UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
(Mark One)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001 or
| | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 1-6352
John H. Harland Company
(Exact name of registrant as specified in its charter)
Georgia 58-0278260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2939 Miller Road, Decatur, Georgia 30035
(Address of principal executive offices) (Zip Code)
(770) 981-9460
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------------- -----------------------------------------
Common Stock $1 par value New York Stock Exchange
Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.| |
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of the close of business on March 20, 2002 was $785,423,055.
The number of shares of the Registrant's Common Stock outstanding on March 20,
2002, was 29,188,438.
A portion of the Registrant's Proxy Statement dated March 20, 2002, is
incorporated by reference in Part III hereof.
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John H. Harland Company and Subsidiaries
Index to Annual Report on Form 10-K
Page
Part I
Item 1: Business 3
Item 2: Properties 6
Item 3: Legal Proceedings 7
Item 4: Submission of Matters to a Vote of Security Holders 7
Executive Officers of the Registrant 7
Part II
Item 5: Market for the Registrant's Common Equity and
Related Stockholder Matters 7
Item 6: Selected Financial Data 8
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 7A: Quantitative And Qualitative Disclosures About
Market Risk 8
Item 8: Financial Statements and Supplementary Data 8
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 8
PART III
Item 10: Directors and Executive Officers of the Registrant 8
Item 11: Executive Compensation 8
Item 12: Security Ownership of Certain Beneficial Owners
and Management 8
Item 13: Certain Relationships and Related Transactions 8
PART IV
Item 14: Exhibits, Financial Statement Schedule and
Reports on Form 8-K 9
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PART I
ITEM 1. BUSINESS
General
John H. Harland Company (the "Company") is a Georgia corporation
incorporated in 1923. The Company is a leading provider of printed products and
software sold to financial institutions, including banks, credit unions,
brokerage houses and financial software companies. The Company's subsidiary,
Scantron Corporation ("Scantron") is a leading provider of data collection and
assessment products and services sold primarily to the educational, financial
institution and commercial markets.
The Company serves its major markets through three primary business
segments: Printed Products, Software and Services and Scantron. Each of these
three segments is described below. Reference is made to Note 12 of the Notes to
Consolidated Financial Statements on page F31 of this Annual Report on Form 10-K
with respect to information concerning the Company's business segments.
Recent Developments
The Company completed three acquisitions in 2001, each of which the
Company believes strengthens its position in key market segments. The three
acquisitions were:
ImTran, Inc. acquired in March, 2001. ImTran was a data collection and
document imaging firm. The acquired operation is now part of the Company's
Scantron segment.
Scanning Systems, acquired in October, 2001. Scanning Systems was a
provider of optical mark reading hardware and scannable forms primarily for the
educational market. The acquired assets are now part of the Company's Scantron
segment.
DocuPrint, Inc., acquired in October, 2001. DocuPrint was a
manufacturer of internal bank forms. The acquired assets are part of the
Company's Printed Products Segment.
Recent developments also include the appointment of Darryl W. Jackson
as president and chief operating officer of the Company. Mr. Jackson joined the
Company in September 2001 and now directs operations for the Company's three
business segments.
The Company's three business segments introduced a number of new
products and services in 2001. The Company believes these new products and
services help strengthen its relationships with its customers and its position
in the marketplace. These new products are described below.
Printed Products
The Printed Products segment ("Printed Products") includes the
Company's checks operations, as well as its direct marketing business and
computer checks and forms business. Segment sales of $527.3 million accounted
for 71% of the Company's total sales for the year.
Printed Products' traditional products are checks and forms, including
personal and business checks and computer checks, as well as internal bank
forms. Printed Products also produces a variety of financial documents in
conjunction with personal or small business financial software packages.
Printed Products has two primary competitors in the sale of checks to
financial institutions. They are national financial printers that specialize in
check printing. The Company believes that Printed Products is the second-largest
producer of checks and related forms for financial institutions in the United
States. One of Printed Products' competitors has substantially greater sales and
financial resources than the Company.
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Printed Products markets its products and services primarily in the
United States, although there is different market penetration in the Caribbean
and Mexico. Printed Products has two distinct sales forces. One sales force
focuses on the financial institution market, including community, regional and
national banks, credit unions and brokerage houses. The second sales force
concentrates on financial software companies and office supply superstores.
Printed Products maintains 15 production facilities in the United
States, which consist of nine imprint plants, two computer checks facilities,
one facility dedicated to direct marketing and brokerage production and three
forms and specialty production facilities. Printed Products also has an imprint
facility in Puerto Rico. The Company has a 51% ownership in a check-printing
company in Mexico, which has one production facility. One imprint facility and
one computer check facility are being consolidated into a single facility. One
specialty plant is also being consolidated.
In 2000, the Company began converting its imprint facilities from
offset printing to digital printing technology, which the Company believes is a
more efficient technology. By the end of 2001, five imprint facilities had been
converted to digital, and the remaining four plants will be converted by
mid-year 2002. The conversion of all nine facilities will cost approximately $40
million when it is completed.
The Company has brought customer service for its personal checks
business back in house, a program that began in 2000. Customer service for this
part of the Company's business had been outsourced in 1996.
Principal raw materials used by Printed Products include safety paper,
form paper and MICR bond paper. Printed Products purchases other material, such
as vinyl, inks, checkboards, packaging material and miscellaneous supplies, from
a number of suppliers. The Company believes that adequate raw materials will be
available to support Printed Products operations.
The Company believes that the loss of any one customer in the Printed
Products segment would not have a materially adverse effect on the Company's
consolidated operations.
Software and Services
Software and Services includes Harland Financial Solutions and Harland
Analytical Services. These two parts of the Company's business provide financial
institutions with a variety of products and services that are designed to help
them strengthen profitable relationships with their customers. These products
and services include lending and mortgage origination and closing applications,
database marketing software, host processing applications and business
intelligence solutions.
Harland Financial Solutions, Inc., a subsidiary of the Company, is
composed of Delivery Systems, Financial Intelligence, Host Processing and
Mortgage Services.
Delivery Systems sells loan and deposit origination and compliance
software to the financial institution market. Delivery Systems sells what the
Company believes is the most complete product suite in the industry, including
solutions for lending, account opening, sales management and loan underwriting.
Competition within this market varies by financial institution size, but the
Company believes Delivery Systems is the market leader.
-4-
Financial Intelligence helps financial institutions increase the
profitability of customer relationships through customer relationship management
("CRM") software, marketing customer information file ("MCIF") software and
branch automation software.
Financial Intelligence's CRM software, Touche(TM), is an
enterprise-wide system that allows financial institutions to manage every aspect
of the customer relationship. Touche was launched in mid-2001, and the Company
believes it is one of the most complete CRM solutions designed specifically for
financial institutions.
Financial Intelligence's MCIF software allows financial institutions to
analyze the profitability of customer relationships at both the account and
household level. It can also enable financial institutions to import data, such
as demographic and geographic information, that help identify products customers
are most likely to purchase. Financial institutions use this information to
implement targeted marketing campaigns.
Financial Intelligence's branch automation solution, Encore!, provides
comprehensive sales, service and contact management capabilities for the branch
office or telephone banking center. Encore! operates in traditional
client/server as well as thin client web-based environments.
Host Processing sells host processing application software for credit
unions. Its products centralize member information and offer real-time
processing of transactions from every delivery channel. It markets these
products under the ULTRADATA(R) name.
Mortgage Services develops, markets and provides maintenance services
for mortgage software. Like Delivery Systems, Mortgage Services is largely a
compliance business.
Software and Services also includes Harland Analytical Services, which
was formed in September 2000. Harland Analytical Services sells behavioral
models to financial institutions, enabling them to, among other things, identify
their customers most at risk for switching financial institutions, as well as
identifying a consumer's propensity to purchase a financial product and the
financial product a consumer is most likely to purchase next.
The Company believes that the loss of any one customer in the Software
and Services segment would not have a materially adverse effect on the Company's
consolidated operations.
Scantron
Scantron Corporation ("Scantron") was founded in 1972 and acquired by
the Company in 1988. Scantron is a leading provider of data collection, testing
and assessment, and field maintenance services. Its products and services
include scannable forms, scanning equipment, imaging software and survey
services.
Scantron has a solid leadership position in the in-classroom education
market, where more than 90% of all high schools and 80% of all colleges and
universities use a Scantron product. In addition to the traditional Scantron
system, which consists of a scanner, forms and software, Scantron has introduced
new products for the education market. One of these products is Classroom
Wizard(TM), which the Company believes is the first real-time testing solution
for the in-classroom education market. Students take tests using handheld
devices that provide instantaneous feedback to both the student and teacher.
With the addition of document imaging through the ImTran acquisition,
Scantron now provides a total solution for customers' forms-based transactions,
including printing, distributing, processing and electronic archiving.
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Scantron's markets are diverse and competitive. In addition to the
education market, Scantron markets its products to the commercial and financial
institution markets. The Company believes Scantron is the second-largest
provider of data collection systems to commercial and educational markets in the
United States.
Scantron's field services operation provides maintenance services for
scanners, printers and network systems. It competes with various organizations
that provide installation and maintenance services, including technology
manufacturers, and other national and local field service and maintenance
companies.
Scantron markets its products and services primarily through inside and
outside sales and services representatives in the United States and Canada.
Scantron's products are also marketed internationally through distributors.
Scantron purchases a majority of its paper from one supplier. It
purchases scanner components from equipment manufacturers and supply firms. The
Company believes Scantron can continue to obtain such materials or suitable
substitutes in acceptable quantities and at acceptable prices to continue all
operations.
There is a seasonal nature to Scantron's business in the educational
market, but it does not significantly affect the Company's consolidated results.
The Company believes that the loss of any one Scantron customer would
not have a materially adverse effect on the Company's consolidated operations.
Patents and Trademarks
The Company has patents on several products and processes and
trademarks on several of its products and services. While the Company believes
these patents and trademarks to be of value, it does not consider any of them to
be critical to its operations.
Employees
As of December 31, 2001, the Company and its subsidiaries employed
approximately 5,200 people.
ITEM 2. PROPERTIES
As of December 31, 2001, the Company and its subsidiaries owned and
leased facilities throughout the United States and in Puerto Rico and Mexico.
The Printed Products facilities consist of nine imprint plants, two computer
checks facilities, one facility dedicated to direct marketing and brokerage
production and three forms and specialty production facilities. The Company also
leases a production facility in Puerto Rico. The Company has a 51% ownership in
a check printing company in Mexico, which has one production facility.
The Software and Services segment leases office space for sales and
service activities in ten states.
The Scantron subsidiary conducts its business in two facilities located
in California and Nebraska and leases small amounts of space for its field
services activities in various states.
The Company owns nine of the Printed Product facilities and one of the
Scantron facilities and leases the remainder of its properties. These leases
have expiration dates ranging from 2002 to 2012. The Company also owns three
buildings located in Atlanta, Georgia which houses its Printed Products support
and administrative services and also its corporate offices.
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ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to various
legal proceedings and claims. The Company believes that the ultimate outcome of
these matters will not have a material effect on its financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to all
executive officers of the Company.
Name Age Office Held
Timothy C. Tuff 54 Chairman and Chief Executive Officer
Darryl W. Jackson 48 President and Chief Operating Officer
Charles B. Carden 57 Vice President and Chief Financial Officer
S. David Passman III 49 President, Printed Products
John C. Walters 61 Vice President, Secretary and General
Counsel
Mr. Tuff joined the Company as President and Chief Executive Officer
in 1998. For the prior five years, he served as President and Chief Executive
Officer of Boral Industries, Inc., managing the North American and European
operations of Australian-based Boral, Ltd., a world leader in building and
construction materials.
Mr. Jackson joined the Company in September 2001. He previously served
as a Partner with Deloitte Consulting since 1998, prior to which he was a
Partner with Andersen Consulting for three years. Prior to 1995 he served as
Executive Vice President and Chief Operating Officer of M.S. Carriers, a leading
transportation company, for three years. He was previously employed by Milliken
and Company, a leading textile company, for eight years, last serving as General
Manager and Quality Director.
Mr. Carden joined the Company in 1999. He previously served as
Executive Vice President and Chief Financial Officer of Mariner Post-Acute
Network, a health care provider, since 1996.
Messrs. Passman and Walters have been employed by the Company for more
than five years.
Mr. Tuff also serves on the Board of Directors. Officers are elected
annually and serve at the pleasure of the Board.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
See the information with respect to the market for and number of
holders of the Company's common stock, quarterly market information and dividend
information which is set forth on page F35. The Company has an established
policy of making quarterly dividend payments to shareholders. The Company
expects to pay future cash dividends depending upon the Company's pattern of
growth, profitability, financial condition and other factors which the Board of
Directors may deem appropriate.
