United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2002
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 Rd.
Decatur, Georgia 30035
(Address of principal executive offices) (Zip code)
(770) 981-9460
(Registrant's telephone number, including area code)
(Not Applicable)
(Former name, former address and former fiscal year, if changed since last
report.)
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 ( ).
The number of shares of the registrant's common stock outstanding on July 26,
2002 was 29,443,072.
-1-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . 21
-2-
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
(In thousands) June 28, December 31,
2002 2001
- ----------------------------------------------------------------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 10,546 $ 10,096
Accounts receivable, net 61,075 60,926
Inventories 19,240 19,762
Deferred income taxes 25,917 25,621
Other 8,362 11,179
---------- ----------
Total current assets 125,140 127,584
---------- ----------
Other Assets:
Investments 4,089 7,896
Goodwill - net 135,959 125,409
Intangible assets - net 9,640 9,312
Deferred income taxes 7,309 6,604
Refundable contract payments 26,615 27,563
Other 19,408 19,899
---------- ----------
Total other assets 203,020 196,683
---------- ----------
Property, plant and equipment 342,459 334,260
Less accumulated depreciation
and amortization 200,814 191,534
---------- ----------
Property, plant and equipment - net 141,645 142,726
---------- ----------
Total $ 469,805 $ 466,993
========== ==========
See Notes to Condensed Consolidated Financial Statements.
-3-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(In thousands, except share and June 28, December 31,
per share amounts) 2002 2001
- ----------------------------------------------------------------------
(Unaudited)
Current Liabilities:
Accounts payable $ 18,767 $ 23,880
Deferred revenues 39,657 31,240
Accrued liabilities:
Salaries, wages and employee benefits 22,503 27,077
Taxes 22,200 16,729
Other 14,190 17,230
---------- ----------
Total current liabilities 117,317 116,156
---------- ----------
Long-Term Liabilities:
Long-term debt, less current maturities 96,089 124,118
Other 26,683 24,695
---------- ----------
Total long-term liabilities 122,772 148,813
---------- ----------
Total liabilities 240,089 264,969
---------- ----------
Shareholders' Equity:
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 1,992 -
Retained earnings 386,560 372,164
Accumulated other comprehensive
income/(loss) (134) 3,710
Unamortized restricted stock awards (5,784) (8,218)
---------- ----------
420,541 405,563
Less 8,467,503 and 8,977,790 shares
of treasury stock - at cost,
respectively 190,825 203,539
---------- ----------
Shareholders' equity 229,716 202,024
---------- ----------
Total $ 469,805 $ 466,993
========== ==========
See Notes to Condensed Consolidated Financial Statements.
-4-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 28, 2002 AND JUNE 29, 2001
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
(In thousands, except JUNE 28, JUNE 29, JUNE 28, JUNE 29,
per share amounts) 2002 2001 2002 2001
- --------------------------------------------------------------------------
Net Sales $ 184,486 $ 187,267 $ 370,058 $ 378,558
Cost of sales 99,790 102,718 201,000 209,380
---------- ---------- ---------- ----------
Gross Profit 84,696 84,549 169,058 169,178
Selling, general and
administrative expenses 61,124 59,346 128,735 119,251
Amortization of intangibles 644 3,483 1,272 7,046
---------- ---------- ---------- ----------
Income From Operations 22,928 21,720 39,051 42,881
---------- ---------- ---------- ----------
Other Income (Expense):
Interest expense (1,509) (2,484) (3,093) (5,923)
Other - net (299) (215) (314) (71)
---------- ---------- ---------- ----------
Total Other Expenses - net (1,808) (2,699) (3,407) (5,994)
---------- ---------- ---------- ----------
Income Before Income Taxes 21,120 19,021 35,644 36,887
Income Taxes 8,197 8,084 13,934 15,677
---------- ---------- ---------- ----------
Net Income 12,923 10,937 21,710 21,210
Retained Earnings at
Beginning of Period 376,075 348,953 372,164 343,998
---------- ---------- ---------- ----------
388,998 359,890 393,874 365,208
Cash Dividends (2,208) (2,181) (4,402) (4,329)
Issuance of treasury and
deferred shares under
stock plans (230) (743) (2,912) (3,913)
---------- ---------- ---------- ----------
Retained Earnings at
End of Period $ 386,560 $ 356,966 $ 386,560 $ 356,966
========== ========== ========== ==========
Weighted Average Shares
Outstanding:
Basic 29,441 29,125 29,341 28,981
Diluted 31,069 30,202 30,838 29,861
========== ========== ========== ==========
Earnings Per Common Share:
Basic $ 0.44 $ 0.38 $ 0.74 $ 0.73
Diluted $ 0.42 $ 0.36 $ 0.70 $ 0.71
========== ========== ========== ==========
Cash Dividends Per
Common Share $ 0.075 $ 0.075 $ 0.15 $ 0.15
========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
-5-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 28, 2002 AND JUNE 29, 2001
(Unaudited)
(In thousands) 2002 2001
- -----------------------------------------------------------------------------
Operating Activities:
Net income $ 21,710 $ 21,210
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 27,679 29,947
Stock-based compensation 7,480 1,080
Other 834 1,553
Change in assets and liabilities net of effects
of businesses acquired:
Deferred income taxes (832) 5,073
Accounts receivable 994 27,355
Inventories and other current assets 3,883 18,317
Deferred revenues 6,990 (14,916)
Accounts payable and accrued liabilities (8,754) (11,743)
Refundable contract payments (5,256) (4,863)
--------- ----------
Net cash provided by operating activities 54,728 73,013
--------- ----------
Investing Activities:
Purchases of property, plant and equipment (18,727) (22,097)
Payment for acquisition of businesses -
net of cash acquired (10,803) (841)
Proceeds from sale of property, plant and equipment 1,436 255
Long-term investments and other assets (221) 853
--------- ----------
Net cash used in investing activities (28,315) (21,830)
--------- ----------
Financing Activities:
Purchases of treasury stock (1,568) (1,229)
Issuance of treasury stock 9,215 3,226
Dividends paid (4,402) (4,329)
Long-term debt - net (28,029) (51,272)
Other - net (1,179) 251
--------- ----------
Net cash used in financing activities (25,963) (53,353)
--------- ----------
Increase (decrease) in cash and cash equivalents 450 (2,170)
Cash and cash equivalents at beginning of period 10,096 18,480
--------- ----------
Cash and cash equivalents at end of period $ 10,546 $ 16,310
========== ==========
See Notes to Condensed Consolidated Financial Statements.
