash flow was $20.9 million versus $29.9 million in 2007. For the year, free cash flow was $82.8 million as compared to $105.4 million in 2007. We ended the year with $20 million in capital spending; $8.2 million less than the $28.2 million spend in 2007. For 2009, we currently expect our capital spending to be in the area of $10 million to $15 million.

Turning to our two businesses; in the quarter, Direct Marketing revenue decreased 8.1%, and operating income decreased 19.2% resulting in an operating income margin decreased 15.6% compared to 17.7% in the fourth quarter of 2007. During the quarter, October revenues were consistent with the overall third quarter trends, but November and December decreased sharply.

A charge of $2.8 million was taken in the fourth quarter related to headcount reduction as a result of adjusting expenses to the revenue decline. Removing this charge would have resulted in operating income margins of 17.1% for the quarter. For the year, operating income margins finished at 14.1%, a decrease from 2007 margins of 14.9%.

In the quarter, our high tech/telecom vertical market represented 29% of Direct Marketing revenue; retail was 28%, select markets were 19%, financial was 12.5%, and healthcare/pharma was 11.5%. For the year, high tech/telecom represented 28% of Direct Marketing revenue, retail was 25%, and financial was 15.5%, select markets 20%, healthcare/pharma 11%. Our top 25 Direct Marketing customers represented approximately 44% of Direct Marketing revenue for the quarter and 41% for the year.

Turning to Shoppers, our performance for the quarter and year was disappointing. Shoppers' fourth quarter revenue decreased by 17.2% and 18.7% for the year. As we discussed in last quarter's call, due to calendar shifts, we had one extra week of publication in the fourth quarter of 2008 versus 2007. The 53 week has historically been marginally profitable, and in 2008, it was a small loss. The extra week caused an approximate four point increase in quarterly revenues and a one point increase for the year. Circulation curtailment negatively impacted the quarter by one point and the year by 1.2 points.

Shoppers operating income margin for the quarter declined to negative 1.2% as compared to 14.1% for the prior-year quarter. And for the year, operating income margin was 7.4% as compared to 16.4% in 2007. Responding to the worsening economic environment, our Shoppers leadership took aggressive additional steps to reduce cost, which resulted in $2.1 million of fourth quarter charges. Towards the end of the quarter, approximately 500,000 circulation was closed in Florida.

In California, we will close approximately 700,000 circulation in three areas early in the first quarter of 2009. The Florida circulation curtailment will allow us to consolidate two production facilities into one facility. The expected 2009 savings from the consolidation which will be completed by the end of the first quarter will be offset by the 2009 first quarter charges previously outlined.

Most of the charges we discussed in the press release impacting the first quarter of 2009 relate to lease exit cost and accelerated depreciation from the production facility consolidation. Removing the fourth quarter Shoppers charges would have resulted in a small amount of operating income.

These 2008 fourth quarter and 2009 first quarter payroll actions will result in reduced 2009 Direct Marketing expenses of $22.5 million along with $6.1 million of Shoppers expenses. Our fourth quarter effective tax rate was 35.6% which was slightly lower than the 2007 fourth quarter of 36.6%. Lower state taxes drove the decrease. Our 2008 effective tax rate was 38.2%, which was 50 basis points down from our 2007 effective tax rate. For 2009, we expect our effective tax rate to be approximately 35% to 36%.

We estimate the fourth quarter charges outlined in the press release, which include the CEO transition in December, negatively impacted fourth quarter earnings by approximately $0.055 per share. On the balance sheet, at December 31, we were showing a net debt balance of $240.5 million versus $273.5 million at September 30, a reduction of $33 million.

Net accounts receivable were $169.4 million versus $199.2 million at year end 2007. Days outstanding at end of December, was 58 days, a decrease compared to 60 days outstanding at December 2007. We ended the quarter with leverage ratio of 1.7 times versus the covenants of 3 times and interest coverage ratio of 11.2 times versus a covenant of 2.7 times. We currently have all $125 million available under our revolver. We believe that our conservatively leveraged balance sheet and free cash flow provide us good operational flexibility.

With that, operator, we'd like to turn the call over for questions.

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