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ITEM 6. SELECTED FINANCIAL DATA
See the information with respect to selected financial data on page
F35.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See the information under the caption Management's Discussion and
Analysis of Results of Operations and Financial Condition on pages F2 through
F11 of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the information with respect to Quantitative And Qualitative
Disclosures About Market Risk on pages F9 and F10 under the captions Market
Risk, Interest Rate Risk and Equity Price Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information with respect to Financial Statements and
Supplementary Data on pages F12 through F35.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors required herein is incorporated by
reference to the information under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's
Proxy Statement for the Annual Meeting of Shareholders dated March 20, 2002 (the
"Proxy Statement").
The information regarding Executive Officers required herein is
included in Part I of this Annual Report and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated by
reference to the information under the caption "Executive Compensation and Other
Information" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference to the
information under the caption "Stock Ownership of Directors and Executive
Officers and Certain Other Persons" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
Page in
this
Annual
Report
on Form
10-K
-------
(a)1. Financial Statements:
Consolidated Balance Sheets F12
Consolidated Statements of Income F14
Consolidated Statements of Cash Flows F15
Consolidated Statements of Shareholders' Equity F16
Notes to Consolidated Financial Statements F17
Independent Auditors' Report F33
Management's Responsibility for Financial Statements F34
Supplemental Financial Information (unaudited) F35
(a)2. Financial Statement Schedule:
Schedule II. Valuation and Qualifying Accounts S1
All other schedules have been omitted since the information required is either
in the financial statements or notes thereto or is not required.
(a)3. Exhibits
(Asterisk indicates exhibit previously filed with the Securities and
Exchange Commission as indicated in parentheses and incorporated herein by
reference.)
3.1 * Amended and Restated Articles of Incorporation (Exhibit B to
Registrant's Proxy Statement dated March 12,1999).
3.2 * Bylaws, as amended through February 1, 1999 (Exhibit 3.2 to
Registrant's Annual Report on Form 10-K ("1998 10-K") for the year
ended December 31, 1998).
4.1 * Revolving Credit Agreement, dated as of August 23, 2000, among
Registrant and the Lenders named therein (Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated August 23, 2000).
4.2 * First Amendment dated October 19, 2000 to the Revolving Credit
Agreement (Exhibit 4.2 to the 2000 10-K).
4.3 * Second Amendment dated February 28, 2001 to the Revolving Credit
Agreement (Exhibit 4.3 to the 2000 10-K).
4.4 Third Amendment dated February 25, 2002 to the Revolving Credit
Agreement.
4.5 * Rights Agreement, dated as of December 17, 1998, between Registrant
and First Chicago Trust Company of New York (Exhibit 4.1 to
Registrant's Current Report on Form 8-K dated July 1, 1999).
4.6 See Articles IV, V and VII of Registrant's Amended and Restated
Articles of Incorporation, filed as Exhibit 3.1, and Articles I, V and
VIII of Registrant's Bylaws, filed as Exhibit 3.2.
10.1 * Form of Noncompete and Termination Agreement between Registrant and
Charles B. Carden, S. David Passman III and John C. Walters (Exhibit
10.6 to the 1995 10-K).
10.2 Employment Agreement, dated September 24, 2001, between Registrant and
Darryl W. Jackson.
10.3 Noncompete and Termination Agreement, dated as of January 1, 2002,
between Registrant and Timothy C. Tuff.
10.4 * Restricted Stock Agreement, dated October 6, 1998, between Registrant
and Mr. Tuff (Exhibit 10.8 to the 1998 10-K).
10.5 * Form of Restricted Stock Agreement between Registrant and Messrs.
Carden, Jackson, Passman, Tuff and Walters (Exhibit 10.4 to
the 2000 10-K).
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10.6 Form of Restricted Stock Agreement in connection with the Voluntary
Option Exchange Program between Registrant and Messrs. Carden,
Passman, Tuff and Walters.
10.7 Supplemental Retirement Agreement, dated as of January 1, 2002,
between Registrant and Mr. Tuff.
10.8 * John H. Harland Company 1999 Stock Option Plan, as amended
(Exhibit 99.1 to Registrant's Registration Statement on Form S-8,
File No. 333-94727).
10.9 * John H. Harland Company 2000 Stock Option Plan, as amended (Exhibit
99-1 to Registrant's Registration Statement on Form S-8, File No.
333-70386).
10.10 * John H. Harland Company 2002 Stock Option Plan (Exhibit A to the
Registrant's Proxy Statement dated March 20, 2002).
10.11 * John H. Harland Company Employee Stock Purchase Plan, as amended
(Exhibit 10.8 to the 2000 10-K).
10.12 John H. Harland Company Deferred Compensation Plan for
Outside Directors, as amended.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JOHN H. HARLAND COMPANY
/s/ Charles B. Carden 3/21/2002 /s/ J. Michael Riley 3/21/2002
- ------------------------ --------- ------------------------ ---------
Charles B. Carden Date J. Michael Riley Date
Vice President and Vice President and
Chief Financial Officer Controller
(Principal Financial Officer) (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Timothy C. Tuff 3/21/2002 /s/ William S. Antle III 3/21/2002
- ------------------------ --------- ------------------------ ---------
Timothy C. Tuff Date William S. Antle III Date
Chairman and Director
Chief Executive Officer
(Principal Executive Officer)
/s/ John D. Johns 3/21/2002 /s/ Richard K. Lochridge 3/21/2002
- ------------------------ --------- ------------------------ ---------
John D. Johns Date Richard K. Lochridge Date
Director Director
/s/ John J. McMahon Jr. 3/21/2002 /s/ G. Harold Northrop 3/21/2002
- ----------------------- --------- ------------------------ ---------
John J. McMahon Jr. Date G. Harold Northrop Date
Director Director
/s/ Larry L. Prince 3/21/2002 /s/ Eileen M. Rudden 3/21/2002
- ----------------------- --------- ------------------------ ---------
Larry L. Prince Date Eileen M. Rudden Date
Director Director
/s/ Jesse J. Spikes 3/21/2002
- ----------------------- ---------
Jesse J. Spikes Date
Director
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JOHN H. HARLAND COMPANY AND SUBSIDIARIES
Index to Information For Inclusion
in the Annual Report on Form 10-K
for the year ended December 31, 2001
Management's Discussion and Analysis of
Results of Operations and Financial Condition F2
Consolidated Financial Statements
and Notes to Consolidated Financial Statements F12
Independent Auditors' Report F33
Management's Responsibility For Financial Statements F34
Supplemental Financial Information (Unaudited) F35
Financial Statement Schedule S1
-F1-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
John H. Harland Company (the "Company") operates its business in three
segments. The Printed Products segment ("Printed Products") includes checks and
direct marketing activities marketed primarily to financial institutions.
The Software and Services segment ("Software") is focused on the
financial institution market and includes lending and mortgage origination and
closing applications, database marketing software, host processing applications
and business intelligence solutions.
The Scantron segment ("Scantron") represents products and services sold
by the Company's Scantron subsidiary including scanning equipment and software,
scannable forms, survey solutions and field maintenance services. Scantron sells
these products and services to the commercial, financial institution and
education markets.
Results of Operations
2001 versus 2000
Consolidated net sales for the year ended December 31, 2001 were $743.2
million compared to $720.7 million for the year ended December 31, 2000, an
increase of 3.1%. Printed Products sales were $527.3 million in 2001 compared to
$567.5 million in 2000, a decrease of 7.1%. The largest decrease in Printed
Products occurred in traditional check printing operations where an 11.2% volume
decrease primarily reflected a decline in orders received from a direct check
marketer and the loss of market share. A gain in share in the community bank
market was more than offset by a decline in the large bank market. The impact of
these two factors was moderated by an improvement of 3.7% in average price per
unit. Sales in direct marketing also decreased due to the general economic
slowdown which resulted in lower credit card promotions and fewer openings of
brokerage accounts.
Software sales increased 100.7% from $60.5 million in 2000 to $121.3
million in 2001 primarily due to the acquisition of Concentrex Incorporated
("Concentrex")(see Note 2). Comparing the September through December periods of
2000 and 2001, where the results are comparable relative to the acquisition of
Concentrex, Software sales decreased 3.2% in 2001 compared to the 2000 period.
This decrease was due to the Company's decision to exit from unprofitable
product lines, an increase in usage-based contracts and a higher proportion of
term license agreements compared with perpetual agreements. The usage-based
contracts and term license agreements defer contract payments and revenue
recognition into future periods which should mitigate revenue volatility in the
future as those deferred revenues are recognized on a more stable, predictable
basis.
Scantron's sales were $95.9 million in 2001 compared to $93.4 million
in 2000, an increase of 2.7%. The increase in Scantron's sales was primarily due
to acquisitions and internal growth in Scantron's field services and survey
solutions divisions. In 2001, Scantron's scanning division sales were relatively
flat compared to 2000 with increased sales in forms products and additional
sales related to its acquisition of Scanning Systems (see Note 2) being offset
by a decrease in optical mark reading equipment sales, a result of a shift to
greater use of on-line technologies.
Consolidated gross profit increased by 14.2% from $294.1 million in
2000 to $335.9 million in 2001 and increased as a percentage of sales from 40.8%
in 2000 to 45.2% in 2001. The increase in consolidated gross profit was the
result of cost management and productivity improvement initiatives and a
favorable change in sales mix. Printed Products gross profit decreased 4.9% in
2001 from 2000 due to lower volumes in checks and in direct marketing. However,
Printed Products gross profit as a percentage of sales increased from 37.1% in
2000 to 38.0% in 2001, a result of the combination of the increase in average
price per unit, process improvements and new technology. Software's gross
profit, as a percent of sales, increased to 67.8% in 2001 from 58.0% in 2000
-F2-
primarily due to a full year's effect of the Concentrex acquisition. Scantron's
gross profit increased by 9.8% over 2000 and increased as a percentage of sales
to 55.3% in 2001 from 51.7% in 2000 due to lower costs resulting from
restructuring in 2000 and efficiencies gained from consolidating printing
operations into a single facility in 2001.
Consolidated selling, general and administrative expenses ("SG&A")
totaled $233.3 million in 2001 compared to $201.7 million in 2000, an increase
of 15.7%. As a percentage of sales, SG&A increased from 28.0% in 2000 to 31.4%
in 2001. The increase was primarily due to the addition of Concentrex operations
which had higher SG&A costs in relation to sales than the Company's other
operations. Compensation costs of $3.0 million associated with accelerated
vesting of certain restricted stock grants made in 2001 as a result of the
Company's favorable stock price performance also contributed to the increase
(see Note 7). The increase in SG&A costs was moderated by decreased expenses due
to employee positions eliminated in a reorganization that occurred in 2000 and
also due to lower customer service costs in Printed Products resulting from a
reduction in contract payments to a service provider.
During the fourth quarter of 2000, the Company recorded a restructuring
charge of $14.5 million (see Note 3) which was primarily for impairment of
intangible assets and severance-related expenses. The impairment of intangibles
was a result of the Company's examination during the fourth quarter of the
long-term viability of product offerings in two of its software operations.
Subsequent to the acquisition of Concentrex in August 2000, the Company decided
to discontinue certain DOS-based products and migrate current customers to
similar Concentrex product offerings or to a web-based product currently in
development. As a result of this decision, the remaining intangibles associated
with these products were written off. Due to lower than anticipated sales of a
new version of an existing product, the Company revised the long-term prospects
of another of its software operations. The revision of expectations required an
adjustment of the carrying value of the operation's long-term assets to the
calculated value based on discounted projected cash flows. The impairment
charges for these two actions had a total pre-tax impact of $9.4 million, or
$7.9 million after tax. The severance costs resulted primarily from a
reorganization of the Company into three distinct segments. In connection with
the reorganization during the fourth quarter of 2000, the Company eliminated 145
positions, which resulted in a pre-tax charge of $4.3 million, or $2.6 million
after tax.
Amortization of intangibles in 2001 increased by $4.7 million from 2000
primarily due to the Concentrex acquisition in August 2000.
Other Income (Expense) increased from an expense of $6.2 million in
2000 to $17.7 million in 2001. The increase was primarily due to the combination
of a $7.8 million write-down in 2001 of the Company's equity investment in
Netzee, Inc. ("Netzee") and a $2.9 million gain on the sale of a Company
investment in 2000. The increase was partially offset by a decrease in interest
expense due to decreases in debt levels and interest rates.
The Company's effective income tax rate was 45.0% in 2001 and 47.1% in
2000. The effective rate in 2001 included the impact of a change in the
valuation allowance associated with a portion of the tax benefit related to the
Netzee capital loss. The effective rate in 2000 reflected the impact of
non-deductible costs including acquired in-process research and development and
impairment of intangibles that were in restructuring costs. See Note 5 to the
Consolidated Financial Statements for factors affecting the tax rate in each
year.