-6-
JOHN H. HARLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 2002
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements contained in this report are
unaudited but reflect all adjustments which are, in the opinion of management,
necessary for a normal presentation of the results of operations, financial
position and cash flows of the John H. Harland Company and subsidiaries
(the "Company") for the interim periods reflected. Certain information and note
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted pursuant to applicable rules and regulations of the Securities
and Exchange Commission. The results of operations for the interim periods
reported herein are not necessarily indicative of results to be expected for the
full year. Certain reclassifications have been made in the 2001 financial
statements and notes to financial statements to conform to the 2002
classifications.
The condensed consolidated financial statements included herein should be read
in conjunction with the consolidated financial statements and notes thereto, and
the Independent Auditors' Report included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001 ("2001 Form 10-K").
2. Accounting Policies
Reference is made to the accounting policies of the Company described in the
notes to consolidated financial statements included in the 2001 Form 10-K. Other
than as described in Note 4 below, the Company has consistently followed those
policies in preparing this report.
3. Acquisitions
In May 2002, the Company's subsidiary, Harland Financial Solutions, Inc. ("HFS")
completed the acquisition of Easy Systems, Inc. for approximately $10.8 million,
net of cash acquired. Easy Systems was a software solutions company that
provided turnkey branch automation solutions for the community bank market. The
Company has accounted for the acquisition using the purchase method. The
allocation of the purchase price to acquired assets and liabilities resulted in
a preliminary allocation of $10.4 million to non tax-deductible goodwill and
$2.9 million to definitive-lived intangibles. The average-weighted life assigned
to the definitive-lived intangibles is 7.3 years. Goodwill was determined based
on the residual difference between the amount paid and the values assigned to
identifiable tangible and intangible assets.
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.
Assets acquired through acquisitions in 2001 totaled $7.5 million. Of the total
2001 acquisition costs, $5.8 million was allocated to goodwill.
All acquisitions were paid for with cash provided from operating activities and
proceeds from the Company's credit facility. The results of operations of the
acquired businesses have been included in the Company's operations since the
particular acquisition. The pro forma effects on operations are not material.
-7-
4. Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement No. 142,
"Goodwill and Other Intangibles" ("SFAS 142"). 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 definitive
lives will continue to be amortized over their useful lives. Effective January
1, 2002, the Company adopted SFAS 142. The Company engaged an independent
valuation firm to perform a goodwill impairment test. Based upon the analysis,
there was no impairment of goodwill upon adoption of SFAS 142.
Application of the provisions of SFAS 142 is expected to result in an increase
in net income of approximately $10.4 million for the 2002 year as compared to
2001. The following presents a reconciliation of net income and earnings per
share information for the three and six months ended June 28, 2002 and June 29,
2001 with the 2001 period adjusted for the provisions of SFAS 142 (in thousands,
except per share amounts):
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
--------- -------- --------- --------
Net income:
Reported $12,923 $10,937 $21,710 $21,210
Add: Goodwill
amortization,
net of tax effect - 2,555 - 5,191
------- ------- ------ -------
Adjusted $12,923 $13,492 $21,710 $26,401
======= ======= ======= =======
Basic earnings
per share:
Reported $ 0.44 $ 0.38 $ 0.74 $ 0.73
Add: Goodwill
amortization,
net of tax effect - 0.09 - 0.18
------- ------- ------- -------
Adjusted $ 0.44 $ 0.47 $ 0.74 $ 0.91
======= ======= ======= =======
Diluted earnings
per share:
Reported $ 0.42 $ 0.36 $ 0.70 $ 0.71
Add: Goodwill
amortization,
net of tax effect - 0.09 - 0.18
------- ------- ------- ------
Adjusted $ 0.42 $ 0.45 $ 0.70 $ 0.89
======= ======= ======= =======
The changes in the carrying amounts of goodwill by business segment for the six
months ended June 28, 2002 are as follows (in thousands):
Printed Software &
Products Services Scantron Consolidated
----------------------------------------------------
Balances as of
December 31, 2001 $ 24,572 $ 82,128 $ 18,709 $125,409
Purchase price
allocation/adjustment 127 10,423 - 10,550
--------- -------- -------- --------
Balances at
June 28, 2002 $ 24,699 $ 92,551 $ 18,709 $135,959
========= ========= ========= =========
-8-
The Company is completing the review and determination of the fair values of
assets acquired and liabilities assumed with regard to acquisitions that
occurred in 2002 and late 2001. Accordingly, carrying amounts of goodwill and
intangible assets related to those acquisitions may have further adjustments,
although such adjustments are not expected to be material.