-F3-
Net income for 2001 was $39.0 million compared to $28.7 million for
2000. Basic and diluted earnings per share for 2001 were $1.34 and $1.31,
respectively, compared to basic and diluted earnings per share of $1.01 and
$1.00 in 2000. Included in 2001 were charges for the write-down of the
investment in Netzee, costs associated with accelerated vesting of stock-based
compensation and severance costs related to a plant consolidation which reduced
diluted earnings by $0.27 per share. Included in 2000 were charges for
restructuring and acquired in-process research and development costs, which
reduced diluted earnings by $0.66 per share. These were offset partially by a
gain on the sale of an investment, which increased earnings per share by $0.10.
The acquisition of Concentrex had a dilutive impact on 2000 earnings of $0.10
per share.
Results of Operations
2000 versus 1999
Consolidated net sales for the year ended December 31, 2000 were $720.7
million compared to $702.5 million for the year ended December 31, 1999, an
increase of 2.6%. Printed Products sales were $567.5 million in 2000 compared to
$577.7 million in 1999, a decrease of 1.8%. The largest decrease in Printed
Products occurred in traditional check printing operations where a 6.0% volume
decrease was due to a decline in orders received from a direct check marketer
and the loss of certain large customers resulting from continued consolidation
in the financial institution industry. The average price per unit in traditional
check printing operations grew by 2.7% and partially offset the impact of lower
volumes. Direct marketing volume and sales also declined in 2000.
Software sales increased 120.0% from $27.5 million in 1999 to $60.5
million in 2000 primarily due to the acquisition of Concentrex (see Note 2).
Sales from the acquired operations totaled $36.8 million for the period from
August 23, 2000 (date of acquisition) to December 31, 2000. Sales in previously
existing Software operations were down compared to 1999 due to a delay in the
delivery of a new loan and deposit origination product and slower than
anticipated sales of database marketing software products.
Scantron's sales were $93.4 million in 2000 compared to $97.6 million
in 1999, a decrease of 4.3%. The decrease in sales was primarily due to the
divestiture of Scantron Quality Computers ("SQC") in December 1999. Adjusted for
the divestiture of SQC, Scantron sales increased 2.2% with the increases
occurring in its scanning and survey divisions. Scantron's field services
division had a slight decrease in sales compared to 1999.
Consolidated gross profit increased by 11.3% from $264.3 million in
1999 to $294.1 million in 2000 and increased as a percentage of sales from 37.6%
in 1999 to 40.8% in 2000. The increase in Printed Products gross profit as a
percentage of sales to 37.1% in 2000 from 35.0% in 1999 accounted for most of
the consolidated gross profit increase. Printed Products gross profit
improvement resulted primarily from a price increase, a favorable product
pricing/mix and improvement in productivity due to the implementation of new
technology and price enhancements. Software's gross profit, as a percentage of
sales, increased to 58.0% in 2000 from 52.0% in 1999. Scantron's gross profit
increased by 0.9% over 1999 and increased as a percentage of sales to 51.7% in
2000 from 49.0% in 1999 due to product mix and the divestiture of SQC in 1999,
which had lower margins.
SG&A totaled $201.7 million in 2000, an increase of 9.0% over 1999. As
a percentage of sales, SG&A increased from 26.3% in 1999 to 28.0% in 2000. The
increase was due in part to the addition of Concentrex operations which had
higher SG&A costs in relation to sales than the Company's traditional
operations. The impact of the Concentrex acquisition was partially offset by
decreases in corporate expenditures relating to Year 2000 and other projects in
1999.
-F4-
During the fourth quarter of 2000, the Company recorded a restructuring
charge of $14.5 million (see Note 3) which was primarily for impairment of
intangible assets and severance-related expenses. The impairment of intangibles
was a result of the Company's examination during the fourth quarter of the
long-term viability of product offerings in two of its software operations.
Subsequent to the acquisition of Concentrex in August 2000, the Company decided
to discontinue certain DOS-based products and migrate current customers to
similar Concentrex product offerings or to a web-based product currently in
development. As a result of this decision, the remaining intangibles associated
with these products were written off. Due to lower than anticipated sales of a
new version of an existing product, the Company revised the long-term prospects
of another of its software operations. The revision of expectations required an
adjustment of the carrying value of the operation's long-term assets to the
calculated value based on discounted projected cash flows. The impairment
charges for these two actions had a total pre-tax impact of $9.4 million, or
$7.9 million after tax. The severance costs resulted primarily from a
reorganization of the Company into three distinct segments. In connection with
the reorganization during the fourth quarter, the Company eliminated 145
positions, which resulted in a pre-tax charge of $4.3 million, or $2.6 million
after tax.
Amortization of intangibles in 2000 increased by $3.3 million from 1999
primarily due to the Concentrex acquisition in August 2000.
Interest expense increased by $3.2 million in 2000 due to increases in
debt levels related to the financing of the Concentrex acquisition and
refinancing of existing debt.
Other income - net increased $1.8 million in 2000 due primarily to a
gain on the sale of a Company investment in the fourth quarter.
The Company's effective income tax rate was 47.1% in 2000 and 37.7% in
1999. The effective rate increased due to the impact of non-deductible costs in
2000, including acquired in-process research and development, impairment of
intangibles included in restructuring costs and Concentrex-related intangibles
amortization. The increase between years was moderated by an increase in tax
credits in 2000. See Note 5 to the Consolidated Financial Statements for factors
affecting the tax rate in each year.
Net income for 2000 was $28.7 million compared to $42.7 million for
1999. Basic and diluted earnings per share for 2000 were $1.01 and $1.00,
respectively, compared to basic and diluted earnings per share of $1.39 and
$1.37 in 1999. Included in 2000 were charges for restructuring and acquired
in-process research and development costs, which reduced diluted earnings by
$0.66 per share. These were offset partially by a gain on the sale of
investments, which increased earnings per share by $0.10. The acquisition of
Concentrex had a dilutive impact on 2000 earnings of $0.10 per share.
Financial Condition, Capital
Resources and Liquidity
Cash flows provided from operations in 2001 were $133.7 million, an
increase of 31.6% over $101.6 million for 2000. The increase in cash provided by
operations was due primarily to increases in net income adjusted for
depreciation and amortization. Financing activities used $79.2 million in 2001
compared to providing $69.8 million in 2000. The primary uses of funds in 2001
were to fund reductions of outstanding debt balances, capital expenditures,
refundable contract payments, dividend payments to shareholders and purchases of
treasury stock.
-F5-
Capital expenditures totaled $47.5 million in 2001 compared to $40.5
million in 2000. The increase in capital expenditures related primarily to
process improvement activities in Printed Products. During 2001, the Company
expended approximately $17.5 million related to digital printing costs compared
to $16.3 million in 2000. In 2002, capital expenditures are forecasted to be in
the $38.0 million to $42.0 million range and will include further digital
technology implementation and process improvements.
In March 2000, the Company's Board of Directors extended a program
authorizing the repurchase of the Company's outstanding common stock of up to
3.1 million shares with an authorization for an additional 2.9 million shares
for a total of up to 6.0 million shares. Shares repurchased under this program
may be held in treasury, used for acquisitions, used to fund the Company's stock
benefit and compensation plans or for other corporate purposes. In March 2001,
the Company completed the original authorization. The total cost of the 3.1
million shares repurchased was $57.5 million. As of December 31, 2001, the
Company has repurchased 445,146 shares of its common stock under the additional
authorization at a cost of approximately $9.1 million.
As of December 31, 2001, the Company's accumulated other comprehensive
income totaled $3.7 million and consisted of net unrealized gains on
investments, net changes in fair value of cash flow hedging instruments and
foreign currency translation adjustments. In September 2001, the Company's
investment in Netzee was written down to its market value due to the Company's
evaluation that the decline in the value of Netzee stock was other than
temporary.
The Company has a $325.0 million revolving credit facility with a
syndicate of banks. The Credit Facility matures in 2004 and may be used for
general corporate purposes, including acquisitions, and includes both direct
borrowings and letters of credit. As of December 31, 2001, direct borrowings
totaled $124.0 million under the facility. There were $4.4 million in
outstanding letters of credit, which were issued under the credit facility,
leaving $196.6 million available for borrowings at December 31, 2001.
In November 2000, in conjunction with the sale of certain assets to
Netzee, the Company extended a guaranty to a financial institution, on behalf of
Netzee, of Automated Clearing House exposures up to an amount not to exceed
$15.0 million. In March 2001, the guaranty was terminated with no liability to
the Company.
On December 31, 2001, the Company had $10.1 million in cash and cash
equivalents and $196.6 million available for borrowing under the credit
facility. The Company believes that its current cash position, funds from
operations and the availability of funds under the credit facility will be
sufficient to meet anticipated requirements for working capital, dividends,
capital expenditures and other corporate needs. Management is not aware of any
condition that would materially alter this trend. The Company also believes that
it possesses sufficient unused debt capacity and access to equity capital
markets to pursue additional acquisition opportunities.
-F6-
Contractual Obligations and Commitments
The following table aggregates the Company's contractual obligations
and commitments with definitive payment terms which will require significant
cash outlays in the future. The commitment amounts are as of December 31, 2001
(in millions):
Contractual Payments Due by Period
Obligations -----------------------------------------------------------
and Commitments Total 2002 2003 2004 2005 2006+
- -----------------------------------------------------------------------------
Long-term debt $124.2 $ 0.1 $ 0.1 $124.0 $ - $ -
Operating leases 87.6 14.7 11.8 9.8 9.0 42.3
Digital printing
equipment 6.2 6.2 - - - -
- -----------------------------------------------------------------------------
Total $218.0 $ 21.0 $ 11.9 $133.8 $ 9.0 $ 42.3
=============================================================================
Acquisitions
In March 2001, the Company's Scantron subsidiary acquired ImTran, Inc.
("ImTran"). ImTran was a data collection and document capture solutions firm
specializing in automated data collection and document imaging. In October 2001,
the Company's Printed Products segment acquired the assets of DocuPrint,
Incorporated ("DocuPrint"). DocuPrint produced forms for major financial
institutions. Also in October 2001, the Company's Scantron subsidiary acquired
substantially all the assets of the Scanning Systems division of Associated
Business Products, Inc., a subsidiary of Global DocuGraphix, Inc. for
approximately $6.0 million in cash.
The assets acquired through acquisitions in 2001 totaled $7.5 million.
Of the total acquisition costs, $5.7 million was allocated to goodwill. All
consideration was paid in cash that was funded with proceeds from the Company's
credit facility.
On August 23, 2000, the Company completed its cash tender offer for the
outstanding common stock of Concentrex. The acquired operations provide
technology-powered solutions to deliver financial services, including a broad
range of traditional software and services integrated with e-commerce solutions
to over 5,000 financial institutions of all types and sizes in the United
States. Consideration totaled $146.9 million of which approximately $100.0
million was funded from a credit facility obtained by the Company (see Note 4).
As part of the Concentrex acquisition, the Company acquired in-process
research and development costs of $8.2 million, which were expensed at
acquisition, and represented the fair value of certain acquired research and
development projects that were determined to have not reached technological
feasibility.
A portion of the Concentrex acquisition cost was allocated to the net
realizable value of certain assets of the acquired operation's online banking
and electronic payments business which the Company identified as a business held
for sale. In November 2000, these assets, which totaled $8.2 million, were sold
to Netzee in exchange for Netzee common stock. The Company also extended a $5.0
million line of credit to Netzee of which $3.0 million and $5.0 million were
outstanding at December 31, 2001 and December 31, 2000, respectively. In
September 2001, the Company determined that the decline in market value of its
investment in Netzee was other than temporary and the investment was written
down to its market value, resulting in a recognized loss before income taxes of
$7.8 million.
-F7-
All acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of operations of each have been
included in the Company's consolidated financial statements from the date of
acquisition.
Outlook
The Company believes that its financial position continues to be strong
and expects a positive cash flow in all business segments in 2002. The Company
projects an increase in the Printed Products segment's 2002 profits due to
implementation of new technology and process improvements. Printed Products
sales are expected to stabilize during the second half of 2002 compared with the
recent trend of declining sales. The Company anticipates the Software and
Services segment's profitability will continue to improve steadily during 2002
due to increased sales of existing products and services as well as new products
and services. The Scantron segment is also projected to increase sales and
profits in 2002 through internal growth in sales and a full year's impact from
acquisitions. Consolidated SG&A, as a percentage of sales, is expected to
increase slightly in 2002. The effect of discontinuing goodwill amortization
with the implementation of a new accounting pronouncement (see the New
Accounting Standards section of Note 1) will have a positive effect on the
Company's net income.
Risk Factors and
Cautionary Statements
When used in this report and in subsequent filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
written or oral statements made by authorized representatives of the Company,
the words or phrases "should result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are necessarily
subject to certain risks and uncertainties, including, but not limited to, those
discussed below that could cause actual results to differ materially from the
Company's historical experience and its present expectations or projections.
Caution should be taken not to place undue reliance on any such forward-looking
statements, which speak only as of the date such statements are made and which
may or may not be based on historical experiences and/or trends which may or may
not continue in the future. The Company does not undertake and specifically
declines any obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect events or circumstances
occurring after the date of such statements or to reflect the occurrence of
unanticipated events.
Various factors may affect the Company's financial performance,
including, but not limited to, those factors discussed below and could cause the
Company's actual results for future periods to differ from any opinions,
statements or projections expressed with respect thereto. Such differences could
be material and adverse. Many variables will impact the ability to achieve sales
levels, improve service quality, achieve production efficiencies and reduce
expenses in Printed Products. These include, but are not limited to, the
implementation of new digital technology, automated ordering systems and call
service centers used in the Company's manufacturing and customer service
operations.
Several factors outside the Company's control could negatively impact
check revenue. These include the continuing expansion of alternative payment
systems such as credit cards, debit cards and other forms of electronic commerce
or on-line payment systems. Check revenues could also be adversely affected by
continued consolidation of financial institutions, competitive check pricing and
the impact of governmental laws and regulations. There can be no assurances that
the Company will not lose significant customers or that any such loss could be
offset by the addition of new customers.
-F8-
While the Company believes substantial growth opportunities exist in
the Software and Services segment, there can be no assurances that the Company
will achieve its revenue or earnings growth targets. The Company believes its
software business still represents a turnaround and therefore has many inherent
risk factors, including but not limited to the retention of employee talent and
the retention of customers. Also, variables exist in the development of new
software products, including the timing and costs of the development effort,
product performance, functionality, product acceptance, competition, and general
changes in economic conditions or U.S. financial markets.
Several factors outside of the Company's control could affect results
in the Scantron segment. These include the rate of adoption of new electronic
data collection, testing and assessment methods, which could negatively impact
current forms, scanner sales and related service revenue. The Company continues
to develop products and services that it believes offers state of the art
electronic data collection, testing and assessment solutions. However, variables
exist in the development of new testing methods and technologies, including the
timing and costs of the development effort, product performance, functionality,
market acceptance, adoption rates, competition and the funding of education at
the federal, state and local level, all of which could have an impact on the
Company's business.
Market Risk
All financial instruments held by the Company are held for purposes
other than trading and are exposed to primarily two types of market risks:
interest rate and equity price.
Interest Rate Risk
The Company is exposed to interest rate risk on its variable rate debt.
At December 31, 2001, the Company had outstanding variable rate debt of $124.0
million. In order to manage its exposure to fluctuations in interest rates, the
Company has entered into interest rate swap agreements, which allow it to raise
funds at floating rates and effectively swap them into fixed rates. At December
31, 2001, the notional principal amount of interest rate swaps outstanding was
$98.0 million. The Company believes that its interest rate risk at December 31,
2001 was minimal. These derivative financial instruments are viewed as risk
management tools and are entered into for hedging purposes only. The Company
does not use derivative financial instruments for trading or speculative
purposes.
The fair value of the swaps, which represent what the Company would
have to pay to terminate the swaps, reflected a loss of $2.2 million ($1.3
million net of income taxes) at December 31, 2001. The fair value of the swaps
was recognized on the balance sheet in other liabilities with a corresponding
charge to accumulated other comprehensive income, a component of shareholders'
equity. Charges and credits to other comprehensive income will net to zero over
the term of interest rate swap agreements that are not terminated early.
Equity Price Risk
The fair value of the Company's investments is primarily affected by
fluctuations in the market price for the common stock of Bottomline
Technologies, Inc. and Netzee. The change in market value has been accounted for
as a component of other comprehensive income. In September 2001, the Company's
management determined that the decline in Netzee's market value was other than
temporary. The investment was written down to its market value resulting in a
recognized loss of $7.8 million. The following presents the Company's investment
-F9-
in Bottomline and Netzee reflecting the high and low closing market prices for
the year ended December 31, 2001 (in thousands):
Carrying
Value(a) High(b) Low(b)
- ----------------------------------------------------------------------
Investment in:
Bottomline $5,458 $14,427 $1,465
Netzee 924 7,838 358
(a) Based on market value as of December 31, 2001.
(b) Based on quoted market prices for these items.
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement
No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill
and Other Intangibles" ("SFAS 142"). SFAS 141 addresses financial accounting and
reporting for business combinations. Under SFAS 141, all business combinations
are to be accounted for using the purchase method of accounting. Under SFAS 142,
goodwill and intangible assets with indefinite lives are no longer amortized but
are tested at least annually for impairment. Separable intangible assets with
defined lives will continue to be amortized over their useful lives. The
provisions of SFAS 142 apply to goodwill and intangible assets recognized on the
Company's financial statements on January 1, 2002 and thereafter. In 2001,
amortization of goodwill totaled $11.2 million, most of which was non-deductible
for tax purposes. The Company has not yet assessed the other financial statement
impact of adopting SFAS 142. The Company has engaged a third party for
valuations of the businesses which have associated goodwill balances and will
determine whether an impairment exists by June 30, 2002.
In August 2001, the Financial Accounting Standards Board issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144") which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 will be effective for the
Company beginning January 1, 2002. The Company does not believe the adoption of
SFAS 144 will have a material effect on the Company's financial position or
results of operations.
Critical Accounting Policies
The Company has identified certain of its accounting policies as
critical to its business operations and the understanding of its results of
operations. These policies include revenue recognition, impairment of long-lived
assets, goodwill and other intangibles, software and other development costs and
income taxes.
The Company considers its revenue recognition policy as critical to its
reported results of operations primarily in its Software and Services segment.
This segment utilizes estimates of efforts to complete a project in percentage
of completion calculations to recognize revenue from licensing of software with
significant amounts of tailoring and/or customization. Due to uncertainties
inherent in these estimates, actual results, including the amounts of revenue
and expenses recognized, could differ from those estimates.
The Company reviews investments, long-lived assets and certain
intangibles for impairment when events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Any impairment losses
are reported in the period in which the recognition criteria are first applied
based on the fair value of the asset. In 2001, the Company recorded a charge of
$7.8 million before income taxes for a write-down of an equity investment. In
2000, the Company recorded a charge of $9.4 million for a write-down of
intangible and other assets.
-F10-
The Company makes estimates and assumptions regarding future cash flows
in its review of the carrying values of goodwill and other intangibles to assess
recoverability. If these estimates and assumptions change in the future, the
Company may be required to record impairment charges for these assets not
previously recorded. In the first quarter of 2002, the Company will adopt SFAS
142 and will be required to analyze its goodwill for impairment by June 30, 2002
and then at least on an annual basis thereafter.
The carrying value of the Company's net deferred tax assets assumes the
Company will be able to generate sufficient future taxable income in certain tax
jurisdictions, based on estimates and assumptions. The Company may be required
to record additional valuation allowances against its deferred tax assets
resulting in additional income tax expense if these estimates and assumptions
change in the future.
-F11-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
2001 2000
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,096 $ 18,480
Accounts receivable from customers, less
allowance for doubtful accounts of $4,819
and $4,272 60,926 86,767
Inventories:
Raw materials and semi-finished goods 17,309 19,506
Hardware component parts 765 342
Finished goods 1,688 755
Deferred income taxes 25,621 19,217
Prepaid income taxes - 15,738
Other 11,179 7,211
- -------------------------------------------------------------------------------
Total current assets 127,584 168,016
- -------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS:
Investments 7,896 16,740
Goodwill and other intangibles - net 134,721 142,960
Deferred income taxes 6,604 6,614
Refundable contract payments 27,563 25,705
Other 19,899 33,301
- -------------------------------------------------------------------------------
Total investments and other assets 196,683 225,320
- -------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 3,555 3,555
Buildings and improvements 51,054 49,098
Machinery and equipment 242,152 216,138
Furniture and fixtures 14,970 14,230
Leasehold improvements 11,179 10,150
Additions in progress 11,350 17,426
- -------------------------------------------------------------------------------
Total property, plant and equipment 334,260 310,597
Less accumulated depreciation and amortization 191,534 181,007
- -------------------------------------------------------------------------------
Property, plant and equipment - net 142,726 129,590
- -------------------------------------------------------------------------------
TOTAL $466,993 $522,926
===============================================================================
-F12-
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
2001 2000
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 23,880 29,509
Deferred revenues 31,240 47,622
Accrued liabilities:
Salaries, wages and employee benefits 27,077 28,395
Restructuring costs 102 3,296
Taxes 16,729 8,013
Other 17,128 23,612
- -------------------------------------------------------------------------------
Total current liabilities 116,156 140,447
- -------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt 124,118 191,617
Other 24,695 19,497
- -------------------------------------------------------------------------------
Total long-term liabilities 148,813 211,114
- -------------------------------------------------------------------------------
Total liabilities 264,969 351,561
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (see Note 11)
SHAREHOLDERS' EQUITY:
Series preferred stock, authorized 500,000
shares of $1.00 par value, none issued
Common stock, authorized 144,000,000 shares of
$1.00 par value, 37,907,497 shares issued 37,907 37,907
Additional paid-in capital - -
Retained earnings 372,164 343,998
Accumulated other comprehensive income:
Foreign currency translation adjustments 196 (312)
Unrealized gains on investments 4,858 5,396
Changes in fair value of cash flow
hedging instruments (1,344) -
Unamortized restricted stock awards (8,218) (1,591)
- -------------------------------------------------------------------------------
405,563 385,398
- -------------------------------------------------------------------------------
Less 8,977,790 and 9,383,806 shares in
treasury, at cost 203,539 214,033
- -------------------------------------------------------------------------------
Total shareholders' equity 202,024 171,365
- -------------------------------------------------------------------------------
TOTAL $466,993 $522,926
===============================================================================
See Notes to Consolidated Financial Statements.
-F13-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year ended December 31,
2001 2000 1999
- ---------------------------------------------------------------------------------
Net Sales $ 743,203 $ 720,677 $ 702,512
Cost of sales 407,350 426,589 438,223
- ---------------------------------------------------------------------------------
Gross Profit 335,853 294,088 264,289
Selling, general and administrative
expenses 233,334 201,653 185,072
Amortization of intangibles 13,993 9,318 6,035
Acquired in-process research and
development charge - 8,248 -
Restructuring charge - 14,451 -
- ---------------------------------------------------------------------------------
Income From Operations 88,526 60,418 73,182
- ---------------------------------------------------------------------------------
Other Income (Expense):
Interest expense (9,933) (10,379) (7,170)
Investment write-down (7,848) - -
Other - net 76 4,225 2,447
- ---------------------------------------------------------------------------------
Total (17,705) (6,154) (4,723)
- ---------------------------------------------------------------------------------
Income Before Income Taxes 70,821 54,264 68,459
Income taxes 31,847 25,567 25,775
- ---------------------------------------------------------------------------------
Net Income $ 38,974 $ 28,697 $ 42,684
=================================================================================
Earnings Per Common Share
Basic $ 1.34 $ 1.01 $ 1.39
Diluted $ 1.31 $ 1.00 $ 1.37
=================================================================================
See Notes to Consolidated Financial Statements.