Intangible assets with definitive lives consist of customer lists, developed
technology and trademarks. At June 28, 2002 and December 31, 2001, the gross
carrying amount of customer lists totaled $24.3 million and $23.5 million,
respectively. The related accumulated amortization totaled $15.5 million at June
28, 2002 and $14.2 million at December 31, 2001. Customer list amortization
expense for the six months ended June 28, 2002 and June 29, 2001 was $1.3
million and $1.4 million, respectively. At June 28, 2002 and December 31, 2001,
the gross carrying amount of developed technology totaled $17.6 million and
$16.3 million, respectively. The related accumulated amortization totaled $7.2
million at June 28, 2002 and $5.0 million at December 31, 2001. Developed
technology amortization expense for the six months ended June 28, 2002 and June
29, 2001 was $2.2 million and $1.8 million, respectively. Carrying amounts of
developed technology are included in the other assets caption on the balance
sheets and the related amortization expense is included in the cost of goods
sold caption on the statements of income. The net carrying amount of trademarks
at June 28, 2002 totaled $0.8 million. The estimated intangible amortization
expense for each of the next five years beginning January 1, 2002 is as follows
(in thousands):
For the year ended December 31,
2002 $ 6,873
2003 $ 6,160
2004 $ 4,918
2005 $ 2,032
2006 $ 1,827
5. Income Taxes
The effective income tax rate for the six month period ended June 28, 2002 was
39.1% compared to 42.5% for the six month period ended June 29, 2001. This
decrease was primarily due to the nondeductible portion of goodwill amortization
in 2001 that is not in the 2002 period because of the implementation of SFAS
142.
6. Inventories
As of June 28, 2002 and December 31, 2001, inventories consisted of the
following (in thousands):
2002 2001
- ------------------------------------------------------------------------
Raw materials and semi-finished goods $ 17,069 $ 17,309
Finished goods 1,776 1,688
Hardware component parts 395 765
--------- ---------
Total $ 19,240 $ 19,762
========= =========
7. Long Term Debt
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 an annual commitment fee of 0.175%
on the unused amount of the Credit Facility. Borrowings under the Credit
Facility bear interest, on the following indices at the Company's option (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.
-9-
At June 28, 2002, the Company had $96.0 million in outstanding cash borrowings,
$5.4 million in outstanding letters of credit and $223.6 million available for
borrowing under the Credit Facility. 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 June 28, 2002,
including the effect of the Company's interest rate hedging program, was 5.20%.
The Company recognizes all derivatives at fair value as either assets or
liabilities in the statements of financial position. The Company uses derivative
financial instruments to manage interest rate risk. On the date the interest
rate derivative contract is entered into, the Company designates the derivative
as either a fair value hedge or a cash flow hedge. The Company formally
documents the relationships between hedging instruments and the hedged items, as
well as its risk-management objectives and strategy for undertaking various
hedge transactions. The Company formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows of the
hedged items.
The Company enters 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. 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 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 June 28, 2002, the
notional principal amount of interest rate swaps outstanding was $81.0 million
and the average fixed rate in effect on the Company's interest rate swap
agreements, including the Company's credit margin was 5.67%. The net change in
fair value of the swaps at June 28, 2002 is reported in other comprehensive
income (See Note 8). The swaps are considered to be highly effective. No amounts
for hedge ineffectiveness were reported in net income during the six month
periods ended June 28, 2002 and June 29, 2001.