-F14-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
2001 2000 1999
- -----------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 38,974 $ 28,697 $ 42,684
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 33,259 29,595 29,738
Amortization 28,062 18,867 10,826
Investment write-down 7,848 - -
Stock-based compensation 5,318 788 601
Noncash portion of restructuring charge - 12,415 -
Acquired in-process research and
development charge - 8,248 -
Loss (gain) on sale of assets (52) (2,426) 1,547
Other - net 3,436 1,420 2,930
Change in assets and liabilities net of
effects of businesses acquired/disposed:
Deferred income taxes 2,174 15,867 5,040
Accounts receivable 28,677 (7,584) 6,913
Inventories and other current assets 18,133 11,408 3,324
Deferred revenues (15,568) 8,760 (1,350)
Accounts payable and accrued liabilities (16,518) (24,454) (5,619)
- -----------------------------------------------------------------------------------
Net cash provided by operating activities 133,743 101,601 96,634
- -----------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (47,503) (40,474) (23,794)
Proceeds from sale of property, plant and equipment 418 412 1,797
Proceeds from sale of investments - 3,350 -
Refundable contract payments (11,818) (12,959) (10,529)
Payment for acquisition of businesses -
net of cash acquired (7,509) (143,195) -
Note receivable 1,983 (5,000) -
Other - net 1,458 (4,842) (376)
- -----------------------------------------------------------------------------------
Net cash used in investing activities (62,971) (202,708) (32,902)
- -----------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Short-term borrowings - net - 155 24
Credit facility proceeds (payments) - net (61,000) 184,995 -
Repayment of long-term debt (6,477) (100,000) (625)
Purchases of treasury stock (10,092) (7,000) (49,535)
Issuance of treasury stock 6,925 2,315 2,154
Dividends paid (8,728) (8,519) (9,188)
Debt issuance costs paid (58) (1,369) -
Other - net 274 (813) 720
- -----------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (79,156) 69,764 (56,450)
- -----------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (8,384) (31,343) 7,282
Cash and cash equivalents at beginning of year 18,480 49,823 42,541
- -----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 10,096 $ 18,480 $ 49,823
===================================================================================
Supplemental cash flow information:
Interest paid $ 10,617 $ 8,741 $ 7,133
Income taxes paid 24,612 23,302 19,013
Exchange of net noncash assets for investment
in Netzee, Inc. - 8,139 -
===================================================================================
See Notes to Consolidated Financial Statements.
-F15-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2001, 2000, and 1999
------------------------------------------------------------------------------
(In thousands, except share Accumulated Unamortized
and per share amounts) Additional Other Restricted Total
Common Paid-in Retained Comprehensive Treasury Stock Shareholders'
Stock Capital Earnings Income (Loss) Stock Awards Equity
- ------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 37,907 $ - $ 293,425 $ (400) $ (168,148) $ (470) $ 162,314
Net income 42,684 42,684
Other comprehensive income:
Foreign currency
translation adjustments 528 528
Unrealized gains on investments,
net of $1,381 in taxes 18,963 18,963
-------------
Comprehensive income 62,175
-------------
Cash dividends, $.30 per share (9,188) (9,188)
Purchase of 2,629,623 shares of treasury
stock (49,535) (49,535)
Issuance of 180,366 shares of treasury
stock under stock compensation plans (1,666) 4,077 (133) 2,278
Other 794 188 982
- ------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 37,907 - 326,049 19,091 (213,606) (415) 169,026
Net income 28,697 28,697
Other comprehensive income (loss):
Foreign currency
translation adjustments (440) (440)
Unrealized losses on investments,
net of $655 in tax benefits (13,567)
(13,567)
-------------
Comprehensive income 14,690
-------------
Cash dividends, $.30 per share (8,519) (8,519)
Purchase of 412,641 shares of treasury
stock (7,000) (7,000)
Issuance of 295,834 shares of treasury
stock under stock compensation plans (2,628) 6,611 (1,668) 2,315
Other 399 (38) 492 853
- ------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 37,907 - 343,998 5,084 (214,033) (1,591) 171,365
Net income 38,974 38,974
Other comprehensive income (loss):
Foreign currency
translation adjustments 508 508
Unrealized losses on investments,
net of $273 in tax benefits (8,386) (8,386)
Reclassification for investment
write-down included in net income 7,848 7,848
Changes in fair value of cash
flow hedging instruments,
net of $860 in tax benefits (1,344) (1,344)
-------------
Comprehensive income 37,600
-------------
Cash dividends, $.30 per share (8,728) (8,728)
Purchase of 505,146 shares of treasury
stock (10,092) (10,092)
Issuance of 910,289 shares of treasury
stock under stock compensation plans (1,636) (2,080) 22,069 (11,432) 6,921
Other 1,636 (1,483) 4,805 4,958
- ------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ 37,907 $ - $ 372,164 $ 3,710 $ (203,539) $(8,218) $ 202,024
==================================================================================================================
See Notes to Consolidated Financial Statements.
-F16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the financial statements
of John H. Harland Company and its majority-owned subsidiaries (the "Company").
Intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments with a
maturity, when purchased, of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost of
inventory for checks and related forms is determined by average costing. Cost of
scannable forms and hardware component parts inventories is determined by the
first-in, first-out method. Cost of data entry terminals is determined by the
specific identification method.
Impairment of Long-Lived Assets
Assets held for disposal are carried at the lower of carrying amount or
fair value, less estimated cost to sell such assets in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
reviews long-lived assets and certain intangibles for impairment when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable and any impairment losses are reported in the period in which the
recognition criteria are first applied based on the fair value of the asset (see
Note 3).
Investments
The Company classifies all of its investments as available-for-sale
securities. Such investments consist primarily of U.S. corporate securities and
other equity interests which are stated at market value, with unrealized gains
and losses on such investments reflected, net of tax, as other comprehensive
income in shareholders' equity. Realized gains and losses on investments are
included in earnings and are derived using the specific identification method.
In September 2001, the Company determined that the decline in market value of
Netzee, Inc. ("Netzee") was other than temporary. Accordingly, the Company's
investment in Netzee was written down resulting in a recognized loss of $7.8
million. The following is a summary of investments at December 31, 2001 and 2000
(in thousands):
Available-for-sale securities
-----------------------------
Cost Market Value
- --------------------------------------------------------------
2001
Corporate equity securities $ 2,174 $ 7,019
Other equity investments 409 877
- --------------------------------------------------------------
Total 2,583 7,896
==============================================================
2000
Corporate equity securities 10,021 14,829
Other equity investments 597 1,911
- --------------------------------------------------------------
Total $10,618 $16,740
==============================================================
-F17-
Goodwill and Other Intangibles
In June 2001, the Financial Accounting Standards Board issued Statement
No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill
and Other Intangibles" ("SFAS 142") which address, among other things,
accounting for goodwill and other intangibles. On July 1, 2001, the Company
adopted SFAS 141 and adopted the portions of SFAS 142 that were effective for
goodwill and intangible assets acquired after June 30, 2001. See the New
Accounting Standards section of Note 1 regarding the impact of the adoption of
SFAS 142.
Goodwill represents the excess of acquisition costs over the fair value
of net assets of businesses acquired. Other intangible assets consist primarily
of purchased customer lists and noncompete covenants that were acquired in
business combinations. Goodwill acquired prior to July 1, 2001 is amortized on a
straight-line basis over periods from 11 to 40 years. Other intangible assets
are amortized on a straight-line basis over periods ranging from two to eight
years. Amortization periods of intangible assets are periodically reviewed to
determine whether events or circumstances warrant revision to estimated useful
lives. Carrying values of goodwill and other intangibles are periodically
reviewed to assess recoverability based on expectations of undiscounted cash
flows and operating income for each related business unit. Impairments are
recognized in operating results if a permanent diminution in value is indicated
(see Note 3).
Refundable Contract Payments
Certain contracts with the Company's customers involve up-front
payments to the customer. These payments are amortized as a reduction of sales
over the life of the related contract and are refundable from the customer if
the contract is terminated.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation of
buildings is computed primarily by the declining balance method. Depreciation of
equipment, furniture and fixtures is calculated by the straight-line or
sum-of-the-years digits method. Leasehold improvements are amortized by the
straight-line method over the life of the lease or the life of the property,
whichever is shorter. The Company capitalizes the qualifying costs of software
developed or obtained for internal use. Depreciation is computed for internal
use software by using the straight-line method over three to five years.
Revenue Recognition
Sales of products and services are recorded based on shipment of
products or performance of services. Revenue from maintenance contracts is
deferred and recognized over the period of the agreements. Revenue from
licensing of software with no follow-on obligations on the part of the Company
is recognized upon delivery. Revenue from licensing of software under
usage-based contracts is recognized ratably over the term of the agreement or on
actual usage basis. Revenue from licensing of software under term license
agreements is recognized ratably over the term of the agreement. Revenue from
licensing of software with standard installation and training is recognized upon
delivery of the licenses. Revenue from installation and training services is
recognized upon completion of those services. Revenue from licensing of software
with significant amounts of tailoring and/or customization is recognized on a
percentage of completion basis as the services are performed. Estimates of
efforts to complete a project are used in the percentage of completion
calculation. Due to the uncertainties inherent in these estimates, actual
results could differ from those estimates. If the license agreement obligates
the Company to provide post-contract support ("PCS") at no additional cost to
the customer, the revenue related to PCS, which is based on prices charged when
sold separately from the software, is recognized ratably over the support
period.
-F18-
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock-based compensation plans
and applies the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The
related disclosures are presented in Note 7.
Earnings Per Common Share
Earnings per common share for all periods have been computed under the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." The net income used in the calculation of diluted earnings per common
share is adjusted for the effect of the interest on the conversion of
subordinated debt. The net income used for the calculation of diluted earnings
per common share for 2001, 2000 and 1999 was $39,143,000, $28,968,000 and
$42,958,000, respectively. The average number of common shares used in the
calculation of basic earnings per common share for 2001, 2000 and 1999 was
29,073,406, 28,468,887 and 30,637,619, respectively. The average number of
common shares and dilutive potential common shares used in the calculation of
diluted earnings per common share for 2001, 2000 and 1999 was 29,984,345,
28,831,637 and 31,261,483, respectively. Dilutive potential common shares that
were not included in the calculation of diluted earnings per share for 2001,
2000 and 1999 were 151,000, 1,011,000, and 615,000, respectively, because they
were anti-dilutive. The dilutive potential common shares relate to options under
stock compensation plans and the effect of the conversion of subordinated debt.
Software and Other Development Costs
The Company expenses research and development costs, including
expenditures related to development of software that does not qualify for
capitalization.
The Company accounts for costs to develop or obtain computer software
for internal use in accordance with Accounting Standards Executive Committee
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" which requires certain costs to be
capitalized.
Software development costs incurred prior to the establishment of
technological feasibility are expensed as incurred. Software development costs
incurred after the technological feasibility of the subject software product has
been established are capitalized in accordance with SFAS 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed."
Capitalized software development costs are amortized on a product-by-product
basis using the estimated economic life of the product on a straight-line basis
over three to four years. Unamortized software development costs in excess of
estimated future net revenues from a particular product are written down to
estimated net realizable value.
Income Taxes
The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between financial statement and tax bases
of assets and liabilities.
Risk Management Contracts
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), as amended by Statements No. 137 and No. 138, which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133, as amended, requires all
derivative instruments to be recognized in the balance sheet at fair value, and
changes in the fair values of such instruments must be recognized currently in
earnings unless specific hedge accounting criteria are met.
-F19-
The Company uses derivative instruments to manage interest rate risk.
On the date an interest rate derivative contract is entered into, the Company
designates the derivative as either a fair value hedge or a cash flow hedge.
Changes in derivative fair values that are designated as fair value hedges are
recognized in earnings as offsets to the changes in fair value of related hedged
assets, liabilities and firm commitments. Changes in the derivative fair values
that are designated as cash flow hedges are deferred and recorded as a component
of accumulated other comprehensive income until the hedged transactions occur
and are recognized in earnings. The Company's derivative instruments used to
manage interest rate risk are considered highly effective. If the hedging
derivatives would be considered ineffective, the change in fair value would be
immediately recognized in earnings. Derivatives that are executed for risk
management purposes but not designated as hedges under SFAS 133, as amended, are
recorded at their market value and recognized in current earnings.
The Company formally documents the relationship between hedging
instruments and the hedged items, as well as its risk-management objectives and
strategy for undertaking various hedge transactions. The Company links all
hedges that are designated as fair value hedges to specific assets or
liabilities on the balance sheet or to specific firm commitments. The Company
links all hedges that are designated as cash flow hedges to forecasted
transactions or to floating-rate liabilities on the balance sheet. The Company
also assesses, both at the inception of the hedge and on an on-going basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
Should it be determined that a derivative is not highly effective as a hedge,
the Company will discontinue hedge accounting prospectively.
The Company adopted SFAS 133, as amended, on January 1, 2001. Adoption
of these pronouncements has not had a material effect on the Company's financial
position or results of operations. In 2001, the Company recorded the change in
value related to cash flow hedges to other comprehensive income which was not
material. In 2001, the Company did not have any hedging instruments that were
designated as fair value hedges.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS 141
and SFAS 142 (see Goodwill and Intangibles section of Note 1). SFAS 141
addresses financial accounting and reporting for business combinations. Under
SFAS 141, all business combinations after June 30, 2001 are to be accounted for
using the purchase method of accounting. Under SFAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are tested at least
annually for impairment. Separable intangible assets with defined lives will
continue to be amortized over their useful lives. The provisions of SFAS 142
apply to goodwill and intangible assets recognized on the Company's financial
statements on January 1, 2002 and thereafter. In 2001, amortization of goodwill
totaled $11.2 million, most of which was non-deductible for tax purposes. The
Company has not yet assessed the other financial statement impact of adopting
SFAS 142. The Company has engaged a third party for valuations of the businesses
which have associated goodwill balances and will determine whether an impairment
exists by June 30, 2002.