8. Comprehensive Income
Other comprehensive income for the Company includes foreign currency translation
adjustments, unrealized gains (losses) on investments and changes in fair value
of cash flow hedging instruments. Total comprehensive income for the three and
six month periods ended June 28, 2002 and June 29, 2001 was as follows (in
thousands):
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
- ------------------------------------------------------------------------
Net income: $12,923 $10,937 $21,710 $21,210
Other comprehensive
income, net of tax:
Foreign exchange
translation adjustments (290) 209 (718) 590
Unrealized losses
on investments, net
of $117, $67, $245 and
$274 in tax benefits (1,780) (1,203) (3,549) (9,436)
Changes in fair value of
cash flow hedging
instruments, net of $224,
$16, ($76) and $100 in
tax (provisions) benefits (351) (25) 119 (156)
Reclassification for
investment write-down
included in net income 303 - 303 -
-------- -------- -------- --------
Comprehensive income $10,805 $ 9,918 $17,865 $12,208
======== ======== ======== ========
-10-
9. Earnings per Common Share
The computation of basic and diluted earnings per share for the three and six
month periods ended June 28, 2002 and June 29, 2001 is as follows (in thousands,
except per share amounts):
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
- ------------------------------------------------------------------------
Computation of basic earnings per common share:
Numerator
Net Income $ 12,923 $ 10,937 $ 21,710 $ 21,210
-------- -------- -------- --------
Denominator
Average weighted shares
outstanding 29,348 29,055 29,250 28,914
Average weighted deferred
shares outstanding under
non-employee directors
compensation plan 93 70 91 67
-------- -------- -------- --------
Shares outstanding for
basic earnings per share
calculation 29,441 29,125 29,341 28,981
-------- -------- -------- --------
Basic earnings per share $ 0.44 $ 0.38 $ 0.74 $ 0.73
======== ======== ======== ========
Computation of diluted earnings per common share:
Numerator
Net Income $ 12,923 $ 10,937 $ 21,710 $ 21,210
Reduced interest expense
on assumed conversions of
convertible subordinated
debentures - 68 - 135
-------- -------- -------- --------
Net income for diluted
earnings per share
calculation 12,923 11,005 21,710 21,345
-------- -------- -------- --------
Denominator
Basic weighted average
shares outstanding 29,441 29,125 29,341 28,981
Dilutive effect of stock
options 1,628 816 1,497 619
Assumed conversions
of convertible subordinated
debentures - 261 - 261
-------- -------- -------- --------
Shares outstanding for
diluted earnings per share
calculation 31,069 30,202 30,838 29,861
-------- -------- -------- --------
Diluted earnings per share $ 0.42 $ 0.36 $ 0.70 $ 0.71
======== ======== ======== ========
-11-
10. 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
("Software & Services") segment 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. The Company does not have sales to
any individual customer greater than 10% of total Company sales. Equity
investments, as 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 2. Management evaluates segment performance
based on segment income or loss before income taxes. Segment income or loss
excludes interest income, interest expense, certain other non-operating gains
and losses and incentive compensation for segment management, 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.
Selected summarized financial information for 2002 and 2001 periods were as
follows (in thousands):
Business Segment
-------------------------------
Printed Software &
Products Services Scantron Corporate & Consoli-
Eliminations dated
- -----------------------------------------------------------------------------------
Three months ended
June 28, 2002:
Net sales $ 128,510 $ 30,820 $ 25,598 $ (442) $ 184,486
Income (loss) 20,039 2,818 7,204 (8,941) 21,120
Identifiable assets 234,549 143,883 42,661 48,712 469,805
Three months ended
June 29, 2001:
Net sales $ 132,756 $ 31,273 $ 23,501 $ (263) $ 187,267
Income (loss) 23,680 (1,743) 5,426 (8,342) 19,021
Six months ended
June 28, 2002:
Net sales $ 259,267 $ 62,233 $ 49,491 $ (933) $ 370,058
Income (loss) 41,359 6,401 13,373 (25,489) 35,644
Six months ended
June 29, 2001:
Net sales $ 271,557 $ 61,164 $ 46,409 $ (572) $ 378,558
Income (loss) 48,493 (3,674) 10,771 (18,703) 36,887
11. 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.
12. Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued Statement No. 145
("SFAS 145"), "Rescission of FASB Statements 4, 44 and 64, Amendment to FASB
Statement 13, and Technical Corrections". One of the major changes of this
statement is to change the accounting for the classification of gains and losses
from the extinguishment of debt. Upon adoption, the Company will follow APB 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
-12-
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions in determining whether such extinguishment of debt may
be classified as extraordinary. The provisions of this statement related to the
rescission of FASB Statement 4 are effective for fiscal years beginning after
May 15, 2002. The Company is currently evaluating the impact of this Statement.
In June 2002, the Financial Accounting Standards Board issued Statement No. 146
("SFAS 146"), Accounting for Costs Associated with Exit or Disposal Activities.
This Statement requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon management's commitment
to an exit plan, which is generally before an actual liability has been
incurred. Adoption of this Statement is required with the beginning of fiscal
year 2003. The Company has not yet completed its evaluation of the impact of
adopting this Statement.
13. Subsequent Events
On July 24, 2002, Scantron Corporation, a wholly owned subsidiary of the
Company, acquired EdVISION Corporation for approximately $30 million. The
acquisition will be accounted for using the purchase method of accounting and
the results of operations of EdVISION will be included in the Company's
consolidated financial statements from the date of acquisition. EdVISION was a
leading provider of curriculum development and assessment tools for the
education industry.