In August 2001, the Financial Accounting Standards Board issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144") which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 will be effective for the
Company beginning January 1, 2002. The Company does not believe the adoption of
SFAS 144 will have a material effect on the Company's financial position or
results of operations.
Reclassifications
Certain reclassifications have been made in the 1999 and 2000 financial
statements and notes to financial statements to conform to the 2001
classifications.
-F20-
2. Acquisitions
In March 2001, the Company's Scantron subsidiary acquired ImTran, Inc.
("ImTran"). ImTran was a data collection and document capture solutions firm
specializing in automated data collection and document imaging. In October 2001,
the Company's Printed Products segment acquired the assets of DocuPrint,
Incorporated ("DocuPrint"). DocuPrint produced forms for major financial
institutions. Also in October 2001, the Company's Scantron subsidiary acquired
substantially all the assets of the Scanning Systems division of Associated
Business Products, Inc., a subsidiary of Global DocuGraphix, Inc. for
approximately $6.0 million in cash.
The assets acquired through acquisitions in 2001 totaled $7.5 million.
Of the total acquisition costs, $5.7 million was allocated to goodwill in the
Scantron segment. Most of the goodwill was acquired after July 1, 2001 and was
assigned an indefinite life. All consideration was paid in cash that was funded
with proceeds from the Company's credit facility.
On August 23, 2000, the Company completed a cash tender offer for all
of the outstanding common stock of Concentrex. The acquired operations provided
technology-powered solutions to deliver financial services, including a broad
range of traditional software and services to over 5,000 financial institutions
of all types and sizes in the United States.
Consideration totaled $146.9 million of which approximately $100.0
million was funded from a credit facility obtained by the Company (see Note 4).
The acquisition costs were allocated on the basis of the estimated fair
market values of the assets acquired and liabilities assumed. Acquisition costs
were allocated as follows and are being amortized on a straight-line basis over
the useful life indicated below (in thousands):
Useful Life
Value In Years
- --------------------------------------------------------------------------
Tangible net assets acquired $ 17,555 -
Goodwill 88,895 11
Other intangible assets 10,668 7
Software 13,274 4
Net assets held for sale 8,242 -
In-process research and development 8,248 -
- --------------------------------------------------------------------------
Total $ 146,882
==========================================================================
As part of the acquisition, the Company acquired in-process research
and development costs of $8.2 million, which were expensed at acquisition, and
which represented the fair value of certain acquired research and development
projects that were determined to have not reached technological feasibility.
A portion of the acquisition costs was allocated to the net realizable
value of certain assets of the acquired operation's online banking and
electronic payments business which the Company identified as a business held for
sale. In November 2000, these assets, which totaled $8.2 million, were sold to
Netzee in exchange for Netzee common stock. The Company also extended a $5.0
million line of credit to Netzee of which $3.0 million and $5.0 million were
outstanding at December 31, 2001 and December 31, 2000, respectively. In
September 2001, the Company determined that the decline in market value of its
investment in Netzee was other than temporary and the investment was written
down to its market value, resulting in a recognized loss before income taxes of
$7.8 million.
All acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of operations of each have been
included in the Company's consolidated financial statements from the date of
acquisition.
-F21-
The following unaudited pro forma summary presents information as if
the Concentrex acquisition occurred at the beginning of the respective year in
which the assets were acquired as well as the beginning of the immediately
preceding year (in thousands, except per share amounts):
2000 1999
- -------------------------------------------------------------------------
Net sales $ 786,682 $ 809,082
Net income $ 13,982 $ 12,661
Earnings per common share:
Basic $ .49 $ .41
Diluted $ .49 $ .40
The unaudited pro forma summary includes adjustments related to the
purchase of 100% of the common stock of ULTRADATA Corporation by Concentrex in
1999. The pro forma summary includes adjustments which remove the operating
results of the business held for sale and certain other adjustments, primarily
increased amortization of intangible assets, increased interest expense and
reduced interest income. Pro forma results also include the write-off of
acquired in-process research and development costs of $8.2 million and $18.5
million for the years ended December 31, 2000, and 1999, respectively.
The unaudited pro forma financial information presented does not
purport to be indicative of either the results of operations that would have
occurred had the acquisitions taken place at the beginning of the periods
presented or of future results.
Goodwill and other intangible assets acquired in acquisitions consist
of the following as of December 31 (in thousands):
2001 2000
- -------------------------------------------------------------------------
Goodwill $ 206,223 $ 208,631
Non-compete covenants 30,100 30,100
Customer lists 23,510 23,510
- -------------------------------------------------------------------------
Total 259,833 262,241
Less accumulated amortization 125,112 119,281
- -------------------------------------------------------------------------
Total $ 134,721 $ 142,960
=========================================================================
3. Restructuring Charge
In the fourth quarter of 2000, the Company recorded a restructuring
charge of $14.5 million which was primarily for impairment of intangible assets
and severance costs.
The impairment of intangibles was a result of the Company's examination
during that quarter of the long-term viability of product offerings in two of
its software operations. Subsequent to the acquisition of Concentrex in August
2000, the Company decided to discontinue certain DOS-based product offerings and
migrate current customers to similar Concentrex product offerings or to a
web-based product currently in development. As a result of this decision, the
remaining intangibles associated with these products were written off. Due to
lower than anticipated sales of a new version of an existing product released in
late 1999, the Company revised the long-term prospects of another of its
software operations. The revision of expectations required an adjustment of the
carrying value of the operation's long-term assets to the calculated value based
on discounted projected cash flows. The impairment charges for these two actions
had a total pre-tax impact of $9.4 million, or $7.9 million after tax.
Restructuring charges by operating segment are presented in Note 12.
The severance costs resulted primarily from a reorganization of the
Company into three distinct segments. In connection with the reorganization
during the fourth quarter of 2000, the Company eliminated approximately 145
positions, which resulted in a pre-tax charge of $4.3 million, or $2.6 million
after tax.
-F22-
The cash and noncash elements of the restructuring charge for each of
the years ended December 31, 2001, 2000 and 1999, as well as the beginning and
ending balances of accrued restructuring costs, consisted of the following
components (in thousands):
Utilized
Beginning Restructuring -------------------- Ending
Balance Charge Cash Non-Cash Balance
- -------------------------------------------------------------------------------
1999
Employee severance $ 6,669 $ - $ (6,226) $ - $ 443
Other 2,390 - (1,460) (135) 795
- -------------------------------------------------------------------------------
Total 9,059 - (7,686) (135) 1,238
===============================================================================
2000
Write-down of
intangible and
other assets - 9,417 - (9,417) -
Employee severance 443 4,334 (1,662) - 3,115
Other 795 700 (614) (700) 181
- -------------------------------------------------------------------------------
Total 1,238 14,451 (2,276) (10,117) 3,296
===============================================================================
2001
Employee severance 3,115 - (2,982) (87) 46
Other 181 - (125) - 56
- -------------------------------------------------------------------------------
Total $ 3,296 $ - $ (3,107) $ (87) $ 102
===============================================================================
4. Long-Term Debt
Long-term debt consisted of the following as of December 31, 2001 and
2000 (in thousands):
2001 2000
- -------------------------------------------------------------------------
Revolving Credit Facility $ 124,000 $ 185,000
Convertible Subordinated Debentures, net of
unamortized issuance costs of $0
and $132,000 - 6,444
Other 173 894
- -------------------------------------------------------------------------
Total 124,173 192,338
Less current portion 55 721
- -------------------------------------------------------------------------
Long-term debt $ 124,118 $ 191,617
=========================================================================
The Company has a revolving credit facility (the "Credit Facility")
with a syndicate of banks in an amount of $325.0 million. The Credit Facility
matures in 2004 and may be used for general corporate purposes, including
acquisitions, and includes both direct borrowings and letters of credit. The
Credit Facility is unsecured and the Company presently pays a commitment fee of
0.175% on the unused amount of the Credit Facility. Borrowings under the Credit
Facility bear interest, at the Company's option, on the following indices (plus
a margin as defined): the Federal Funds Rate, the SunTrust Bank Base Rate or
LIBOR. The Credit Facility has certain financial covenants including leverage,
fixed charge and minimum net worth tests. The Credit Facility also has
restrictions that limit the Company's ability to incur additional indebtedness,
grant security interests or sell its assets beyond certain amounts.
At December 31, 2001, the Credit Facility consisted of $124.0 million
in outstanding cash borrowings, $4.4 million in outstanding letters of credit
and $196.6 million available for borrowing. In addition to the outstanding
letters of credit, the Company has outstanding a surety bond in the amount of
$1.1 million issued by an insurance company that covers certain insurance
obligations. The average interest rate in effect on outstanding cash borrowings
at December 31, 2001, including the effect of the Company's interest rate
hedging program (see Note 10), was 5.15%.
-F23-
The Company's 6.75% Convertible Subordinated Debentures ("the
Debentures") were redeemed at par in August 2001. At December 31, 2001, there
were no outstanding amounts under the Debentures. Prior to being redeemed, the
Debentures were convertible into common stock of the Company at any time at a
conversion price of $25.17 per share.
Other long-term debt relates to other miscellaneous obligations. At
December 31, 2001, the Company believes it was in compliance with the covenants
associated with all debt instruments.
Annual maturities of long-term debt are $0.1 million in 2002, $0.1
million in 2003 and $124.0 million in 2004.
5. Income Taxes
The income tax provision for the years ended December 31, 2001, 2000
and 1999 consisted of the following (in thousands):
2001 2000 1999
- -------------------------------------------------------------------------
Current:
Federal $ 25,747 $ 7,225 $ 17,400
State 3,926 2,475 3,335
- -------------------------------------------------------------------------
Total 29,673 9,700 20,735
- -------------------------------------------------------------------------
Deferred:
Federal 2,119 13,302 4,213
State 55 2,565 827
- -------------------------------------------------------------------------
Total 2,174 15,867 5,040
- -------------------------------------------------------------------------
Total $ 31,847 $ 25,567 $ 25,775
=========================================================================
The tax effects of significant items comprising the Company's net
deferred tax assets as of December 31 were as follows (in thousands):
2001 2000
- ---------------------------------------------------------------------------
Current deferred tax asset:
Accrued vacation $ 3,157 $ 2,315
Deferred revenue 360 646
Accrued liabilities 6,637 4,679
Benefit of net operating loss carryforwards 8,629 2,664
Allowance for doubtful accounts 1,917 4,182
Other 4,921 4,731
- --------------------------------------------------------------------------
Total 25,621 19,217
- --------------------------------------------------------------------------
Non-current deferred tax asset (liability):
Difference between book and tax basis
of property (11,269) (9,208)
Deferred revenue 2,040 1,213
Deferred compensation 2,476 1,798
Postretirement benefit obligation 5,348 4,333
Capital loss carryforward 24,595 20,625
Unrealized (gain) loss on investments 406 (718)
Acquisitions and restructuring reserves 532 3,293
Benefit of net operating loss carryforwards 5,260 5,773
Other 3,305 3,504
- --------------------------------------------------------------------------
Total 32,693 30,613
Valuation allowance (26,089) (23,999)
- --------------------------------------------------------------------------
Net deferred tax asset $ 32,225 $ 25,831
==========================================================================
-F24-
During 2001, the Company utilized approximately $1.7 million of capital
loss recognized in a prior year to offset unrealized capital gains associated
with investments.
The Company has established a valuation allowance for certain net
operating loss and capital loss carryforwards. Management believes that, based
on a number of factors, the available objective evidence creates uncertainty
regarding the recoverability of these carryforwards. The valuation adjustment
increased in 2001 due to the Company recording an impairment charge on
investments thereby reducing the utilization of loss carryforwards.
Additionally, the Company has recorded a valuation allowance of $8.9 million
related to certain deferred tax assets acquired from Concentrex.
The following reconciles the income tax provision (benefit) at the U.S.
federal income tax statutory rate to that in the financial statements (in
thousands):
2001 2000 1999
- -------------------------------------------------------------------------
Statutory rate $ 24,787 $ 18,992 $ 23,994
State and local income taxes, net
of Federal income tax benefit 2,669 3,453 2,710
Non-deductible goodwill
amortization 3,156 3,326 448
Other comprehensive items - (4,942) 6,625
Loss from benefits subsidiary - - (25,261)
Change in valuation allowance 1,789 3,168 17,457
In-process research and development
costs - 2,887 -
Benefits from tax credits (441) (1,078) -
Other - net (113) (239) (198)
- --------------------------------------------------------------------------
Income tax provision $ 31,847 $ 25,567 $ 25,775
==========================================================================
6. Shareholders' Equity
In 2001, the Company purchased 60,000 shares of common stock for $1.0
million to complete a 1999 authorization to purchase up to 3.1 million shares of
the Company's outstanding common stock. Including the purchases made in 2000 and
1999, the Company repurchased 3,100,000 shares for $57.5 million under this
authorization. In 2000, the Board of Directors approved an extension of this
program to include up to an additional 2.9 million shares of common stock. As of
December 31, 2001, 445,146 shares of common stock were purchased for $9.1
million under the additional authorization. The funding of stock purchases came
from internally generated cash. The Company issued 980,236 shares and 295,834
shares of treasury stock under its stock compensation plans for the years ended
2001 and 2000 respectively.
In 1999, the Company renewed its Shareholder Rights Agreement. The
rights were distributed as a dividend at the rate of one right for each share of
common stock of the Company held by shareholders of record. Each right entitles
shareholders to buy, upon occurrence of certain events, one share of common
stock for $90.00. The rights generally will be exercisable only if a person or
group acquires beneficial ownership of 15% or more of the Company's common
stock, or commences a tender or exchange offer that, upon consummation, would
result in a person or group owning 30% or more of the Company's common stock.
Under certain circumstances the rights are redeemable at a price of $.001 per
right. The rights expire on July 5, 2009.
7. Stock Compensation Plans
Under the Company's Employee Stock Purchase Plan ("ESPP"), the Company
is authorized to issue up to 5,100,000 shares of common stock to its employees,
most of whom are eligible to participate. Under the ESPP, eligible employees may
exercise an option to purchase shares of Company stock through payroll
deductions. The option price is 85% of the lower of the beginning-of-quarter or
end-of-quarter market price. During 2001, 2000 and 1999, employees exercised
options to purchase 116,450, 148,415 and 155,413 shares, respectively. Options
granted under the ESPP were at prices ranging from $12.03 to $18.62 in 2001,
$11.98 to $12.75 in 2000 and $10.81 to $16.60 in 1999. At December 31, 2001,
there were 751,318 shares of common stock reserved for purchase under the ESPP.
-F25-
Under the Company's 1999 Stock Option Plan, the Company may grant stock
options to key employees to purchase shares of Company stock at no less than the
fair market value of the stock on the date of the grant or issue restricted
stock to such employees. The Company is authorized to issue up to 2,000,000
shares of common stock under the plan. Stock options have a maximum life of ten
years and generally vest ratably over a five-year period beginning on the first
anniversary date of the grant. Upon adoption of the 1999 plan, the Company
terminated a previous plan except for options outstanding thereunder. Options
granted under such plan are generally exercisable ratably over a five-year
period beginning on the first anniversary of the date of grant, and have a
maximum life of ten years. Certain options granted in 1998 and 1999 vest per
specified schedules beginning one to five years from the date of the grant.
In 2000, the Company adopted the 2000 Stock Option Plan which
authorizes shares for issuance through stock options and grants of restricted
stock. In 2001, the Company's Board of Directors approved an amendment to the
2000 Plan increasing the shares authorized for issuance to a total of 3,000,000
shares. The 2000 Plan is substantially similar to the 1999 Plan, except that the
Company's executive officers are ineligible to receive options or stock grants
thereunder. As of December 31, 2001, there were 5,285,922 shares of common stock
reserved for issuance under these stock option plans.
Restricted stock grants generally vest over a period of five years,
subject to earlier vesting if the Company's common stock outperforms the S&P 500
in two of three consecutive years. Unearned compensation is recorded at the date
of the award based on the market value of shares issued and is amortized over
the period of restriction. The certificates covering the restricted stock are
held by the Company, but such shares are deemed to be outstanding for all other
purposes. The shares have all the rights of other shares of common stock,
subject to certain restrictions. The restricted stock is generally forfeited if
the employee is terminated for any reason prior to the lapse in restrictions,
other than death or disability.
In February 2001, the Company effected a voluntary program allowing
certain officers to exchange certain options for a grant of restricted stock.
Options to purchase 840,000 shares with a weighted average exercise price of
$24.09 were exchanged for 295,905 shares of restricted stock. At the same time,
an additional 105,500 shares of restricted stock were granted to such officers
as part of an annual grant. These shares of restricted stock vest to the extent
of one third of the grant when the closing stock price reaches at least $22.50
per share for ten consecutive trading days and two thirds of the grant vest when
the closing stock price similarly reaches at least $27.00 per share. In any
event, such shares vest after five years. In August 2001, the vesting conditions
for one third of these shares were met.
In 1998, the Board of Directors granted 50,000 restricted shares of the
Company's common stock to the Company's chief executive officer. Of this amount,
39,596 shares were immediately issued with the remainder issued in 1999. The
restrictions expired as to 25,000 shares in October 2001 and restrictions expire
as to 12,500 shares in October 2002 and October 2003, respectively. All
restricted stock granted to the Company's chief executive officer vests in the
event of termination of employment without cause.
-F26-
A summary of option transactions during the three years ended December
31, 2001, follows:
Weighted
Average
Exercise
Shares Price
- -------------------------------------------------------------------------
Outstanding - December 31, 1998 3,280,000 $ 19.16
Options granted 1,039,000 20.52
Options canceled (771,050) 22.34
Options exercised (7,950) 16.92
- -------------------------------------------------------------------------
Outstanding - December 31, 1999 3,540,000 18.87
Options granted 1,549,250 14.50
Options canceled (552,400) 18.28
Options exercised (35,200) 14.20
- -------------------------------------------------------------------------
Outstanding - December 31, 2000 4,501,650 17.47
Options granted 627,500 14.32
Options canceled (1,319,950) 21.91
Options exercised (372,601) 18.85
- -------------------------------------------------------------------------
Outstanding - December 31, 2001 3,436,599 $ 16.36
=========================================================================
The following table summarizes information pertaining to options
outstanding and exercisable as of December 31, 2001:
Options Outstanding
- -------------------------------------------------------------------------
Weighted Weighted
Average Average
Range of Contractual Exercise
Exercise Prices Options Life(Years) Price
- -------------------------------------------------------------------------
$12.75 to $13.94 1,494,949 7.69 $ 13.64
$14.31 to $15.44 825,950 8.18 15.14
$16.19 to $20.00 484,200 7.35 19.10
$20.06 to $24.03 566,500 8.62 21.22
$31.88 to $31.88 65,000 4.79 31.88
- -------------------------------------------------------------------------
Total 3,436,599 7.86 $ 16.36
=========================================================================
Options Exercisable
- -------------------------------------------------------------------------
Weighted
Average
Range of Exercise
Exercise Prices Options Price
- -------------------------------------------------------------------------
$12.75 to $13.94 644,749 $ 13.50
$14.31 to $15.44 130,450 15.08
$16.19 to $20.00 218,500 19.64
$20.06 to $24.03 109,400 21.94
$31.88 to $31.88 65,000 31.88
- -------------------------------------------------------------------------
Total 1,168,099 $ 16.64
=========================================================================
-F27-
A summary of restricted stock transactions during the three years ended
December 31, 2001, follows:
Weighted
Average
Shares Price
- -------------------------------------------------------------------------
Outstanding - December 31, 1998 39,596 $ 12.75
Restricted stock issued 10,404 12.75
- -------------------------------------------------------------------------
Outstanding - December 31, 1999 50,000 12.75
Restricted stock issued 111,400 14.98
Restrictions lifted (2,500) 15.38
Restricted stock forfeited (4,500) 15.38
- -------------------------------------------------------------------------
Outstanding - December 31, 2000 154,400 14.24
Restricted stock issued 501,055 23.04
Restrictions lifted (158,800) 22.36
Restricted stock forfeited (7,700) 15.18
- -------------------------------------------------------------------------
Outstanding - December 31, 2001 488,955 $ 20.61
=========================================================================
The Company has a deferred compensation plan for its non-employee
directors covering a maximum of 200,000 shares. At December 31, 2001 and 2000,
there were 87,854 and 62,329 shares, respectively, reserved for issuance under
the Plan.
For the years ending December 31, 2001, 2000 and 1999, the Company
recognized expense related to stock-based compensation of $5,318,000, $788,000
and $601,000, respectively. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
consistent with the method of SFAS 123, the Company's net income and earnings
per share would have changed to the pro forma amounts listed below (in
thousands, except per share amounts):
2001 2000 1999
- -------------------------------------------------------------------------
Net income:
As reported $ 38,974 $ 28,697 $ 42,684
Pro forma $ 37,721 $ 25,093 $ 40,038
Earnings
per common share:
As reported
Basic $ 1.34 $ 1.01 $ 1.39
Diluted $ 1.31 $ 1.00 $ 1.37
Pro forma
Basic $ 1.30 $ .88 $ 1.31
Diluted $ 1.26 $ .87 $ 1.29
Pro forma compensation costs associated with options granted under the
ESPP is estimated based on the discount from market value. The following
presents the estimated weighted average fair value of options granted and the
weighted average assumptions used under the Black-Scholes option pricing model
for each of the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
- -------------------------------------------------------------------
Fair value per option $7.65 $5.91 $6.48
Weighted average assumptions:
Dividend yield 1.6% 2.1% 1.5%
Expected volatility 33.2% 34.7% 29.6%
Risk-free interest rate 5.0% 6.0% 5.4%
Expected life (years) 8.5 8.2 8.7
8. Employee Retirement and Savings Plans
The Company's Master 401(k) Plan and Trust ("401(k) plan") is a defined
contribution 401(k) plan with an employer match covering any employee of the
Company or a participating affiliate. Participants may contribute on a pretax
and after-tax basis, subject to maximum IRS limits and not exceeding 17% of
annual compensation. The Company matches employee contributions $0.50 for every
dollar up to a maximum Company-matching contribution of 3% of qualified annual
compensation. The Company recognized matching contributions to the 401(k) plan
of $3.3 million in 2001, $3.9 million in 2000, and $3.4 million in 1999.
Additional contributions may be made from accumulated and/or current net
profits. In 2001, an additional contribution to the 401(k) plan of $1.0 million
was recognized by the Company.
-F28-
The Company has a non-qualifying deferred compensation plan similar to
the 401(k) plan. This plan provides an opportunity for eligible employees to
contribute additional amounts for retirement savings once they have reached the
maximum contribution amount in the 401(k) plan. The Company's contributions to
this plan during 2001, 2000 and 1999 were not significant.
The Company has unfunded deferred compensation agreements with certain
officers. The present value of cash benefits payable under the agreements is
being provided over the periods of active employment and totaled $3.8 million at
December 31, 2001 and 2000. The charge to expense for these agreements is not
significant.
9. Postretirement Benefits
The Company sponsors two defined postretirement benefit plans that
cover qualifying salaried and nonsalaried employees. One plan provides health
care benefits and the other provides life insurance benefits. The medical plan
is contributory and contributions are adjusted annually based on actual claims
experience. The Company's intent is that the retirees provide the majority of
the actual cost of providing the medical plan. The life insurance plan is
noncontributory. Neither plan is funded.
As of December 31, 2001 and 2000, the accumulated postretirement
benefit obligation ("APBO") under such plans was $20.8 million and $17.9
million, respectively. The following table reconciles the plans' beginning and
ending balances of the APBO and reconciles the plans' status to the accrued
postretirement health care and life insurance liability reflected on the balance
sheet as of December 31 (in thousands):
2001 2000
- ----------------------------------------------------------------------
APBO as of January 1:
Retirees $ 10,641 $ 10,135
Fully eligible participants 7,308 5,473
Other participants - 3,525
- ----------------------------------------------------------------------
17,949 19,133
Net Change in APBO:
Service costs - 360
Interest costs 1,433 1,499
Benefits paid (1,007) (602)
Change in discount rate 2,384 851
Plan curtailment - (3,292)
- ----------------------------------------------------------------------
Total net change in APBO 2,810 (1,184)
- ----------------------------------------------------------------------
APBO as of December 31:
Retirees 17,383 10,641
Fully eligible participants 3,376 7,308
- ----------------------------------------------------------------------
20,759 17,949
Unrecognized net loss (7,776) (5,617)
- ----------------------------------------------------------------------
Accrued postretirement cost -
included in Other Liabilities $ 12,983 $ 12,332
======================================================================
-F29-
Net periodic postretirement costs ("NPPC") are summarized as follows
(in thousands):
2001 2000 1999
- -----------------------------------------------------------------------
Interest on APBO $ 1,433 $ 1,499 $ 1,029
Net amortization 225 504 309
Service costs - 360 408
- -----------------------------------------------------------------------
Total $ 1,658 $ 2,363 $ 1,746
=======================================================================
In 2000, the Company eliminated employer subsidies for all future
retirees except those that have twenty or more years of service as of December
31, 2000 and retire prior to December 31, 2002. During 1999, benefit eligibility
was extended below age fifty-five to any employee with twenty years of service.