On August 6, 2002, Harland Financial Solutions, Inc., a wholly owned subsidiary
of the Company, signed a definitive agreement to acquire the INTERLINQ Software
Corporation for $6.25 per share. The total purchase price is expected to be
approximately $34 million, including fees and expenses, less INTERLINQ's cash
balance of about $10 million. The Company expects the acquisition to close in
the fourth quarter of 2002, subject to approval by INTERLINQ shareholders. The
Company expects acquisition costs in the range of $3.0 - $4.0 million will be
allocated to in-process research and development and expensed at acquisition.
INTERLINQ is the industry leader in mortgage loan production and servicing
systems, with relationships with more than 1,300 mortgage lenders.
On August 7, 2002, a large bank customer of the Company's Printed Products
Division notified the Company that it was consolidating its check printing
business with a competitor of the Company. This business was previously split
between the Company and its competitor. The impact on the Company's operations
in 2002 will be minimal, as it is expected that the customer will begin moving
the business in early 2003. The Company's sales will decrease approximately
$19.0 million in 2003 as a result of that lost volume.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 & Services") 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") includes 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 SECOND QUARTER 2002 VERSUS 2001
Consolidated net sales were $184.5 million for the quarter ended June 28, 2002
compared to $187.3 million for the quarter ended June 29, 2001, a decrease of
1.5%.
Printed Products sales totaled $128.5 million and $132.8 million for the second
quarters of 2002 and 2001, respectively, a decrease of 3.2%. The largest
decrease occurred in traditional check printing operations where a 7.6% volume
decrease occurred. The volume decline was primarily attributable to the loss of
certain large customers during 2001 and a decline in orders received from a
direct check marketer. The impact of these two factors was moderated by an
improvement of 2.7% in average price per unit primarily due to lower volume with
the direct check marketer which is less favorably priced, a payment of $1.0
million received from a customer for early termination of a contract, and to
price increases. Sales also decreased in direct marketing activities primarily
due to fewer openings of brokerage accounts and a continued slowdown in direct
mail campaigns for credit card companies. Sales in computer checks and related
products increased in 2002 compared to 2001 due to a fulfillment program for a
software customer initiated in late 2001 and to increases in commercial referral
business from financial institutions which partially offset the sales decreases
in other Printed Products operations.
Software & Services sales decreased 1.6% from $31.3 million in the second
quarter of 2001 to $30.8 million in the second quarter of 2002. The decrease in
sales was primarily due to lower sales of compliance software products and
services due to the continuing trend of a higher proportion of term license
agreements, whereby revenue recognition is deferred from the current period into
future periods. This trend has an adverse near term impact; however, it will
have a longer-term favorable impact by mitigating revenue volatility in future
periods as these deferred revenues are recognized on a more stable, predictable
basis. Partially offsetting the sales decline were increased sales of host
application software, customer relationship management software, analytical
services and sales attributable to the acquisition of Easy Systems, Inc. (see
Note 3 to Condensed Consolidated Financial Statements included in this report).
Scantron's sales for the second quarter increased 8.9% from $23.5 million in
2001 to $25.6 million in 2002. The increase was primarily due to the acquisition
of the assets of Scanning Systems in October 2001 (see Note 3 to Condensed
Consolidated Financial Statements included in this report), internal growth in
field services and growth in sales of imaging products. Increases in sales of
scannable forms were offset by reduced sales of optical mark reading equipment
due to a trend in data collection from optical mark reading to imaging and
direct input methods.
Consolidated gross profit increased slightly by 0.2% from $84.5 million in the
second quarter of 2001 to $84.7 million in the second quarter of 2002, but
increased as a percentage of sales from 45.1% in 2001 to 45.9% in 2002. The
improvement was the result of cost management and productivity improvement
initiatives and a favorable change in sales mix. As a percentage of sales,
Printed Products gross margin was 38.5% in 2002 compared to 38.4% in 2001.
Printed Products gross profit decreased $1.6 million due to lower volumes in
checks and direct marketing and also to costs incurred to consolidate the
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Seattle and Portland printing operations. The impact of lower volumes in 2002
and the consolidation costs more than offset profitability improvements realized
from process improvements and new technology and the $1.0 million payment
received for early termination of a contract. Software & Services gross profit
decreased 1.2% from 2001 due to lower sales in compliance products but, as a
percentage of sales, increased to 67.9% in 2002 from 67.7% in 2001 due primarily
to lower headcount and related expenses in 2002 compared to 2001. Scantron's
gross profit increased by 15.8% from 2001, and also increased as a percentage of
sales to 56.0% in 2002 from 52.7% in 2001 due to efficiencies realized from
acquisitions and improved margins in existing products and services.
Consolidated selling, general and administrative expenses ("SG&A") increased by
$1.8 million or 3.0% in the second quarter of 2002 from 2001. These expenses as
a percentage of sales were 33.1% in 2002 compared to 31.7% in 2001. Decreases in
SG&A related to headcount reductions during 2001 were more than offset by
increases in Printed Products and Corporate SG&A related to the move of customer
service activities in house from an outsource provider, increased marketing
expenditures, higher expenses for customer care infrastructure initiatives,
upgrade expenses for the Company's ERP system and severance expenses related to
management reductions in 2002.