Medical costs were assumed to increase by 15.0% in 2001 and 12.0% in
2002 and increases are projected to decline gradually to 5% in 2008 and to
remain at that level thereafter. Participant contributions were assumed to
increase by 20% in 2001 and 15% in 2002 and increases are projected to decline
gradually to 5% in 2008 and thereafter. The medical cost and participant
contributions trend rate assumptions could have a significant effect on amounts
reported. An increase of 1.0% in the assumed trend rates would have had the
effect of increasing the APBO by $1.6 million and the NPPC by $102,000. A
decrease of 1.0% in the assumed trend rates would have had the effect of
decreasing the APBO by $1.4 million and the NPPC by $88,000. The weighted
average discount rate used in determining the APBO was 7.0% in 2001, 7.5% in
2000 and 8.0% in 1999, and employee earnings were estimated to increase 3.5%
annually until age 65.
In 1999, the Company transferred its obligations under certain of its
benefits programs to an existing subsidiary to administer. In connection with
the transfer, the Company sold a minority interest in the subsidiary to a third
party benefits management company.
10. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
investments, receivables, accounts payable, borrowings and interest rate risk
management contracts.
At December 31, 2001 and 2000, the fair values of cash and cash
equivalents, receivables, accounts payable and short-term debt approximated
carrying values because of the short-term nature of these instruments. The
estimated fair values of other financial instruments subject to fair value
disclosures are determined based on commercial banker estimates or quoted market
prices or rates for the same or similar instruments, and the related carrying
amounts at December 31 are as follows (in thousands):
Carrying Value Fair Value
- -------------------------------------------------------------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------
Investments:
Long-term $ 7,896 $ 16,740 $ 7,896 $ 16,740
Debt:
Long-term (124,118) (191,617) (124,116) (189,912)
Risk management contracts:
Interest rate swaps (2,204) - (2,204) -
In 2001, the Company entered into interest rate swap agreements to
manage its exposure to interest rate movements by effectively exchanging
floating rate payments for fixed rate payments without the exchange of the
underlying principal. The interest rate swaps are directly matched against U.S.
dollar LIBOR contracts outstanding under the Company's Credit Facility and are
reset quarterly. Both the interest rate swaps and the Credit Facility mature in
2004. The interest rate swaps are structured to amortize on a quarterly basis so
-F30-
that on a percentage basis, they approximate the Company's forecasted cash
flows. The differential between fixed and variable rates to be paid or received
is accrued as interest rates change in accordance with the agreements and
recognized over the life of the agreements as an adjustment to interest expense.
At December 31, 2001, the notional principal amount of interest rate swaps
outstanding was $98.0 million. The fair value of the swaps is reported on the
balance sheet in other long-term liabilities. The net change in fair value of
the swaps at December 31, 2001 is reported in other comprehensive income. The
swaps are highly effective and no significant amounts for hedge ineffectiveness
were reported in net income during the twelve month period ended December 31,
2001.
The Company periodically reviews its positions with, and the credit
quality of, the financial institutions that are counterparties to its financial
instruments, and does not anticipate nonperformance by the counterparties. The
Company would not realize a material loss as of December 31, 2001 in the event
of nonperformance by any one counterparty. The Company enters into transactions
only with financial institution counterparties that have a credit rating of A-,
A3 or better as defined by Standard and Poor's or Moody's Investors Service,
respectively. In addition, the Company limits the amount of investment credit
exposure with any one institution.
11. Commitments and Contingencies
In the ordinary course of business, the Company is subject to various
legal proceedings and claims. The Company believes that the ultimate outcome of
these matters will not have a material effect on its financial statements.
Total rental expense was $15.8 million in 2001, $13.4 million in 2000
and $11.8 million in 1999. Minimum annual rentals under noncancelable operating
leases at December 31, 2001 are as follows (in thousands):
2002 $ 14,651
2003 11,785
2004 9,761
2005 9,023
2006 7,800
Thereafter 34,542
- -----------------------------------------------------------------------
Total $ 87,562
=======================================================================
At December 31, 2001 the Company has committed to purchase
approximately $6.2 million of digital printing equipment.
In November 2000, in conjunction with the sale of certain assets to
Netzee, the Company extended a guaranty to a financial institution, on behalf of
Netzee, of Automated Clearing House exposures up to an amount not to exceed
$15.0 million. In March 2001, the guaranty was terminated with no liability to
the Company.
12. Business Segments
The Company operates its business in three segments. The Printed
Products segment ("Printed Products") includes checks and direct marketing
activities marketed primarily to financial institutions. The Software and
Services segment ("Software") is focused on the financial institution market and
includes lending and mortgage origination and closing applications, database
marketing software, host processing applications and business intelligence
solutions. The Scantron segment ("Scantron") represents products and services
sold by the Company's Scantron subsidiary including scanning equipment and
software, scannable forms, survey solutions and field maintenance services.
Scantron sells these products and services to the commercial, financial
institution and education markets.
The Company's operations are primarily in the United States and Puerto
Rico. There were no significant intersegment sales and no material amounts of
the Company's sales are dependent upon a single customer. Equity investments as
-F31-
well as foreign assets are not significant to the consolidated results of the
Company. The Company's accounting policies for segments are the same as those
described in Note 1.
Management evaluates segment performance based on segment income or
loss before income taxes. Segment income or loss includes restructuring charges
and software and other development costs, but excludes interest income, interest
expense and certain other nonoperating gains and losses, all of which are
considered corporate items. Corporate assets consist primarily of cash and cash
equivalents, deferred income taxes, investments and other assets not employed in
production.
Summarized financial information for 2001, 2000 and 1999 is as follows
(in thousands):
Business Segment
------------------------------
Printed Software and
Products Services Scantron Corporate & Consoli-
Eliminations dated
- -----------------------------------------------------------------------------------
2001
Net sales $ 527,257 $ 121,341 $ 95,907 $ (1,302) $ 743,203
Income (loss) 89,861 (932) 25,282 (43,390) 70,821
Identifiable assets 239,339 130,581 41,003 56,070 466,993
Depreciation and
amortization 36,946 17,804 3,981 2,590 61,321
Capital expenditures 42,473 2,097 2,831 102 47,503
2000
Net sales $ 567,514 $ 60,463 $ 93,361 $ (661) $ 720,677
Restructuring charge 2,074 11,875 502 14,451
Income (loss) 94,779 (26,664) 19,502 (33,353) 54,264
Identifiable assets 223,320 166,631 37,952 95,023 522,926
Depreciation and
amortization 31,193 10,136 4,631 2,502 48,462
Capital expenditures 37,706 991 1,126 651 40,474
1999
Net sales $ 577,708 $ 27,486 $ 97,569 $ (251) $ 702,512
Income (loss) 87,618 (3,220) 17,256 (33,195) 68,459
Identifiable assets 210,607 22,315 48,948 109,535 391,405
Depreciation and
amortization 30,182 3,375 4,787 2,220 40,564
Capital expenditures 18,084 1,457 3,626 627 23,794
-F32-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
John H. Harland Company:
We have audited the consolidated balance sheets of John H. Harland
Company and its subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in Item 14(a)2. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of John H. Harland Company and
its subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements as a whole, presents fairly, in all material respects the
information set forth therein.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Atlanta, Georgia
January 30, 2002
-F33-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements included in this report were prepared by the
Company in conformity with accounting principles generally accepted in the
United States of America consistently applied. Management's best estimates and
judgments were used, where appropriate. Management is responsible for the
integrity of the financial statements and for other financial information
included in this report. The financial statements have been audited by the
Company's independent auditors, Deloitte & Touche LLP. As set forth in their
report, their audits were conducted in accordance with auditing standards
generally accepted in the United States of America and formed the basis for
their opinion on the accompanying financial statements. They consider the
Company's control structure and perform such tests and other procedures as they
deem necessary to express an opinion on the fairness of the financial
statements.
The Company maintains a control structure which is designed to provide
reasonable assurance that assets are safeguarded and that the financial records
reflect the authorized transactions of the Company. As a part of this process,
the Company has an internal audit function which assists management in
evaluating the adequacy and effectiveness of the control structure.
The Audit Committee of the Board of Directors is composed of directors
who are neither officers nor employees of the Company. The Committee meets
periodically with management, Internal Audit and the independent auditors to
discuss audit matters, the Company's control structure and financial reporting
matters. Internal Audit and the independent auditors have full and free access
to the Audit Committee.
/s/ Timothy C. Tuff /s/ Charles B. Carden
Timothy C. Tuff Charles B. Carden
Chairman and Vice President and
Chief Executive Officer Chief Financial Officer
January 30, 2002
-F34-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
Supplemental Financial Information (Unaudited)
(In thousands except per share amounts)
SELECTED QUARTERLY FINANCIAL DATA, DIVIDENDS PAID AND STOCK PRICE RANGE
------------ Quarter ended ------------
March 30 June 29 September 28 December 31
-------------------------------------------------------------------------------
2001:
Net sales $ 191,291 $ 187,267 $ 179,563 $ 185,082
Gross profit 84,629 84,549 81,682 84,993
Net income 10,273 10,937 5,079 (a) 12,685
Per common share:
Basic earnings 0.36 0.38 0.17 0.44
Diluted earnings 0.35 0.36 0.17 0.42
Dividends paid 0.075 0.075 0.075 0.075
Stock market price:
High 18.73 23.54 24.81 22.43
Low 12.94 17.36 18.34 18.88
------------ Quarter ended ------------
March 31 June 30 September 29 December 31
- -------------------------------------------------------------------------------
2000:
Net sales $ 176,702 $ 171,691 $ 179,784 $ 192,500
Gross profit 67,707 68,764 74,906 82,711
Net income 11,522 12,374 4,600 (b) 201 (c)
Per common share:
Basic earnings .41 .44 .16 .01
Diluted earnings .40 .43 .16 .01
Dividends paid .075 .075 .075 .075
Stock market price:
High 17.95 16.13 15.53 16.65
Low 12.06 13.29 11.74 12.25
(a) Third quarter 2001 results include a write-down of the Company's
investment in Netzee, Inc. of $6.1 million after income taxes (see the
Investments section of Note 1).
(b) Third quarter 2000 results include an $8.2 million charge for acquired
in-process research and development costs related to the acquisition of
Concentrex Incorporated on August 23, 2000 (see Note 2).
(c) In the fourth quarter of 2000, the Company recorded restructuring
charges of $14.5 million, which had an impact of $0.38 per share for the
period (see Note 3).
SELECTED FINANCIAL DATA
---------- Year ended December 31 ---------
2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------
Net sales $743,203 $720,677 $702,512 $673,947 $659,954
Net income (loss) 38,974 28,697 42,684 (20,647) 17,296
Total assets 466,993 522,926 391,405 391,770 426,186
Long-term debt 124,118 191,617 106,446 107,071 109,358
Per common share:
Basic earnings (loss) 1.34 1.01 1.39 (.66) .56
Diluted earnings (loss) 1.31 1.00 1.37 (.66) .56
Cash dividends .30 .30 .30 .30 .30
Average number of shares
outstanding:
Basic 29,073 28,469 30,638 31,087 30,971
Diluted 29,984 28,832 31,261 31,087 31,446
Earnings (loss) per share are calculated based on the weighted average number
of shares outstanding during the applicable period.
The Company's common stock (symbol: JH) is listed on the New York Stock
Exchange. At December 31, 2001 there were 4,576 shareholders of record.
See Note 1 regarding an investment write-down in 2001, Note 2 regarding
acquisitions in 2001 and 2000 and Note 3 regarding restructuring charges in
2000.
-F35-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In thousands of dollars)
- --------------------------------------------------------------------------------------------
COLUMN A COLUMN B ---- COLUMN C ---- COLUMN D COLUMN E
ADDITIONS
BALANCE CHARGED TO CHARGED TO BALANCE
AT BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
(1) (2)
- --------------------------------------------------------------------------------------------
Year Ended December 31, 2001
Allowance for doubtful accounts $ 4,272 $ 606 $ 696 $ 755 $ 4,819
======= ======== ======= ======= =======
Year Ended December 31, 2000
Allowance for doubtful accounts $ 6,456 $ (867) $ 24 $ 1,341 $ 4,272
======= ======== ======= ======= =======
Year Ended December 31, 1999
Allowance for doubtful accounts $ 6,806 $ 788 $ (36) $ 1,102 $ 6,456
======= ======== ======= ======= =======
Notes:
(1) Represents recovery of previously written-off and credit balance accounts receivable.
(2) Represents write-offs of uncollectible accounts receivable.
-S1-