Amortization of intangibles decreased to $0.6 million in the second quarter of
2002 compared to $3.5 million in the second quarter of 2001. The primary reason
for the decrease was the elimination in 2002 of goodwill amortization pursuant
to a new accounting standard. Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). In accordance with SFAS 142, goodwill and
indefinite-lived intangible assets are no longer amortized but will be assessed
for impairment on at least an annual basis (see Note 4 to Condensed Consolidated
Financial Statements included in this report).
Consolidated income from operations increased $1.2 million from $21.7 million in
the second quarter of 2001 to $22.9 million in the second quarter of 2002 due to
the elimination of goodwill amortization in 2002, partially offset by the
increase in SG&A expenses.
Other Income (Expense) decreased by $0.9 million from an expense of $2.7 million
in 2001 to an expense of $1.8 million in 2002 due to lower interest expense.
Interest expense decreased by $1.0 million from 2001 due to lower interest rates
and less long-term debt outstanding in 2002 compared with 2001. In the second
quarter of 2002 other expense included a write-down of $0.3 million on the
Company's equity investment in Netzee, Inc.
Consolidated income before income taxes increased $2.1 million from $19.0
million in the second quarter of 2001 to $21.1 million in the second quarter of
2002 due to increased income from operations and lower interest expense.
The Company's consolidated effective income tax rates were 38.8% and 42.5% for
the three-month periods ended June 28, 2002 and June 29, 2001, respectively.
The lower effective rate in 2002 is primarily a result of the elimination of
goodwill amortization, most of which was nondeductible for tax purposes, and
also to adjustments for prior years recorded in the second quarter of 2002.
The Company's net income for the second quarter of 2002 was $12.9 million
compared to $10.9 million for 2001. Basic and diluted earnings per share were
$0.44 and $0.42, respectively, for the second quarter of 2002 compared to basic
and diluted earnings per share of $0.38 and $0.36, respectively, for the same
period in 2001. Amortization of goodwill reduced the second quarter of 2001
diluted earnings per share by $0.09.
RESULTS OF OPERATIONS YEAR TO DATE 2002 VERSUS 2001
Consolidated net sales were $370.1 million for the six months ended June 28,
2002 compared to $378.6 million for the six months ended June 29, 2001.
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Printed Products sales totaled $259.3 million and $271.6 million for the first
six months of 2002 and 2001, respectively. Lower volumes in traditional check
printing operations, which decreased 9.2% in 2002 from 2001, accounted for a
majority of the decrease in Printed Product sales. The volume decline was
primarily attributable to the loss of certain large customers in 2001 and a
decline in orders received from a direct check marketer. The impact of these two
factors was moderated by an improvement of 2.8% in average price per unit
primarily due to lower volume with the direct check marketer that is less
favorably priced and also to price increases. 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. Sales in computer
checks and related products increased in 2002 compared to 2001 due to a
fulfillment program for a software customer initiated in late 2001 and increases
in commercial referral business from financial institutions which partially
offset the sales decreases in other Printed Products operations.
Software & Services sales for the first six months increased from $61.2 million
in 2001 to $62.2 million in 2002. Sales increases from customer relationship
management applications, host processing applications, branch automation and
acquired operations offset decreases in sales of compliance software
applications. Sales of compliance software applications were lower in 2002
compared to 2001 due to the continuing trend of a higher proportion of term
license agreements.
Scantron's sales for the first six months increased approximately 7% from $46.4
million in 2001 to $49.5 million in 2002. The increase was due to the
acquisition of substantially all of the assets of Scanning Systems in
October 2001 (see Note 3 to Condensed Consolidated Financial Statements
included in this report), internal growth in field services and growth in sales
of imaging products. Increases in sales of scannable forms were offset by
reduced sales of optical mark reading equipment due to a trend in data
collections from optical mark reading to imaging and direct input methods.
Consolidated gross profit of $169.1 million for the first six months of 2002 was
flat compared to the same period in 2001, but increased as a percentage of sales
from 44.7% in 2001 to 45.7% in 2002. Printed Products gross profit decreased 5%
in 2002 from 2001 due to lower volumes in checks and direct marketing. As a
percentage of sales, Printed Products gross margin was 38.2% in 2002 compared to
38.3% in 2001. Software & Services' gross profit, as a percent of sales,
increased to 68.8% in 2002 from 65.8% in 2001. Scantron's gross profit increased
by 10% from 2001 and increased as a percentage of sales to 55.1% in 2002 from
53.4% in 2001 due to efficiencies realized from acquisitions and improved
margins in existing products and services.
Consolidated SG&A expenses increased by $9.5 million or 8% in the first six
months of 2002 compared to the first six months of 2001. These expenses as a
percentage of sales were 34.8% in 2002 compared to 31.5% in 2001. The increase
was due primarily to stock-based compensation that totaled $7.5 million in 2002
compared to $1.1 million in 2001. The increase in stock-based compensation was
primarily due to a $6.4 million charge related to accelerated vesting of certain
restricted stock grants in the first quarter of 2002, net of the resulting
reduction of amortization expense for the first six months of 2002. These grants
vested as a result of the Company's favorable stock price performance. Also,
SG&A was unfavorably impacted in 2002 by the move of customer service activities
in house from an outside provider, increases in marketing expenditures, higher
expenses for customer care infrastructure initiatives, upgrade expenses for the
Company's ERP system and severance expenses related to management reductions in
2002.
Amortization of intangibles decreased to $1.3 million in the first six months of
2002 compared to $7.0 million in 2001, primarily due to the elimination of
goodwill amortization in 2002.
Consolidated income from operations decreased $3.8 million to $39.1 million for
the first six months of 2002 from $42.9 million in 2001 due to the increase in
stock-based compensation and other SG&A expenses partially offset by the
elimination of goodwill amortization in 2002.
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Other Income (Expense) decreased by $2.6 million from an expense of $6.0 million
in 2001 to an expense of $3.4 million in 2002. Interest expense decreased from
2001 primarily due to lower interest rates and less long-term debt outstanding
in 2002 compared with 2001.
Consolidated income before income taxes decreased $1.3 million to $35.6 million
in 2002 compared to $36.9 million in 2001.
The Company's consolidated effective income tax rates were 39.1% and 42.5% for
the six-month periods ended June 28, 2002 and June 29, 2001, respectively. The
decrease in the effective income tax rate was primarily due to the impact of
SFAS 142 which eliminated goodwill amortization in 2002.
The Company's net income for the first six months of 2002 was $21.7 million
compared to $21.2 million for 2001. Basic and diluted earnings per share were
$0.74 and $0.70, respectively, for the first six months of 2001 compared to
basic and diluted earnings per share of $0.73 and $0.71, respectively, for the
same period in 2001. Included in 2002 was a charge for accelerated vesting of
stock grants which reduced diluted earnings by $0.13 per share net of the
resulting reduction of amortization expense for the period. Amortization of
goodwill reduced the year-to-date 2001 diluted earnings per share by $0.18.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operating activities of $54.7 million for the first six
months of 2002 decreased $18.3 million compared to $73.0 million for the first
six months of 2001 due primarily to changes in working capital. Those changes
primarily consisted of an income tax refund received in 2001 and an improvement
in 2001 in the collection of past due accounts receivable. The primary uses of
funds in the first six months of 2002 were for the payment of long-term debt,
capital expenditures, acquisition of new business, refundable customer contract
payments, dividend payments to shareholders and purchases of treasury stock.
In March 2000, the Company's Board of Directors authorized the purchase of up to
2.9 million shares of the Company's outstanding common stock. Shares purchased
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
purpose. During the first six months of 2002, the Company purchased 57,900
shares of its common stock under this authorization at a cost of approximately
$1.6 million. As of June 28, 2002, a total 503,046 shares have been purchased
under the share purchase authorization at an average cost of $21.15 per share.
Purchases of property, plant and equipment totaled $18.7 million in the first
six months of 2002, compared to $22.1 million in 2001. Capital expenditures
during both periods were primarily for digital printing equipment and customer
care infrastructure initiatives in Printed Products. As of June 2002, the
Company had digital printing technology installed in all domestic personal check
imprint operations. The Company plans to have all digital units fully
operational by the end of the third quarter of 2002. The Company's customer care
infrastructure initiatives focus on improving systems that support sales,
marketing and customer service to ensure exceptional service and added
functionality for the Company's call centers. The Company currently estimates it
will expend approximately $60.0 million on these initiatives over a four-year
period ending in 2004 with a majority of the expenditures being incurred by the
end of 2003. The total anticipated expenditures include capital expenditures of
approximately $38.0 million. Through June 28, 2002, $22.7 million has been
expended on these initiatives of which $17.3 million was capitalized. Total
capital expenditures are currently expected to be approximately $38-$42 million
in 2002.
As of June 28, 2002, the Company's accumulated other comprehensive income (loss)
totaled ($0.1) million and consisted of net unrealized gains on investments, net
unrealized losses on cash flow hedging instruments and foreign currency
translation adjustments. In June 2002, the Company's equity investment in Netzee
was written down by $0.3 million to its market value due to the Company's
evaluation that the decline in the value of Netzee stock was other than
temporary.
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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 June 28, 2002, direct borrowings totaled $96.0 million
under the facility. There were $5.4 million in outstanding letters of credit,
which were issued under the credit facility, leaving $223.6 million available
for borrowings at June 28, 2002.
On June 28, 2002, the Company had $10.5 million in cash and cash equivalents.
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 capital markets to pursue
additional acquisition opportunities.
ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued Statement No. 145
("SFAS 145"), "Rescission of FASB Statements 4, 44 and 64, Amendment to FASB
Statement 13, and Technical Corrections". One of the major changes of this
statement is to change the accounting for the classification of gains and losses
from the extinguishment of debt. Upon adoption, the Company will follow APB 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions in determining whether such extinguishment of debt may
be classified as extraordinary. The provisions of this statement related to the
rescission of FASB Statement 4 are effective for fiscal years beginning after
May 15, 2002. The Company is currently evaluating the impact of this Statement.
In June 2002, the Financial Accounting Standards Board issued Statement No. 146
("SFAS 146"), Accounting for Costs Associated with Exit or Disposal Activities.
This Statement requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon management's commitment
to an exit plan, which is generally before an actual liability has been
incurred. Adoption of this Statement is required with the beginning of fiscal
year 2003. The Company has not yet completed its evaluation of the impact of
adopting this Statement.
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 profits during the second
half of 2002 compared with the same period in 2001 due to the implementation of
new technology and process improvements which should offset a decrease in 2002
sales, primarily in the first three quarters of the year attributable to the
loss of market share in 2001. A decline in orders received from a direct check
marketer will also affect 2002 sales. The Company anticipates the Software &
Services segment's profitability will continue to improve during the remainder
of 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 the impact of
acquisitions.
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 "believe," "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
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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 update 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 which 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 continuing upgrade
of the Company's customer care infrastructure and systems used in the Company's
manufacturing, sales, marketing, customer service and call center operations.
Several factors outside the Company's control could negatively impact check
revenues. 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 losses could be
offset by the addition of new customers.
While the Company believes substantial growth opportunities exist in the
Software & Services segment, there can be no assurances that the Company will
achieve its revenue or earnings growth targets. The Company believes there are
many risk factors inherent in its software business, including but not limited
to the retention of employee talent and 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, changes in testing and assessment methods which could negatively
impact current forms, or reductions in scanner sales and related service
revenue. The Company continues to develop products and services that it believes
offer 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 adverse impact on the Company's business.
As a matter of due course, the Company and its subsidiaries are subject to
various Federal and State tax examinations by Federal and State taxing
authorities. The Company believes that it is in compliance with the various
Federal and State tax regulations imposed and such returns and reports filed
with respect to such tax regulations are materially correct. The results of
these various Federal and State tax examinations could produce both favorable
and unfavorable adjustments to the Company's total tax expense either currently
or on a deferred basis. At such time when a favorable or unfavorable adjustment
is known, the effect on the Company's consolidated financial statements is
recorded.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
All financial instruments held by the Company are held for purposes other than
trading. The Company is exposed to primarily two types of market risks: interest
rate and equity price.
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Interest Rate Risk
The Company is exposed to interest rate risk on its variable rate debt. At June
28, 2002, the Company had outstanding variable rate debt of $96.0 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 June 28, 2002, the
notional principal amount of interest rate swaps outstanding was $81.0 million.
The Company believes that its interest rate risk at June 28, 2002 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 $2.0 million ($1.2 million net of
income taxes) at June 28, 2002. 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 Inc. The change in market value has been accounted
for as a component of other comprehensive income until management determines
that an other than temporary decline in market value has occurred at which time
a loss is recognized in current earnings. In June 2002, 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 $0.3 million. The following presents the Company's investment in
Bottomline and Netzee reflecting the high and low closing market prices for the
six months ended June 28, 2002 (in thousands):
Carrying
Value(a) High(b) Low(b)
- -------------------------------------------------------------------------
Investment in:
Bottomline $ 2,843 $ 5,015 $ 2,772
Netzee 138 385 138
(a) Based on market value as of June 28, 2002.
(b) Based on quoted market prices for these items.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on April 26,
2002.
(b) At the Annual Meeting Richard K. Lochridge, G. Harold Northrop and
Timothy C. Tuff were elected for three-year terms expiring in 2005.
The Directors whose terms continued after the Annual Meeting are
William S. Antle III, John D. Johns, John J. McMahon, Jr., Larry L.
Prince, Eileen M. Rudden and Jesse J. Spikes.
(c) A brief description of each matter voted upon and the results of the
voting are as follows:
Election of Directors for Three-Year Term:
Richard K. Lochridge.
Voting for 26,164,170
Withheld 576,242
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G. Harold Northrop
Voting for 26,161,870
Withheld 578,542
Timothy C. Tuff
Voting for 26,160,649
Withheld 579,763
Ratification of the appointment of Deloitte & Touche LLP as the Company's
auditors:
Voting for 25,716,051
Voting against 972,207
Withheld 52,154
Approval of the 2002 Stock Option Plan, providing for the issuance of up to
1,000,000 shares of common stock:
Voting for 16,005,644
Voting against 10,616,003
Withheld 118,765
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
* Indicates exhibit previously filed with the Securities and Exchange Commission
as indicated in parentheses and incorporated herein by reference.
Exhibit Description of the Exhibit
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 for the year
ended December 31, 1998).
4.1 * Rights Agreement, dated as of December 17, 1998, between registrant
and First Chicago Trust Company of New York (Exhibit 4.1 to
registrant's Registration Statement on Form 8-A dated July 1, 1999).
4.2 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.
11.1 Computation of Per Share Earnings.+
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarterly period ended June 28,
2002
- --------
+ Data required by SFAS No. 128, "Earnings Per Share," is provided in Note 9 to
the Condensed Consolidated Financial Statements included in this report.
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Signatures
Pursuant to the requirements 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
08/12/2002 /s/ J. Michael Riley
Date: _________________ By:_____________________________
J. Michael Riley
Vice President and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
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